The extraordinary events unfolding throughout Russia, Eastern Europe, and Ukraine have highlighted the need for businesses to establish secondary and tertiary supply chain plans.
If there is anything that the COVID-19 global pandemic taught us, it’s that supply chain disruptions cannot be viewed as one-off events.
Businesses cannot stay viable when one disruption after another leaves them scrambling to keep raw materials, finished goods, money, and data moving throughout the supply chain. For businesses that have not already done so, the time has come to embrace different models and paradigms.
Scaling Back Dependency on Foreign Sources
United States’ businesses are now caught in the supply chain crosshairs of a violent conflict that has destroyed significant amounts of Ukraine’s transportation and manufacturing infrastructure as well as crippling global supply chain management.
This destabilizing environment, combined with the various and comprehensive sanctions placed on Russia, is sending markets and prices on a rollercoaster ride. And if that wasn’t enough, additional COVID-19 virus resurgences are closing industries throughout China.
Suffice it to say, you wouldn’t be alone in the business community if you thought it was time for the US to scale back its dependency on China for technology components and finished goods and on Russia for its raw materials and transportation networks. Perhaps the time has come to return to more regional or national sourcing strategies.
This outlook is not a radical one. In fact, it was standard procedure before the 1990s. That decade saw an embrace of global networks to reduce costs, retain or gain market position, or boost a business’ competitive advantage.
The trend of offshoring and outsourcing moved along with only minor hiccups for nearly 20 years, and it wasn’t until the financial crisis of 2008 that business leaders and company management divisions admitted that their reliance on global supply chain networks increased their exposure to supply chain problems.
While some companies strove to boost local manufacturing efforts to reduce their exposure, many have not. Two years into one of the worst business disruptions our world has ever seen, the end is not in sight. In fact, more problems may be waiting for us around the corner.
Oil and gasoline prices are soaring because of Russia’s invasion of Ukraine, and transportation costs are now following suit. This destabilization primarily impacts businesses such as international freight forwarders that rely on Russia’s transportation infrastructure to ship goods produced in Asia throughout Europe and the Middle East.
However, any business owner, including online enterprises, that relies on transportation networks to source materials or ship finished products will also feel the pinch. In short, this conflict impacts everyone, regardless of the business sector.
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Neon Gas Shortage
According to a recent analysis in the Harvard Business Review, another significant concern for global supply chain management is the looming shortage of neon gas needed for producing semiconductor chips.
Ukraine supplies nearly 50% of the worldwide market of neon gas. So now, every government and private-sector enterprise that relies on high-powered technology is scrambling to source supplies from elsewhere and at a premium price.
While the return to localization is appealing and a smart move for the future, it is not a change that can happen quickly. China has become the dominant, inexpensive producer of components, and bringing that level of manufacturing back “home” will take investment and time.
Shifting the Paradigm
Until USA-based manufacturing and infrastructure investments happen, businesses need to think outside the box and develop management strategies to offer a buffer against global supply chain risks. While the future is uncertain, we can be assured that global networks will continue to be strained or impossible in the immediate and near future.
The global supply chain problem isn’t limited to high-tech and consumer products; food is also being impacted. The Russian and Ukrainian “breadbasket” produces more than 25% of the world’s wheat, 30% of barley, and in excess of 60% of sunflower oil.
Russia is also a large-scale exporter of agricultural fertilizers. Shortages and transportation disruptions will impact crop yields and prices around the world.
The Impact and How to Move On
While the United States does have high production capabilities in these areas, the management of the global supply chain affects the cost of food, transportation fuel, and agricultural fertilizer. Due to the current fluctuations, those living in third-world regions will feel the most significant effects.
Afghanistan, Yemen, Eastern Africa, and other developing countries, which rely on large volumes of grain imports through international relief agencies, are painfully exposed. In these parts of the world, millions of people will likely die from starvation because of a lack of supply chain options.
In the last thirty years, the global supply chain management of businesses has contributed to both the abundance and the fault lines in our current supply chains. While changing how we do business will take time, some actions can be taken immediately. Here are some of the best practices for businesses in all sectors to consider:
Evaluate and Reorganize
- Re-evaluate your risk management systems. The COVID-19 global pandemic was a significant stressor to even the most robust businesses. Just because your enterprise was a survivor doesn’t mean you can’t still be affected by the changes coming as a result of the conflict in Ukraine. Take a long and hard look at how your management style is dependent upon the global supply chain and evaluate the risks and inflationary pressures they might be susceptible to in the year (or two) ahead.
- Look beyond your immediate needs and evaluate secondary and tertiary influences. On the surface, your current materials needs and supply chain may appear to be stable but don’t rest there. More than ever, it’s essential to take a deep dive into the factors impacting the businesses that supply your business. Global networks weave an intricate web, and a few broken strands of connection can have serious repercussions. Look far and wide for the weak points to stay ahead of potential problems.
- Stay alert to additional supply sources. If you haven’t already activated secondary supplier sources to shore up your inventory and capacity, now’s the time. In addition to other supplier sources, it’s also worth investigating if the raw materials you most rely on can be replaced with a similar material that is not facing a shortage. When times are lean, people get creative, and that creativity can set your business apart while others struggle.
Obtain Supplies Closer to Home
- When possible, try not to depend on global sources. Moving your supply chain closer to home base offers better management of the chain and reduces some of the volatility and risk that we now have due to our overreliance on foreign-produced goods. That said, there are many products and services that will never be produced or acquired domestically because the United States lacks the natural resources or the expertise infrastructure that will take years to establish. For those needs, realigning supply chains with foreign suppliers and countries that consider themselves close ideological and political allies to the USA may help to remove some of the turbulence and chaos that we’re currently experiencing.
- Update your short- and long-term inventory plans. Everyone remembers with horror the inventory nightmares that occurred in the first months of the COVID-19 global pandemic. No longer having plentiful access to modern-day necessities was a wake-up call, and “just in time” inventory buffers will not work when a severe and long-term crisis hits. Instead, businesses now need to consider “strategic stock” practices to ensure that mission-critical materials are well-represented in a business’ inventory policy. Remember, all it takes is the lack of one ingredient or one component to grind your business to a standstill immediately.
- Always be on the watch for logistics constraints and rising costs due to global supply chain management issues. Over the last few decades, businesses have had to learn to manage logistics constraints such as port congestion, shipping container shortages, and soaring freight rates. While it may be difficult to imagine that logistics could become even more uncertain and complex, all bets are off the table with the ongoing Russian aggression in Ukraine. Better to operate under the premise that greater complexity will arise and international costs will continue to soar. By operating under those pretenses, global supply chain management issues will have less of an impact on you and your business.
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Solutions to Supply Chain Woes
The number one thing that any business can do right now to reduce their supply chain woes is to cut their exposure to anything connected to Russia and Ukraine. This wake-up call means sourcing alternatives for material sources and suppliers.
For industries or businesses that cannot easily or quickly do this, now is the time to start developing other regions with the necessary natural resources or infrastructure to grow the commodities needed for operation.
As long as Russia continues its war against Ukraine, economic sanctions will remain, and production capacity in Eastern Europe will be limited.
The smart move is to develop alternative sources in the United States and with allied countries. Decisive action is necessary if we hope to stabilize the supply chains that domestic businesses rely on every day. The best time to return to USA-made production and manufacturing was 20 years ago, but second to that, the best time is now.