Insight

Immediate and long-term impacts of the Russia-Ukraine war on supply chains

KPMG looks at the short-term and long-term implications of the Russia-Ukraine war on supply chains including trade in commodities and industrial inputs.

Rob Barrett

Rob Barrett

Principal, Advisory/Supply Chain Leader, KPMG US

+1 480-459-3535

Jim Lee

Jim Lee

Managing Director, Advisory, KPMG LLP

+1 571-213-8765

Jeffry Coble

Jeffry Coble

Director, Advisory, C&O Commercial, KPMG US

+1 678-772-2190


The economic sanctions imposed on Russia in response to the government's decision to invade Ukraine are having immediate impacts across global supply chains. Trade in commodities and industrial inputs that originate in Russia and Ukraine—everything from wheat and oil to nickel and palladium—has been disrupted and prices have soared. Transportation costs are spiking, too.

In this brief paper, we look at the short-term and long-term implications for supply-chain operations and also how the crisis could accelerate long-term trends in supply-chain management that have been building since the COVID-19 pandemic began.


Supply chain snarls and rising prices

The war is exerting widespread pressures on global trade. Manufacturing giants such as Boeing and Ford are suspending operations in Russia.1 Hundreds of ships laden with wheat and corn have been stranded at Ukrainian ports, as the war restricts shipping in the Black Sea, leading to food shortages and inflation around the world.2 In turn, these price hikes directly impact a company’s raw material costs in select markets and transportation spend in nearly every market. The impact is felt across industries, from food and beverage, to high tech.

Commodity Raw material Magnitude of impact on pricing

Grains

Wheat, corn

Russia and Ukraine together account for more than 30 percent of the global wheat market.3 Global wheat prices have jumped more than 55 percent since the week before the invasion.4


Metals / Non-metals

Nickel, neon

Russia is the third-largest producer of nickel, with 10 percent of the market, which is used in lithium-ion and electric vehicle batteries.

Ukraine provides 70 percent of the world’s neon, much of which supports the U.S. microchip industry.5

Futures prices for precious metals such as gold and silver surged after the invasion.


Energy

Oil, natural gas

Russia is the third-largest oil producer in the world; global oil prices have risen to more than $100 a barrel since the invasion. Average U.S. gasoline prices at the pump reached their highest levels since 2008.


While companies may have already undertaken initiatives to drive sourcing efficiencies over the past two years, the following are specific actions that can be taken now to help offset the rising supply costs.


Short-term actions

  • Reduce the volume of raw material procured by using advanced algorithms and manufacturing equipment data to optimize production yield from sourced material.
  • Use contract negotiation levers like shorter payment terms in exchange for tempered commodity pricing or volume discounts to help incentivize suppliers.
  • Anticipate material disruption with better visibility of market signals and evaluate options with scenario models to target sources of supply that may require higher “just-in-case” inventory.

Long-term strategies

  • If the material is strategic and unique to a core product, explore the economics of a potential merger or joint venture with a more localized source of supply to de-risk globalization.
  • Develop alternate commodity strategy for products that comprise material deemed vulnerable due to single-source nature or globalization risk.


Summary

The sanctions in response to the Russia-Ukraine war are having a compound effect on already beleaguered supply chains. Amid the ongoing initiatives to future proof operations, companies now face yet another test of supply chain resilience brought on by the risks of globalization. Targeted actions that leverage digital capabilities can have a near-term impact on supply chain costs. But that shouldn’t delay initiating or accelerating longer-term strategies designed to eliminate the risk.

Will war hasten "de-globalization"?

The supply chain and other economic disruptions caused by the Russia- Ukraine conflict are the latest indications that companies need to re-evaluate localization vs. globalization. Over the past 30 years, the globalization of supply chains has benefited countries and corporations alike.6 But in recent years, support for globalization has fallen,7 trade tensions have risen, and COVID-19 has shown the vulnerabilities of global just-in-time supply chains.

The gradual retreat from globalization could accelerate as a result of the Russia-Ukraine war. Over the past two years, supply-chain leaders have already taken actions to help improve efficiency and reduce the risks that the pandemic exposed. This crisis brings new pressures to act—targeted actions to offset the cost of material and components in the near term but also to develop strategies for the long run.


  1. Source: “Boeing and Ford suspend operations in Russia,” The New York Times, March 1, 2022
  2. Source: “Hundreds of Ships Trapped by Ukraine War, Endangering Sailors and Global Trade,” The Wall Street Journal, March 8, 2022
  3. Source: Jeanna Smialek and Ana Swanson, “What Does Russia’s Invasion of Ukraine Mean for the U.S. Economy?” The New York Times, February 23, 2022
  4. Source: Julie Ingwersen and P.J. Huffstutter, “Insight: Wheat prices soar on Ukraine fears, but U.S. growers can’t cash in,” Reuters, March 21, 2022
  5. Source: Alexandra Alper, “Exclusive: Russia’s attack on Ukkraine halts half ot the world’s neon output for chips,” Reuters, March 11, 2022.
  6. Source: “Economic Blacklist of Russia Marks New Blow for Globalization,” The Wall Street Journal, March 10, 2022
  7. Source: Joe Myers, “This is what people think about trade and globalization,” World Economic Forum, August 19, 2021