10 ways buyers should be responding to the Ukraine war

26 April 2022

Only 15% of CPOs believe they have good visibility over their tier two suppliers, leaving them vulnerable to disruption from Russia’s war on Ukraine, according to research.

The research from Deloitte found there are approximately 15,000 tier one suppliers in Russia. 

However, there are around 7.6m tier two supplier relationships with Russian entities globally. More than 374,000 businesses – 90% of which are in the US – rely on Russian suppliers.

Deloitte said the Covid-19 pandemic coupled with Russia’s war on Ukraine highlighted the need to prioritise supply chain resilience. 

Deloitte explained: “The interconnectedness of economies and businesses has both exacerbated the growing supply chain crisis and to some extent masked it.

“The time has long since passed when supply chain disruptions can be treated as one-off events, with organisations scrambling to mitigate the disruption to their business and to keep goods, funds, and information flowing across the supply chain. The conflict in Ukraine reinforces the imperative for most organisations to have in place more resilient supply chains.”

Deloitte has 10 recommendations for procurement professionals:

1. Ensure risk management frameworks and systems are in place

Procurement teams should take lessons from the Covid-19 pandemic and ensure they have effective risk management systems established to respond to the crisis. 

Deloitte said this means focusing on risks in the extended supplier network and in relation to supply and inflationary pressures on key commodities.

2. Understand and activate alternate sources of supply

“Visibility is one of the core pillars of a resilient supply chain—and it should extend to the entire network,” Deloitte said. 

The company found only a quarter of companies (26%) felt they could predict risks in their tier one supplier base, let alone anticipate issues in their upstream suppliers. 

Deloitte recommended implementing artificial intelligence, machine learning and advanced analytics to identify suppliers and commodities with elevated risk within the direct supplier base and the extended supply network.

3. Understand and activate alternate sources of supply

Where companies have multi-sourced key inputs, it is important to pursue secondary supplier relationships and secure additional critical inventory and capacity. 

However, procurement teams should be careful when choosing new sourcing locations to avoid becoming reliant on supplier hubs that are already concentrated.

4. Consider onshoring and “friend-shoring”

Global disruptions to supply chains and logistics as a result of the pandemic and the war led many analysts to recommend nearshoring. 

However, nearshoring takes significant investment and time, and is not always possible. 

Where it isn’t possible, procurement teams should consider “friend-shoring” to minimise risk. This involves the re-orchestration of critical supply chains by swapping “risky” foreign suppliers with closer allies to avoid areas of geopolitical tensions.

5. Update inventory policy and planning parameters for critical materials

In recent decades, companies have looked to reduce inventory across supply chains, establishing a level of safety stock to buffer normal demand and supply variability. Deloitte said Covid-19 was “a wake-up call” that these traditional inventory buffers are “insufficient” when an unexpected crisis hits. 

It explained: “Many companies had not anticipated these supply-side risks and are now exposed with lean, and potentially insufficient, inventory to manage through a prolonged period of disruption. Being short just one component, such as a wiring harness made in Ukraine, can stop production of an automobile,” Deloitte said.

6. Understand the impact of commodity inflation in supplier and customer contracts

The war in Ukraine quickly saw commodity prices across food, metals and natural gas steeply rise. Organisations should seek to build resilience into their supply chains to drive down costs to reflect changes in commodity prices. Procurement teams should “work thoughtfully” with suppliers who may be struggling themselves. 

However, the implications of rising commodity costs in product profitability and customer pricing may be less obvious. It is therefore important to understand the implications of inflation on product and customer costs and develop strategies to maintain profitability.

7. Monitor logistics constraints and costs

The conflict in Ukraine has disrupted traditional freight routes, highlighting the need for flexibility in logistics operations. 

The war has exacerbated existing pressures on companies, which were dealing with port congestion, container shortages, long lead times, and record high ocean freight rates due to Covid-19. 

Rising oil prices have compounded inflationary pressures across freight and shipping in the Black Sea – situated off of Ukraine – has become increasingly challenging. Air freight has been rerouted to avoid closed air spaces over Russia and Ukraine, and freight trains that were moving goods from China to Europe through Russia, Ukraine, or Belarus may no longer be available.

8. Increase focus on cybersecurity risk monitoring within your own operations and with key suppliers

With cyber attack being an initial part of Russia’s offensive in the conflict, the war has shown digital supply chain attacks “are now part of modern warfare”. State-sponsored and organised attacks have reinforced the “critical need” for cybersecurity and the resilience of the systems and automation supply chains rely on.

9. Prepare for disruption in operations in the conflict region

Companies have had to make “tough decisions” whether to scale back, continue or to cease operations entirely in Russia and Ukraine. 

Deloitte said for companies continuing operations in Russia and Ukraine, focusing on the safety of the workforce is “critical” and procurement teams should “prepare for significant disruption to logistics infrastructure and other supply chain partners”.

10. Conduct global scenario planning

The duration and magnitude of the crisis is uncertain, as are the full implications of commodity price rises on supply.

Also uncertain is the impact on global supply chains of any further government sanctions which may be placed on Russia. Companies should stay up to date with sanctions, assess scenarios based on their exposure to the conflict, and establish the best medium to longer–term course of action.

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