War in Ukraine:  Responding to supply chain disruption

The effects of war on the citizens of Ukraine have been immediate and horrific. As companies around the world seek to help in any way they can, they’re also trying to understand the likely secondary impact of the Russian invasion on their employees, customers, operations, and supply chain.

Executive teams have struggled with a succession of supply chain disruptions over the past decade, from the earthquake and tsunami that struck Japan in 2011 to Covid-19. The pandemic revealed many lingering vulnerabilities in global supply chains, prompting many multinationals to rethink their supply chain strategy.

But regardless of how much they learned during the pandemic and other pivotal episodes in recent history, few companies have a clear idea of how the war in Ukraine—one of the most dangerous and unpredictable developments since the Second World War—will affect their supply chain and for how long. Nor do the questions stop at, “How do we keep serving our customers?” There’s also the cost of maintaining continuity and the impact on sustainability efforts.

Amid ongoing supply shocks such as these, we find it’s helpful for executive teams to analyze the immediate and longer-term impact on raw materials, logistics and transportation, teams, and infrastructure. Below is our early assessment of the challenges in these areas, as well as a handful of no-regret moves that should help companies strengthen supply chain resilience in almost all scenarios for the war in Ukraine, while also guarding against turbulence from future events.

Short-term challenges

As surging commodity prices have already shown, the war in Ukraine is constraining the short-term supply of natural resources and other raw materials vital to businesses around the world. Many fear shortages will get worse in the months ahead.

For oil and gas, the volatility reflects the unwinding of partnerships between western and Russian energy groups, such as BP choosing to divest its shareholding in Rosneft and Shell cutting its ties with Gazprom. The impact of supply issues will vary by country and be heavily influenced by actions against Russian oil and gas exports (whether government-mandated or self-imposed).

The European Union is vulnerable to shortages of natural gas: Almost 40% of the natural gas the EU consumes originates in Russia. Italy and Germany are particularly exposed to fluctuating gas prices and supply, when the proportion of gas coming from Russia is considered in combination with a country’s overall dependence on gas as an energy source (see Figure 1). Also expect pricing pressure on oil-derived products such as naphtha, used in resins and plastics.

Figure 1

Agricultural companies are anxious about the short-term availability of commodities used in fertilizer, such as ammonia, potash and urea. Their surging prices reflect the importance of Russia and Belarus as major global exporters of fertilizer and its components in peacetime. The impact has been felt as far away as Brazil, where farmers have been scrambling to secure fertilizer supplies.
Wheat and corn prices may remain elevated given input cost trends and the importance of Ukrainian and Russian exports. Big grain importers such as Egypt, Turkey and Nigeria could be disproportionately hit.

The price of steel and other commodities derived from natural resources such as iron ore may continue to rise, given Russia and Ukraine’s importance to supply. A very large chunk of the world’s supply of neon, vital to the production of semiconductors, is produced in Russia as a byproduct of steelmaking and then purified in Ukraine (see Figure 2). Germany’s automobile makers could be among those hit hard in the short term if semiconductor makers exhaust their inventories of neon and are unable to secure enough supplies to avoid a fresh chip shortage.

Figure 2

The humanitarian imperative to prioritize refugees is likely to have a knock-on impact on commercial air, road, and rail transport and logistics in western Europe. And war-related disruption to maritime traffic in the Black Sea is likely to continue. Companies still doing business and employing people in the region will face obvious short-term operating constraints given the conditions many of their workers are facing. Sanctions and independent decisions by companies may well further redraw local commercial boundaries. Worldwide, companies will have to cope with volatile demand in certain categories as consumers adjust spending amid soaring food and energy costs.

Longer-term challenges beyond six months

The outlook for raw materials, including energy, is mixed. Downstream agricultural products such as ethanol and other corn- or wheat-based derivatives are likely to be affected by production shortfalls and the diversion of supplies to food. Similarly, we expect trade restrictions with Russia to reduce the production and availability of key strategic metals, alloys and other derivative metal products (e.g., batteries) that use materials such as nickel, tungsten and neon gas.

