The supply chains have been fragile since the beginning of the pandemic, and this military conflict between Russia and Ukraine is only exacerbating the situation for several companies in various industries, especially those reliant on energy resources.

The Impact- Global dependencies on businesses in the Ukrainian region is now being felt

The Russian military invasion in Ukraine, a large country situated at the nexus of Asia and Europe has led to the cancellation or rerouting of some flights, thus putting pressure on cargo capacity and raising concerns about further disruptions in the supply chains. The clash has put at risk global supplies of products like aluminum, platinum, sunflower oil and steel. The situation has led to a rise in energy prices, further raising shipping costs.

Organizations with complex global supply chains such as automakers are witnessing the aftermath of this ongoing crisis. For instance, Volkswagen has announced that shortages of parts would force it to slow down production at its main factory in Wolfsburg and various other German plants. Even BMW is looking at curtailing its production at its facilities in Austria, Germany, and Britain.

According to a report from Dun & Bradstreet, worldwide 374,000 businesses rely on Russian suppliers, out of these 90 percent of businesses are based in the US. Approximately 241,000 businesses depend on Ukrainian suppliers and 93 percent are based in the US.

The report observed that “Businesses around the globe continue to grapple with inflation brought on by the pandemic as well as commodity price increases brought on by disruptions to the supply chain.”

“Amidst the ongoing volatility are the new consequences arising from the Russia-Ukraine crisis that could leave the world facing extended reductions to energy supply, severe sanctions that will likely impact food security as well as rare metal supplies needed to sustain production of key technologies.”

“All this coupled with a significant humanitarian crisis makes the unrest even more complicated,” the report stated.

Russia’s war against Ukraine is being felt especially hard in the following industries-

Natural Gas & Oil 

The most adverse impact of this crisis will be felt in European countries that are beneficiaries of Russian natural gas and oil. About 41 percent of Europe’s natural gas supplies and approximately 34 percent of crude oil imports come from Russia.

Uncertainty over the crisis, however, will lead to a surge in natural gas and oil prices across the globe, even if additional supplies outside Russia come to the fore. This will be detrimental to oil importers, however, oil-exporting countries will benefit.

Industry Metals

The global production of metals such as nickel, aluminum, iron ore, and copper ore are led by Russia and Ukraine. They are the main suppliers of metals for Europe, about 90 percent of neon, used for chip lithography comes from Russia. The global trade of palladium, an essential component for global chip manufacturing, has also been impacted by this development that has led to an increase in its price by 80 percent.

Therefore, the continuing tension in the region could push the global chip production and supply process into an unfathomable crisis. The automakers, phone and electronic device manufacturers, and many other sectors that are reliant on semiconductor chip manufacturing can be at greater risk due to the conflict.

Transportation and Logistics

Another industry that will bear the brunt of this clash is the transportation industry since it has the highest energy intensity of all major industries. Besides that, export controls and restrictions are creating issues as not only customs authorities but even the freight forwarders have to make themselves aware of the new rules about thousands of various products and technologies that are traded between the EU and Russia.

During the pandemic, the shipping costs surged to more than 300 percent in 2021, due to ports and border restrictions across the globe. Now, due to the scarcity of new containers the shipping costs will continue to rise.

Furthermore, the train lines for cargo between China and EU through Belarus and Ukraine are presently disrupted. This is critical in both directions for imports of raw materials and components as well as export of finished goods. Air transport has also been affected, the closure of Russian airspace to Western airlines has led EU logistics companies to halt shipments till further notice. The shipments to Ukraine and Belarus have also been impacted.

Logistics and transportation are key to wide range of industries from processed food to advanced industrial manufacturing and affect particularly those that depend on inputs from various parts of the world.

Agriculture and Food

Russia and Ukraine are some of the largest producers of food items across the globe. Both account for over 25 percent of the world’s trade in wheat, about 80 percent of sunflower oil exports, and about 20 percent of corn sales.

