Supply Chain Disruption on a Global Scale
JOHN SALDANHA , PH . D .
In April 1993 , I witnessed a different supply chain disruption involving Ukraine and Russia firsthand . On April 11 of that year , the freighter , on which I served as a trainee second officer , docked in Nikolayev — today known as Mykolaiv — one of the largest ports in the then brand-new country of Ukraine to load urea from post-Soviet Russia . Besides the winter weather related delays and a financial crisis that saw four-digit inflation in both Russia and Ukraine , we loaded just half the load in 17 days . The freighter waited at anchor in the Dniprovska Gulf at the mouths of the Southern Bug and Dnieper rivers for nearly three months . After that , we loaded some of the balance in Odessa before sailing out with less than our full promised cargo of urea .
Fast forward nearly three decades , and the Russian invasion of Ukraine has precipitated disruptions across a broad swath of supply chains , from fertilizers and food commodities to automotive and high-tech . From a supply chain perspective , the effects of these disruptions can be classified into commodity , transportation and inventory .
Starting with commodities , Ukraine is widely regarded as the breadbasket of Europe . When the invasion began , The Wall Street Journal reported that Russia and Ukraine ’ s combined products account for nearly a third of the world ’ s wheat exports . In addition , nearly one-fifth of corn and 80 % of sunflower oil exports originate in Ukraine . While reading this , I absentmindedly checked the nutrition facts of my breakfast cereal to find sunflower as a listed ingredient . In the short run , it is unlikely the Ukrainian invasion will directly affect these seasonal food commodity prices , some of which we don ’ t import into the U . S . However , as the war drags on and these crops are not planted , we can see a severe shortage of these essential commodities , which will push food prices up , affecting inflation and consumers ’ wallets .
While some of these commodities can be substituted , it will take time and cost to do so , which manufacturers will pass on to consumers . Furthermore , it will put pricing pressure on related commodity markets . This is exactly what is happening with fertilizers amid Russia ’ s efforts to slow and even stop fertilizer exports . According to the U . S . Geological Survey ( USGS ) Mineral Commodity Summaries , Russia is the second largest exporter of potash fertilizer in the world . While the U . S . imports most of its fertilizer from elsewhere , countries dependent on Russian fertilizer , like China , will look to alternative suppliers , pushing up prices for U . S . farmers and ultimately consumers .
Aside from disruptions to food commodities , oil and natural gas , which pushed prices upward soon after the invasion , the war has disrupted a number of more esoteric commodity and component supply chains that can have wide-reaching impacts . For example , the semiconductor supply chain , barely recovering from the pandemic disruptions , faces a new disruption from neon used in lasers at the lithography stage of chip manufacturing . The USGS reports that a substantial portion of the world ’ s supply of palladium used in automobile catalytic converters comes from Russia . Relatedly , international sanctions can affect substantial supplies of rare earth metals like vanadium , originating in Russia and used to manufacture electric vehicle batteries . Even a lack of components , such as electric harnesses originating in factories in Ukraine , can shut down production at assembly plants for Volkswagen , the second largest auto manufacturer in the world . The results of all these disruptions can be distilled down to one simple but hard truth : higher prices for the consumer .
We are all familiar with the pandemic shutting down seaports such as Long Beach in California , holding up everything from electronics and home appliances to building supplies . One of the safety valves was air freight , with several passenger airlines converting airplanes for freight to make up for the lack of passenger traffic . The other was the Trans-Siberian Railway shipping containers from Pacific Rim countries , like China , to Western Europe . The Trans-Siberian Railway is no longer an option , and the cost of air travel will increase as flight paths have to be altered . Fuel costs are going to push up the cost of transportation in general , while the destruction of Ukrainian Black Sea ports is going to exacerbate commodity shortages long after the end of the war .
Inventory in supply chain management is typically used to balance the mismatch between demand and supply . Firms don ’ t want to run out of product , which will affect their revenues and customer confidence in the short term and eventually market share in the long term . In the short term , firms order more to stock up on inventories , which will push prices up . This has two effects pushing inventory holding costs higher . First , firms must now finance higher priced inventories for longer . Second , as transportation capacity comes under pressure , increasing the length of time to move items across the globe , firms will have to finance longer pipelines of inventories while they are in transit . While this will add to the prices consumers pay at checkout , this will also require firms to have greater cash reserves to service these costs .
In summary , the Ukrainian invasion has affected all three levels of supply chain management . Since the pandemic , several firms have already evaluated their global supply chain vulnerabilities , looking at nearshoring and re-shoring to reduce their vulnerability to the vagaries of global instability . I contend that the leadership of every firm must do the same to reduce their exposure to global instability .
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WEST VIRGINIA EXECUTIVE