Ukraine: a Link in a Chain
The war in Ukraine is not just a humanitarian disaster of gigantic proportions: it is another shock to the global economy.
Businesses should now consider the effect of necessary sanctions against the Putin regime, alongside the disruption to global supply chains already seen directly in the closing of the Ukrainian ports of Mariupol and Odessa, among many others on the Black Sea and Azov Sea.
This week IgniteSAP will summarise expert analysis from a variety of sources on the direct and indirect effects of the Ukrainian war on global supply chains, and discuss some ways in which businesses will require IT services from SAP and it’s partners to compensate for these supply chain problems.
The direct interruption of sea-based exports from Ukraine were recently discussed by Christian Roeloffs, CEO of Germany’s ContainerxChange:
“Parts of the Black Sea and Sea of Azov are now dangerous or un-passable. There have been missile attacks on vessels and ship arrests and lane closures for commercial shipping. The Ukrainian seaports of Odessa and Mariupol are closed/damaged/under attack. Trade and container movements have ceased. Cargo and equipment is stuck at ports… Due to ongoing disruption to shipping in the Black Sea we expect container build-ups at ports to exacerbate at storage areas across the region. Maersk has pulled out booking shipments to and from any Russian ports (with exception of foodstuffs, medical and humanitarian supplies) and other carriers have started following. Russian and Belarussian ports in the Baltic and Black Sea will likely see a build-up of boxes if carriers refuse to make port calls due to the security situation and sanctions.”
This disruption is not just limited to the ports of Russia, Ukraine and Belarus. A tanker owned by the Russian state-owned Sovcomflot was scheduled to collect oil in Orkney, UK, but was delayed after protests by locals. The protest escalated through local government up to the UK department for Transport and resulted in a statement from UK Transport Secretary Grant Shapps:
“The maritime sector is fundamental to international trade and we must play our part in restricting Russia’s economic interests and holding the Russian government to account. In these circumstances, the Department for Transport does not consider it appropriate for Russian vessels to enter UK ports.”
On the 24th of February Maersk shipping said it was rerouting shipments intended for Ukraine currently at sea to Turkey and Egypt. On March the 1st Maersk released this statement: “We are also starting to see the effect on global supply chain flows such as delays and detention of cargo by customs authorities across various transshipment hubs: overall resulting in unpredictable operational impacts.”
Air and Rail Freight
The disruption of trade routes includes air and rail freight. Kuehne+Nagel, an air and sea and rail freight logistics company commented:
“Closure of the air corridors over Russia and Ukraine and the ban of Russian aircraft from North American and European airspace have led to capacity restrictions and longer lead times, with some long haul flights, particularly in the Eurasian hemisphere increasing by three hours [elsewhere this figure was given as 12-14 hours] …Kuehne+Nagel had to stop the acceptance of bookings for rail transports (Eurasia Express) to and from Europe, as these transports pass through the Russian Federation.”
The business data and analytics company Dun and Bradstreet has released a report into the implications of the Russia-Ukraine crisis for the global economy and businesses. One of the key takeaways from this report is that transportation costs for businesses is likely to increase for several reasons. Apart from the direct interruption of freight, the increase in the cost of fuel for transportation will rise: due to the sanctions on Russian exports of oil, and later on because of the reduced availability of oil and other raw materials.
Ryan Closser, the director for program management and network collaboration at American supply chain visibility platform Fourkites has said that shippers and carriers will expect to pay more to fulfil the same contracts:
“It will cost more to go from A to B than it did last week, and more next week than this week. The cost of oil going up is going to be top of mind to all of us who are heavily involved in the North American transportation market. That will have a direct effect on the business.”
The supply of raw materials including oil, natural gas, metals and agri-commodities (like fertilisers) will have further implications for the global supply chain as it will have a direct impact and consequent delay on the manufacture of products.
Between them, Russia and Ukraine produce about one-third of the world’s wheat, 19% of global corn supply, and 80% of the trade in sunflower oil. Russia is the third largest supplier of nickel, used in high-end batteries, and two countries are also the largest producers of copper and platinum.
The Domino Effect in Manufacturing
The global chip manufacturing industry has been stressed by the pandemic and semiconductor production could suffer further by the rising price for palladium (80% since December). In addition Odessa has been a centre of production of purified neon gas (creating 70% of global supply) which is used to replace oxygen in etching tubes to stop impurities entering microchips during the manufacturing process. These semiconductors are used in a wide variety of technology so a scarcity of them would impact other industries like car production.
Along with the worsening shortage of semiconductors, electrical systems for cars are in short supply. Leoni, a wiring supplier with factories in Ukraine that works closely with the German automotive industry is “working at full speed in close cooperation with our customers and suppliers to manage the consequences of the current production interruptions”.
Volkswagen, Audi, Porsche, BMW and Mercedes-Benz have had to substantially reduce production as a consequence of these shortages.