The sunflower oil shortage could affect makers of potato chips and the cosmetics industry. Ukraine is the second-largest exporter of wheat and if the conflict is prolonged the disruption will certainly trickle up through the supply chain, resulting in a higher cost for consumers for several products that contain wheat, especially in Europe, the Middle East, and North Africa. The food prices have soared due to the disruptions in the global supply chain, snowballing the risk of social unrest in poorer nations.

Russia also produces large amounts of nutrients, like phosphate and potash that are key ingredients in fertilizers, which enable crops and plants to grow and if that is removed from the field for some crops that could result in less yield.

How is the world reacting to the crisis?

Global shipping giant Maersk has recently announced that it would temporarily suspend all shipments to and from Russia by air, ocean, and rail, except for food and medicine. Similar suspensions have been announced by Hapag-Llyod, Ocean Network Express, MSC, and other world’s major carriers.

International organizations are also trying to comply with widespread financial sanctions and exports controls imposed by the US, Europe, and several other countries that have placed restrictions on the movement of money and goods from and to Russia.

The Western governments have made a move to exclude certain banks in Russia from using the SWIFT messaging system, limit Russia’s central bank’s ability to support the ruble, cut-off shipments of high-tech goods and freeze the global assets of Russian business leaders and politicians.

According to the Biden administration, technology restrictions only would stop about a fifth of Russian imports. However, the impact on trade from the financial sanctions is likely to be even bigger, clamping down Russia’s imports from and exports nearly all of its major trading partners.

European countries continue to impose massive costs on Russia while cutting down their banks off to stop them from conducting financial transactions across the globe. The EU sanctions also include export limitations for dual-use goods and technologies, exports ban for space and aviation industry and additional defence technologies. 

However, the economic consequences of these steps are not clear so far. Russia accounts for less than 2 percent of global domestic product, therefore implications for other nations may be rather limited.

The domino effect on the global supply chains 

The global companies that have factories in Russia and Ukraine will have to bear a major brunt in case the conflict prolongs and the sanctions against Russia are further expanded. This will, in turn, increase the risk of creating a domino effect on supply chains that concern important sectors post the global pandemic.

The Russia-Ukraine conflict has disrupted the flight networks of the companies that use to deliver goods globally. Dozens of cargo vessels have been halted since the shipping ports around the Black Sea have been closed. However, more instant effects are likely to be felt in air shipments between Europe and Asia, which now have to divert around Russia’s airspace. This will lead to longer travel time and more spending on fuel.

According to an analysis by a logistics company, Flexport, flights along major trade routes have slowed somewhat. Longer travel time could create cascading backlogs and delays for industries that rely on airfreight, including semiconductors, electronics, and fast fashion.

The Russia-Ukraine conflict has added to the chaos to already burdened global supply chains

While the world is coming back to normal after the Omicron variant-driven chaos globally, a new challenge that has emerged seems to have no end in sight so far. With the fluid nature of what is happening on the ground and constantly changing nature of sanctions is only adding to the uncertainty.

The Russian military operation in Ukraine is cutting supply chains and setting off a clamber among the global companies to comply with new sanctions. The clash between two nations brings along new challenges after two years of pandemic-led disruptions for the global trade and economic system. However, the load of economic impact the Russia-Ukraine conflict will have on global supply chains will axis on how long the crisis lasts.

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A recent Washington Post report noted that, “More than 22 million Americans have filed for unemployment aid since President Trump declared a national emergency, a staggering loss of jobs that has wiped out a decade of employment gains and pushed families to line up at food banks as they await government help.

The United States has not seen this level of job loss since the Great Depression, and the government is struggling to respond fast enough to the deadly coronavirus health crisis and the widespread economic pain it has triggered.”

Amidst all this, businesses whether small or large are struggling around the world. While there are businesses which have adapted to the work from home model and have revenue streams still open, aviation, hospitality, manufacturing, etc. have virtually come to a standstill. With economies under total or partial lockdowns to contain the spread of the novel coronavirus, supply chain disruptions have become the norm. While bigger cash rich businesses may still be able to withstand this shutdown, smaller businesses will basically be wiped out.

The true impact of this human tragedy will be clear in the months to come, however, one thing is for sure, there will be global economic and financial ramifications that will be felt through global supply chains, from raw materials to finished products.

