Russia-Ukraine conflict and its impact on global supply chains

Sajal Kabiraj
Principal Lecturer of Strategy and International Business
School of Entrepreneurship and Business, Häme University of Applied Sciences Ltd. (HAMK)

Supply chains are likely to be disrupted causing system inefficacies, disrupting production and delivery schedules due to the Russia-Ukraine conflict and the need of the hour is to build supply chain resilience. The conflict has emphasized the importance of having crisis plans when uncertain times occur, as humanitarian logistics will take the center stage to compensate significant losses. The supply chains must be designed based on an adaptive modelling technique with RIA viz; Response – Speed of delivery, Impact – Lives of people impacted per population density and Assessment – Economic damage assessment and monitoring as future supply chain tactics.

Ukraine is a top exporter of corn, wheat, barley, and rye. Exports are likely to be affected, which would cause food security issues across the globe, especially in Middle East and African countries. Crops that could have a potential impact are sunflower and rapeseed, which will also escalate cooking oil prices. Procurement spending would increase as would government spending toward supply chain expenses, resulting in reduced competitiveness.

Supply disruption on oil markets from the conflict would result in surging crude prices across the EU.  Russia caters to about 30% of oil and 35% of natural gas demand of Europe and 50% of Germany’s natural gas supply. More than 40% of the gas supply to the EU from Russia runs through pipelines, many passing through Ukraine. This would be cut off if the conflict escalates, which will manifest as higher oil and gas prices at the wholesale level. Long term effect may persist if the EU imposes sanctions on Russian gas. The Russian economy relies heavily on the oil and gas industry and hence complete supply disruption to the EU is undesirable. The main buyers of Russian crude include EU countries like Germany, Hungary, and Italy, which will try to secure supplies through advance procurement thereby increasing prices. Reduced gas supplies from Russia will lead to higher input cost and transporting natural gas from the USA to EU is feasible only via specialized LNG tankers, which will involve higher freight costs, once again escalating price pressures.

Due to sanctions, Russia will not be able to access the payment mechanisms, which in turn will reduce exports and imports, thereby impacting its economic growth. Russia being a major producer and exporter of fertilizers such as ammonia, potash, urea, and phosphates, the conflict could affect Russian exports of fertilizers, which would cause global supply shortages, affecting crop production in countries like Australia. Similarly, the metals market would be heavily impacted, which will affect exports of raw material and intermediate goods for manufacturing industries, lead to supply constraints for semi-conductors and cause price hikes in kitchenware, mobile phones, medical equipment, vehicles, electronics, construction materials, and metal packaging products. Base metals, like aluminum, copper, and nickel will be impacted due to higher commodity prices, thereby affecting downstream manufacturing sectors like automobile, machinery, and equipment manufacturing.

Supply Chain Strategy should be designed so that global supply chains can respond to these sorts of uncertain or unfortunate situations, and countries are prepared and have a crisis plans for addressing the needs of the people at the Bottom of the Pyramid. Humanitarian logistics operations are measured by number of human lives saved. The EU strategy should incorporate more supply routes to assist disaster management and build supply chain capacity to think together. There would be some trade-offs to make between risks and rewards.

Supply chain tactics that EU countries might use to achieve the supply chain strategy would be to devise a crisis plan for unpredictable situations, like collaborative replenishment methods with competitors, potential transportation methods, rerouting, cross docking or re-analyzing the stocks. The tactics with a clear purpose will aid the strategy and provide a finite timeline for economic recovery. Proper supply tactics will bring the EU economies closer to achieving the supply chain strategy.

The immediate impact of the conflict on Europe generally will affect consumer economic growth and supply chains of consumer goods, such as clothing, general supplies, electronics, furniture etc. Shortages on products will lead to extension in their order times. It is advisable to form shorter supply chains and evaluate short term inventory requirements focusing on tactics rather than long term requirements. Strategic sourcing with key suppliers, encouraging onshoring of key raw materials, preparing to switch to alternative sourcing and make to order deliveries would help mitigate the supply chain risks for economies as well as EU companies.

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