Unilever, the consumer goods giant released the following updated statement on Tuesday:
“Our business operations in Ukraine have stopped and we are now fully focused on ensuring the safety of our Ukrainian employees and their families, including helping with their evacuation where necessary, and providing additional financial support. We have also committed to donate €5m of essential Unilever products to the humanitarian relief effort.”
Other global brands such as Coca-cola and MacDonalds are also suspending Russian commercial activities.
Impacts on the global economy highlighted by the Dun and Bradstreet report include the potential for escalation bringing Russia into conflict with Nato, and the ripple effect of economic sanctions on Russia. The report points out that:
“While the focus of newly announced sanctions by the Office of Foreign Assets Control (OFAC) is on the seven major Russian financial institutions and 13 Russian firms at the time of writing, the total corporate family members of these businesses include 16,748 entities spread across 21 countries.”
Financial sanctions on Russia are also expected to provoke retaliatory sanctions such as restricting exports of crude oil, natural gas, coal and rare metals. These would be extremely painful in Europe in particular as Russia has a “near-monopoly” on energy supplies. Many European countries get over 50% of their oil and gas imports from Russia.
In summary, the report states that the combination of disruption of trade routes, rising cost of freight, inaccessibility of raw materials, and wide disruption to business threatens to derail economies while adding to inflationary pressures. The rising cost of maintaining business and commerce would lead to higher prices for goods and services.
Reducing the Strain
Several recommendations are made in the report regarding actions which should be taken to mitigate the impact on individual businesses of the war in Ukraine:
“Businesses should onboard an appropriate balance of risk by reassessing their credit policy to recalibrate their portfolio risk profile for new and existing clients.”
“Have an end-to-end mapping of your supply chain by monitoring your direct suppliers as well as Tier 2 and Tier 3 suppliers. The key question is: ‘How exposed are my suppliers to trade in sectors where Russia and Ukraine are key players?’”
“Stress test your ability to cope with different scenarios. Are there alternatives to existing suppliers? Perhaps in different markets? Can you stockpile? What is the maximum increase in prices that your supply chain would be able to sustain, and for how long?”
At the end of last December IgniteSAP discussed what to expect in supply chain management in 2022, and while nobody predicted that a Russian invasion of Ukraine would cause another global supply chain crisis, some of the points made in that article are worth repeating in this context, so here are some supply chain strategies that may help provide businesses with greater resilience and adaptability.
Move away from a linear supply structure: Creating a large network of suppliers can help to provide flexibility and agility to react quickly when things don’t operate as they should. Though it is tempting to minimise supplier networks and warehousing in the name of efficiency, just-in-time supply chains can lead to breaks and delays when subjected to unforeseen events.
Shorter Chains: Shorter supply chains are now becoming more preferable because the more links in the chain, the more potential for a weak link. Consider finding suppliers near at hand even if this requires more spend up front.
Customer Behaviour: Customers can be a source of disruption as consumer behaviour is linked to events in the real world. Now customers may be asking companies to avoid using Russian suppliers on ethical grounds, and this is one more reason to reassess 1st, and 2nd tier suppliers. Also populations will be reacting to stories in the news, and this may cause a sudden shortage of products or materials, particularly essentials like fuel.
Overall it is important to maintain complete visibility of the supply network, and to manage supply as part of a more adaptable business strategy.
ERP for Aid Organisations
SAP have made statements and taken practical actions in support of Ukraine. The SAP Ariba Discovery program is still allowing open access to SAP Business Network to anyone. It is free to post and free to respond.
“Any buyer facing shortages can post their immediate sourcing needs and find suppliers ready to provide humanitarian aid, while any supplier can respond to show they can deliver with urgency and quality.”
While this is clearly a valuable resource, we look forward to seeing what help, along with the “initial €1 million in humanitarian support” SAP and their partners offer in the weeks ahead. SAP have already offered to convert office spaces at locations across Europe into warehousing and accommodation for refugees. Many non-profit organisations directly involved in providing aid to Ukraine and Ukrainian refugees would benefit from logistics and warehousing solutions from SAP.
A Supply Chain is a Social Network
While concerns about maintaining supply chains may pale in comparison with the harsh realities of a brutal war, it is a genuine concern. Not just to those running businesses, but to their customers as well. In our globalised economy we are all affected by events like these, emotionally and practically.
Clearly the importance of maintaining a supply chain is dependent on the necessity of the product or materials required, and by whom, but whole economies are reliant on these innumerable connections, and millions of people are dependent on daily supplies of food products and fuels.
In a world where some are intent on destruction it is important to realise that connections between people are more powerful than any individual: that a supply chain is a human chain, and there has been ample evidence recently of humanitarian organisations utilising logistics for the highest good.
Aid organisations and even private individuals have been using their time and energy to bring relief and support to those who have been forced from their homes, through the power of the supply chain, so while it may seem detached to discuss business networks and economies at a time of profound crisis, these are the means by which we can maintain societies which are fit to live in.