Though businesses which have been around for some time are not unknown to disruptions, it is the preparedness of a business to mitigate disruptions which ultimately matters and determines its fate.

Here is a comprehensive look at mitigating disruptions and getting your manufacturing and supply chain in robust shape. This is based on a case study. The focus should be in understanding business objectives, as well as, constraints, as well as in conducting a structured optimization/resiliency process that results in an optimal network configuration and strategic roadmap.

The Case Study

A multinational was looking to develop a comprehensive and industry leading disruption mitigation strategy and a well-laid implementation plan to mitigate disruption. The strategy would also have to fuel growth to achieve business goals. It is vital to note that the disruption planning had to account for both global as well as local disruption that would cause significant negative impact to the business.

The business imperatives were analyzed and a disruption sensitivity analysis was performed with well-thought levers to understand the impact of the disruption on the business and to come up with a mitigation plan. Taking the sensitivity analysis into account, the optimal network configuration and strategic roadmap was determined. A comprehensive implementation plan was also drafted to achieve the desired results.

This approach to mitigate disruption can be extended to other forms of disruption and to other business sectors  with specific adjustments as per the type of disruption, and business.

The Business Imperative – At A Glance

The business imperative should be clear, well-defined, and well understood across the organization and its principal decision makers. It should take into account the short term and long term objectives of the business and should focus on mitigating disruptions in the network, addressing capacity constraints, and being prepared to fuel growth and withstand downturns.

Below are the highlights of the business imperative for this case study which would be valid for any supply chain or manufacturing business facing disruption.

Risk mitigation in the network

• Mitigate the risk of sole source across major components, processes and finished goods
• Mitigate the risk of key operational levers that can hinder capacity – including productivity, space and rate of resource ramp up/ramp down
• Mitigate network strategy execution risk – including paced, managed deployment of product changes across the network

Capacity constraints

• Existing facilities may need to grow/shrink to support capacity requirements or downside risk
• Understand resource growth requirements to support capacity requirements

Growth requirements

• Growth needs to be supportable by the manufacturing network or a viable outsource alternative
• Planning of product changes to achieve capacity needs to be evaluated and planned
• Balancing of resources across the business in support of growth/shrinkage needs to be structured

Core competencies to pursue suitable network strategy

• Assess people, process, technology requirements to support network strategy
• Highlight gaps and make necessary changes to build required core competencies

Disruption Sensitivity Analysis

Sensitivity analysis is the first step to estimate the impact of disruptions in a manufacturing network and to understand the impact of different levers to mitigate the resulting revenue loss.

In this case study, local, regional, global, component-specific, product-specific disruptions were analyzed to come up with a holistic approach to mitigation strategy 

Multiple sensitivities were run to understand the impact of various levers (resource reallocation, overtime and additional months of FG inventory) on achieving recovery from a disruption. The objective should not be to achieve full recovery necessarily, but to seek the cost-benefit analysis that the organization is most comfortable investing into.

Country Disruption Analysis

A country disruption for the business would result in an estimated loss of $300M. Executing contingency plans outlined below would result in losses of only a fraction of this amount; representing a much more palatable scenario for management and shareholders. Let’s suppose that the following happens, and management takes the outline of actions below.

• Disruption occurred for a period of 6 months
• 20 FTEs relocated to other sites in 4 months
• 100 FTEs cross trained from Prod X to Prod Y in 4 months
• 2 Months of FG inventory present
• 10 percent overtime is utilized during disrupted time period

Below is the impact of running multiple sensitivities to mitigate the revenue loss:

• Utilizing 10 percent overtime throughout the year and resource reallocation the business could reduce the loss by almost 50 percent
• Utilizing 10 percent overtime throughout the year without resource reallocation reduces the loss by half. However, in this case the business is not able to meet 100 percent of the demand
• 10 percent overtime, 3 months FG inventory and relocation/cross training results in meeting 100 percent demand for Prod X, but approximately 90 percent for Prod Y
• By utilizing only the inventory and overtime levers, the network is able to meet almost 100 percent of demand

