How the Conflict Between Russia and Ukraine is Affecting Supply Chains by@marcmeyer

How the Conflict Between Russia and Ukraine is Affecting Supply Chains

Russia and Ukraine supply 30% wheat, 48% oil, and 40% gas to European countries. With sanctions on Russia, and Ukraine's resources up in smoke, exporting the available supplies is reduced to impossible, not to mention production preparation for the following year. Many companies are looking to move their production centers locally to stabilize their operations. Not all countries have the resources, funds, or infrastructure to bring production home in response to a conflict. The World Bank predicts an almost 37% jump in food prices due to the conflict.
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Marc Meyer

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Conflicts, disruptions, and backlogs – supply chain logistics management has become a battlefield. And now, with new demand streams and the crisis between Russia and Ukraine, resources limited, access routes denied, and workers replaced to support their homes in crisis regions, Europe is facing a whole Pandora’s box of logistical issues.

Russia and Ukraine supply 30% wheat, 48% oil, and 40% gas to European countries. With sanctions on Russia, and Ukraine's resources up in smoke, exporting the available supplies is reduced to impossible, not to mention production preparation for the following year.

Countries are juggling shifts between freight methods, routes, and suppliers with closures such as the Russian railway, which would take goods from China to Eastern and Western EU. Now that airlines need to bypass Russia, this expensive alternative still provides complications. 

The auto industry's largest German brands depend on semiconductors that pass through Russia. Big players are already beginning to localize the production of missing parts from their EU suppliers. Tesla opened two new plants: in Berlin, Germany, and its hometown Austin, Texas, as a strategy to improve the cost and efficiency of distributing vehicles from factories to customers in major European markets. Many companies are looking to move their production centers locally to stabilize their operations.

While reshoring may be the path to a sustainable future, not all countries have the resources, funds, or infrastructure to bring production home in response to a conflict. And for those that do, rebuilding is a timely process. 

Amongst a crisis and already limited supplies to the norm, what can European businesses (large and small) do to tighten their logistics and future-proof operations? 

'Democratizing' the Power That Bigger Players Already Have

The biggest challenges always land on the most vulnerable players. This crisis is less about debt and more about feeding hunger. With the World Bank predicting an almost 37% jump in food prices due to the conflict and scarce grain supplies, these record rises would push hundreds of millions of people into poverty and lower nutrition.

Retail giants who operate nearly all of their supply chain in-house can absorb rising costs of fuel, utility prices, and subsequent product value increases in their cash cow business model. Yet, smaller companies become powerless as providers and shipping companies choose to operate with those who pay. 

In response to immediate needs, the EU has funded a total of €143 million in humanitarian aid to support the people affected by Russia's war on Ukraine. Nonetheless, payouts and grants are not sustainable long-term. Ongoing public innovation programs like Horizon Europe can help smaller companies strengthen their niche and offer innovative solutions to a bigger spectrum of clients. With a budget of €95.5 billion, their goals are to boost economic growth and strengthen the EU's competitiveness – providing participating companies meet specific criteria and implement EU policies.

The problem is when smaller companies drown in regulations and contracts, grants or program applications can form a lengthy, challenging process. As we saw with Shake Shack – which rejected a government payout during the pandemic when realizing others were in more need – those who get accepted more often have the time and resources to hire someone who completes the process while maintaining business as usual. 

So, what are the most significant difficulties for logistics providers? And if grants are simply a short-term solution, what can the smaller earners do to keep up long-term?

Three Key Pain Points and Solutions for Logistics Providers

In the face of the dynamic situation, resources are limited, costs of goods are increasing, and the EU is facing continuous trucker shortages. Three trucker unions opted to join a week-long strike in the face of rising fuel prices. After deciding the €500 million government support package didn’t suffice – the truckers' absence led to further food shortages across the continent, and the cycle of rising costs continues. 

In addition, the Black Sea is off-limits, along with the Azov Sea, Russian throughways, and the China train. Shipping companies purchase aircraft, airports alter routes, and destinations change daily. 

Companies like CMA CGM combine end-to-end transport solutions for all types of goods via shipping, overland, and airfreight services – the trend is to provide agile transportation by increasing control centrally. But data varies from the number of decimal points to the metrics used to scale. When the information from suppliers reflects different formats, central control gets complex.

In a crisis with minimal supplies, delayed routes, and shared control, businesses large and small are left with little choice but to streamline their operations and let technology absorb some of the work.

1. Strategic Capacity Management

To combat a smaller workforce, ensuring each container, vehicle, and ship is fully loaded will reduce the number of journeys – and drivers – required to meet demand. The number of empty vehicles on road totalled 20% of freight transport in 2020 due to last-minute needs and the use of historical schedules.

Artificial intelligence (AI) that assesses each business’s assets, and capacity, can ensure each resource used is at full to best meet priority demand. With new sanctions and blockages made inconsistently, central teams must know in real-time what orders to expect to make immediate amendments to the fleet. They request a larger trucker to fulfil the delivery or fill the vehicle with predicted upcoming demand.

