Ukraine war: battling with supply chain disruption

Roy Williams
posted by Roy Williams
in Risk
29 July 2022

Russia’s invasion of Ukraine has led to a complex picture of rising costs and supply chain disruption that few process industries are able to avoid. So, what can decision makers do to mitigate negative impacts on their operations and financial position?

The Ukraine war has brought with it a further wave of supply chain shocks for businesses across different industries, from those involved in the production of food products, to manufacturers of metals, chemicals, plastics and glass.

Both Russia and Ukraine are major exporters of some of the world’s most important commodities; according to recent findings, 374,000 businesses worldwide rely on Russian suppliers and 241,000 businesses use Ukrainian suppliers. 

In addition to the effects of recently imposed economic sanctions and pre-existing inflationary pressures, the price of crude oil and gas has risen sharply, which is having an immediate impact on energy-intensive industries. However, depending on the length and complexity of their supply chains and pre-existing levels of stock, some businesses may not yet realise the extent to which their business model is affected by the crisis in Ukraine.

At a time when many organisations are still recovering from pandemic-related financial challenges, a perfect storm of factors could see them experiencing a fresh cashflow crisis over the coming months. As well as needing to pay more for critical parts and materials, shortages may result in being unable to ship products to customers and alternative suppliers may be less willing to offer favourable payment terms.

If the business is also unable to rapidly pass on increased costs to customers, it could find itself between a rock and a hard place, facing significant cashflow difficulties. Increasing interest rates, which increase the cost of borrowing, may also make it less feasible for businesses to bridge cashflow gaps.

In order to mitigate the supply chain impact of the war in Ukraine and protect their financial position, there are a number of actions which can help mitigate the challenges ahead.

Firstly, businesses need to move quickly to put in place alternative sources of supply. Establishing ‘plan B’ and then ‘plan C’ suppliers will enable them to secure critical inventory and capacity in order to continue generating much-needed revenue, which is particularly important as market demand in some areas has recovered strongly since the removal of pandemic-related restrictions. However, in the long run they should also consider any opportunities to increase supply chain resilience by switching to more local supply partners.

It's also important for decision makers to develop a clear understanding about exactly which of their products and services are impacted by supplier price increases and the cost of supply chain disruption, and to what extent. This modelling is often much more complex than it would initially seem, but it will enable the business to make informed decisions about the cost increases to pass onto customers.

While this is a delicate balancing act and getting it wrong could cause the organisation to rapidly lose market share, it also creates the opportunity for improved margins.  Access to reliable data insights is needed to develop an effective cost strategy to deliver a sound price increase strategy.

 The fundamental cost of a product or service can also be reviewed. Businesses can use cost engineering principles wherever possible to identify opportunities to remove or reduce materials in short supply and costs from product design, as well as reducing logistics costs and the cost of manufacturing processes. For example, is it possible to manufacture a product with less expensive parts or materials while still achieving the customer’s specification, or reduce the amount of packaging required?

For businesses purchasing commodities in large volumes, hedging is likely to already be an effective method of reducing financial uncertainty to strengthen strategic decision-making.

At a time when there’s the potential for supplier relationships to come under strain, effective communication is more important than ever and decision makers should think about how to make themselves a customer of choice for their suppliers.

This should involve not only clearly communicating any challenges the business is facing but making an effort to understand any problems the supplier is facing too. Both parties should then focus on working together to identify solutions.

Suppliers should also be encouraged to develop an in-depth understanding of supply chain disruption and communicate any issues at the earliest possible opportunity, so mitigation strategies can be developed before problems affect business’ delivery targets. 

Russia’s invasion of Ukraine is another reminder of why it is important to take steps to strengthen supply networks. By establishing alternative sources of supply, reducing supply chain complexity, applying cost engineering best practice and focusing on maintaining close supplier relationships, businesses can avoid an immediate cash crisis and future proof their supply chains, so they are ready for whatever comes next.

Roy Williams is CEO at top-20 management consultancy, Vendigital

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