However, steel prices may stabilize as international companies increase steel production capacity, while trying to balance environmental commitments with any increased coal use needed. Until global energy capacity is rebalanced, the price of oil and gas may continue to rise further against a backdrop of deepening sanctions, especially as the winter heating season approaches.
Unless the conflict substantially escalates, road, rail, and air logistics should stabilize, although global disruptions may remain for air logistics, given Russian airspace restrictions and constraints on Ukraine’s heavy cargo capabilities. Similarly, most maritime routes should be viable, although significant disruption may remain in and around Russia.

Companies operating in the region will likely have to reconfigure their labor pools in areas such as engineering and design, production and logistics. Businesses worldwide may have to make their global supply chains more transparent to customers wanting to identify and manage future Russian exposure, as well as comply with trade restrictions. Similarly, their customers may also start to demand more flexibility and resilience in situations where global supply nodes are located in areas of heightened geopolitical risk. Catering to those demands for enhanced continuity planning could result in strategic redundancy and higher costs to serve customers.

On a macroeconomic level, the sanctions imposed on Russia could contribute to the end of the era of capital superabundance and capital globalization, constraining foreign direct-investment flows and influencing supply chain investment decisions. A marked increase in defense spending in the European Union and beyond could reduce government spending in other areas.
Robust cybersecurity will be essential across the end-to-end value chain—from design through fulfillment. Global and company environmental, social, and corporate governance (ESG) agendas and commitments may also need to be recalibrated as geopolitical and trade bloc dynamics create inefficiencies and a potential delay in energy transition, resulting in prolonged reliance on coal-based energy.

Boosting supply chain resilience amid uncertainty

No company can afford to underestimate the significance of the war in Ukraine, even if it doesn’t directly affect operations now. It’s unclear how the crisis will resolve, or whether it sets a precedent that other geopolitical actors will follow. And in the wider analysis (see Figure 3), the frequency and magnitude of supposedly once-in-a-generation shocks calls for an ongoing strategic response to improve supply chain resilience.

Figure 3

In addition to their urgent responsibility to safeguard staff and customers in the region, executive teams should consider a handful of no-regret supply chain actions, both to protect their business in the short term and transform their resilience over the next decade.

• Assess risks across the value chain, focusing on single points of failure. Conduct a data-driven risk assessment of the value chain from product development and the supply base through production and fulfillment. For the key threats, evaluate probable scenarios and assess the potential magnitude of impact on the business and customers.

• Establish signposts that predict changes to your supply chain risk profile and monitor them. Identify the main indicators of potential risks such as geopolitical trade tensions, industry capacity-to-demand ratios, supplier health, and commodity capacity and geographic concentration. Develop capabilities to provide early warning notifications and set up processes to simulate risk scenarios and prioritize mitigation. Create a digital roadmap using advanced analytics and leading technology for greater precision and accuracy.

• Counter the persistent headwinds of inflation. Cost management will remain a strategic issue across industries, as companies confront challenges related to volatile customer demand, commodity costs, supply chain constraints, and labor availability. Establish a cost management program to offset inflation. Ensure visibility into cost pools and performance trends.

• Upgrade mitigation strategies for the most acute risks. Create a full set of mitigation options including product and process redesign, alternative sources, network structure, capacity buffers, back-up or flexible routes for logistics flows. Understand where you need to ensure supply. For manufacturing, deploy Industry 4.0 applications such as additive manufacturing to minimize labor and raw material requirements. That approach can also support cost curve reductions for potentially relocating sites closer to demand centers.

• Enhance traceability by mapping your supply base from the top tier downwards.  Initiate a plan to achieve visibility at each tier of the value chain—from raw materials to finished goods to recycling—to improve operational, sustainability, regulatory, and resilience outcomes. Create a flexible long-term traceability roadmap.

These actions can all improve supply chain resilience today and tomorrow. But the need to act far exceeds the usual obligations to stakeholders. As shown in the Covid-19 pandemic, when the consistent availability of groceries and other staples was a lifeline for many, keeping products and services flowing amid extreme turbulence can help to stabilize more than just businesses.

Joe Terino is a partner and leads Bain & Company’s global supply chain practice. He can be reached at [email protected]. Peter Guarraia is a partner and senior leader in Bain & Company’s global performance improvement practice where he leads the global supply chain practice. He can be reached at [email protected].

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