In February 2022, 11.6% of the container fleet capacity was unutilized, primarily due to the impact of the COVID-19 pandemic on the global supply chain. In states of panic, logistics providers were eager to meet volatile consumer requests, and existing plans became obsolete which created port congestions and vessel delays. For example, the Los Angeles port saw empty containers clogging bays, while a lack of organization between businesses left roadways blocked for truckers to drive out with their goods. 

Now, with missiles flying in the European skies, fears of crew safety increasing insurance premiums, and cancelled ships rising value of goods, logistics providers must maximize the use of every vehicle, cargo, and air freight departing. Capacity management within each vessel, container, port, and bay will support more efficient storage and minimize the number of assets required per delivery – freeing up additional space for clearer throughways.

By feeding the intelligent technology with data in real-time, companies can reduce the room for error and ensure every last-minute change is incorporated.

2. Route Optimization

In the current situation, with dangerous and unpassable parts of the Black Sea and Sea of Azov and airspace over Ukraine shut, shipping companies face serious complications in route planning. Logistics providers already must design routes based on many factors – demand, destinations, road conditions, weather, port congestion, ships available, drivers on duty, and their hours of work to maintain a healthy workforce. Yet, they also have to factor in new lane closures and avoidance of war zones.

Linehaul planning is constructing the most efficient route between transportation modes, cities, and even countries. Businesses can improve their unique supply chains with AI to consider vast amounts of data and produce the most efficient scenarios.

Imagine you are strapped with six drivers, multiple vehicles available, and volumes required in eight destinations. By breaking down eight locations into six trips with the most convenient drop-off points, logistics providers can calculate what vehicle size they need for each journey to meet the demand. AI that reads data and weighs countless scenarios in seconds can run any new route closures, unsafe zones, and updates to provide the most efficient routes. On top of this, AI can predict each journey length based on real-time traffic data and miles to ensure fair distribution of workers following health regulations, hours worked, and sleep requirements.

In addition, including maintenance needs means logistics providers can generate optimal schedules that factor in wear and tear to minimize breakdowns. Let’s say your truck is driving the E6 (from Oslo up to Kirkenes). AI that reads the journey length, number of maintenance stops on the route, and vehicle engine levels centrally can direct drivers to the nearest garage to make minor repairs before further damage or breakdown between service stations. 

Maximizing resources, speed of passage, and minimizing costs are crucial when facing a crisis. With optimal routes and fully functioning vehicles strategically loaded for efficient drop-offs along the way, businesses can utilize every asset and driver time at full capacity. 

However, what happens when companies don’t open-source their logistics data, and all businesses plan to take the same route?

3. Connecting Companies From Multiple Supply Chains

Businesses that streamline their logistics are ahead of the game. But imagine if they could stay in the loop with other companies in the ecosystem too? When all companies are aware of the ships going out, planes in flight, and roads in congestion, they get a whole new leap of future insight into potential traffic jams and routes available to prioritize and plan. 

There is no more critical time to work together than during a war. Nonetheless, If one system sends data in meters and the other in feet, the time taken to convert information can delay deliveries further. When your data analysts spend 90% of their effort cleaning out data so that it talks to other bits of data, only 10% of the time drives the total value out of the information.

The Digital Container Shipping Association (DCSA) transforms the shipping industry by setting data standards across all aspects, from the bill of lading to gateway connectivity interfaces and bay plans. The goal is to enable global, industry-wide interoperability, minimize port congestion, and improve efficiencies in line with sustainable practices. When logistics providers follow these, they can join forces with new suppliers and networks more efficiently. 

For example, you produce flour in Turkey, have a delivery network, and your usual supply of wheat from Ukraine is unavailable. You have the option to purchase from Ireland, but you need new carriers to transport the goods part of the way. By following the same data standards, you can easily integrate platforms, share quantities, bid drivers, and communicate updates proficiently. 

And when handling large volumes of data, AI platforms that can read all the required information at once are what will make collaborative processes manageable.

The Future: Localization and Collaboration

Teaming up with your trusted partners and new suppliers to source items nearer to home, reduce carbon footprint, fuel required, and the subsequent cost savings are clear. Collaboration to protect human rights and prevent environmental abuse requires structured governance.

The EU Commission is drafting a law that requires all companies with over 500 employees and a turnover of €150 million to carry out due diligence across their business operations. While the legislation only applies to less than 0.2% of EU companies, the process will require investigation into entire supply chains – covering the smaller third parties in collaboration. The goal is to bring a united front to prevent human rights and environmental abuses, paying particular attention to agriculture and fashion, where the risk of exploitation is traditionally high.

For operations to run at optimal efficiency to combat the conflict’s rising fuel costs and large sums of volatile data to manage, integrated platforms with real-time data visibility are essential. Companies with AI systems in place will be prepared with transparent data and can expect smoother, cost-efficient due diligence processes with reduced risk of fines and auditing fees. 

Cost reduction and increasing the sustainability of supply chains are at the advantage of all businesses. Efficient use of assets, capacity, and workers and optimized routes with strategically planned maintenance and drop-off points drive value. When suppliers and shipping providers start collaborating, they save costs further and can improve their united agility in the face of disruption. Swapping suppliers and moving locally to overcome sanctions is made even easier if companies are working as a connected continent with integrated supply chains. This is the future.

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