How is the war in Ukraine impacting the global supply chain?

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Beth Stackpole, Freelance writer, MIT Management Sloan School

The Russia-Ukraine war is having an outsized impact on the global supply chain, impeding the flow of goods, fueling dramatic cost increases and product shortages, and creating catastrophic food shortages around the world, according to experts at a virtual symposium hosted by the MIT Center for Transportation and Logistics.

The upheaval to the supply and demand of goods is exacerbating the already untenable human toll of the conflict, which shows no signs of abating.

The February 2022 Russian invasion of Ukraine may have been the straw that broke the camel’s back, but it was hardly the only contributing factor to the current global supply chain crisis, panelists at the symposium said. Significant supply chain disruptions started bubbling up during the heat of the trade wars in 2018 and 2019 and were pushed into new territory over the course of the COVID-19 pandemic, continuing to this day.

While the main focus remains as it should on the tragedy of human loss and the destruction of Ukrainian territory, the Russian invasion has triggered sanctions and other obstacles that have hampered critical logistics and trade route operations.

The resulting ripple effects are threatening the supply of key food resources like wheat and raising the possibility of a global famine.

Simultaneously, disruption to the flow of electronics, raw materials, and parts supplies emanating out of China and other locales has seriously impeded global trade positions, forcing companies to recalibrate and in some cases, wholly reconsider their long-standing supply chain and partner ecosystems.

“Supply chain managers need to think carefully about opportunities and risk when looking for new sources while considering how to coordinate the change from one source or mode to another,” said Joachim Arts, a CTL research affiliate and associate professor at the Luxembourg Center for Logistics and Supply Chain Management. “If it isn’t coordinated carefully, it could lead to all kinds of bullwhip effects throughout global supply chains.”

Food supply in crisis

One of the most alarming supply chain issues resulting from the Russia-Ukraine war is food shortages, particularly acute in low-income countries in Africa. Ukraine and Russia account for about a third of the world’s wheat and a quarter of barley production, not to mention some 75% of the sunflower oil supply — all critical commodities for keeping humans fed.

The combination of Russian sanctions, blocked Ukrainian ports, and the inability of Ukrainian farmers to work the fields is creating a perfect storm that requires governments and businesses to find new ways to collaborate to head off a humanitarian crisis, said Chris Mejía Argueta, director of the MIT SCALE Network in Latin America. In fact, Russia’s blockade of Ukrainian ports is considered so damaging that EU Foreign Policy Chief Josep Borrell recently dubbed it a war crime.

“If we have a scarcity of the most common commodities around the world, coupled with climate change issues, that’s when we need to start changing our mindset and find ways to collaborate with each other to make a difference,” Mejía Argueta said.

That reset entails establishing alternative suppliers, forging public-private partnerships, and leveraging advanced analytics to forecast food waste and identify opportunities to divert resources to shore up global food supplies, he added.

China – Europe routes disrupted

The state of transportation routes connecting China with Europe is another casualty of the Russian invasion. Surging gas prices are increasing freight costs for all modes of transportation. The train route connecting the regions, which became highly competitive during the height of COVID-19, especially for industries valuing shorter lead times such as automotive and electronics, is now stalled. This is especially true for the primary corridor that traverses Russia, Belarus, and Poland before continuing on to Germany, France, and other European countries.

“If you shifted your product allocation [during the pandemic], you can’t just reverse that decision, [which has] caused a lot of trouble in the automotive industry,” said Pascal Wolff, an assistant professor at the SCALE Network’s Ningbo China Institute for Supply Chain Innovation. While some companies are redirecting product traffic to an alternative train route, most are shifting back to ocean freight mode, he said, which takes more time to get goods to market.

Supply chain makeovers all but inevitable

Given the hurdles, the panelists contended now is as good a time as any to reevaluate supply chain positions and make adjustments. They offered the following suggestions:

Consider alternative sourcing. With governments and businesses no longer able to depend on traditional suppliers, now is the time to either diversify partners or find alternative sourcing modes. While changes are necessary, there are ramifications. “When you change suppliers or change your supply mode, your lead time might increase, and when your lead time increases, there will be temporary shortages,” Arts said.

Capitalize on new opportunities. For entrepreneurs, there’s an opportunity to fill the gaps created by the volatility, creating new business models and potentially improving the lives of others.

Companies need to start collaborating through trade coalitions and other joint partnerships to increase capacity, Mejía Argueta said; when possible, they should transition from global to a localized set of suppliers, although that’s not always possible or optimal, the panelists acknowledged. “If you know you need to collaborate with others in order to increase capacity, start doing it,” Mejía Argueta said. “It’s important to start working, not in silos.”

Understand that quantitative approaches can help, but there are challenges. While modeling can help optimize supply chain changes, there are limits to this approach. Most supply chain models assume a steady state, which is not applicable for redesigning something that is in transition. “Decision makers should move to systems thinking and have multiple objectives and KPIs in mind when designing supply chain networks,” Wolff said.

Accept that this is the new normal. Planning can only get you so far in a world order that continues to be in constant flux. Therefore, the key to sustaining growth in uncertain times is developing best-in-class agile competencies. “You can’t plan for everything,” Wolff said. “Few saw this war coming or anticipated the pandemic. It’s hard, but enterprises need to work on becoming agile organizations.”