Regional Disruption Analysis

A regional disruption for the business would result in an estimated loss of $400M after executing contingency plans outlined below:

• Disruption occurred for a period of 6 months
• 20 FTEs relocated to other sites in 4 months
• 100 FTEs cross trained from Prod X to Prod Y in 4 months
• 2 Months of FG inventory present
• 10 percent overtime is utilized during disrupted time period

Below is the impact of running multiple sensitivities to mitigate the revenue loss:

• Utilizing 10 percent overtime throughout the year and resource reallocation results in meeting only 90 percent of Prod Y demand
• Utilizing only the 10 percent overtime lever results in meeting less than 90 percent of Prod Y demand
• Utilizing all 3 levers result in meeting 100 percent of demand in the year
• Utilizing only the inventory and overtime levers result in falling short of Prod Y demand requirement by approximately 10 percent

A Structured Decision Support Model

Here are some thoughts around a structured Decision Support model to determine the optimal network configuration and strategic roadmap.

• Build decision support model with core inputs and functionality 
• Evaluate model scenarios with no constraints with respect to capabilities and manufacturing changes 
• Add business rules to constrain the number of changes, buffers, etc. 
• Prioritize product changes according to total net contribution to the business and the network/site strategy 
• Lock configuration and changes and run scenarios, sensitivities 
• Conduct final evaluation of the configuration for fit with overall business objectives 
• Make final changes to recommended configuration 

The Recommended Network Configuration

The recommended network configuration was arrived at after considering a number of scenarios and sensitivities on the network model. The focus again was on mitigating disruption and determining the end state profile.

The end state profile is what a business plans to achieve within the predefined timeline to mitigate disruption, restore normalcy, and fuel growth. It includes effective management of resources, and utilization, network reclassifications, Capex planning, and a handful of other considerations.

Key Execution Requirements for Network Strategy 

The key requirements outlined in the network strategy need to be executed successfully to realize the benefits and risk mitigation requirements. Key areas to manage carefully include:

Execute multiple product/process transfers 

Improved management of tech transfer and compliance/regulatory requirements 

Decentralization supports risk mitigation, but there is no one-size fits all

Manage shifts in production volume 

Advanced inventory planning across sites 

Manage aggressive hiring and training of direct labor 

Enhanced focus on workforce recruiting, training, and talent management 

Execute infrastructure and technology investments 

Capacity incremental options at the different sites

Integrated product hierarchy & master data management 

Enhanced systems and inventory controls (PLM, Planning, MES, etc.) 

Visibility to new product demands on manufacturing technology

The Implementation Roadmap

The implementation roadmap needs to be comprehensive and should include all the key elements needed for ensuring success.

Strategic Requirements – The product moves and volume shifts from the recommended model drive the execution requirements.

Execution Requirements

• Capacity Builds, and Changes – The product transfer, regulatory processes and capacity build-outs are key execution requirements
• Hiring and Training – Improvements to the hiring and training process will be required given any steep ramp up rates or downside adjustments
• Supply Chain and IT – There are select Supply Chain and IT related activities key to execution

Project Management – Managing transformations on such a scale requires establishment of appropriate change management, and governance mechanisms.

Effective Contingency Plan During Disruption

Reallocation of resources after prioritizing the product portfolio can mitigate the impact of a disruption to an extent. The prioritization criteria should be well-defined and must include:

• Gross Profit and Capacity Impact – Prioritize products with higher contribution to gross profit and impact to capacity (hours).
• Product Growth Potential – Prioritize products with higher growth potential and the one’s that require minimum resources to produce (ease of production).
• Flexibility and Risk Mitigation – Ensure redundancy across networks for growth products and substitutes.
• Network Management Complexity – Reduce network complexity for e.g. reduce the number of SKUs (SKU Rationalization), minimize the number of hand-offs / touch points, etc.) and ensure the focus is on managing the core business.

The Verdict

Disruptions are common for any business. While it may not necessarily be as severe as the current COVID-19 situation, it is good to plan for even smaller disruptions which can negatively impact a business. A well-defined disruption mitigation plan has the potential to not only bring the business back on track, but also deliver growth.

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