As part of our ongoing commitment to keep our blog readers updated on what’s happening in the supply chain and logistics world, we’re launching a regular industry news roundup, which we’ll release periodically.
In this, the first of our supply chain news posts, you’ll find updates on the following current stories in global supply chain and logistics operations:
- The Ukraine war and its impact on global supply chains
- The grain blockaded in Ukraine
- A growing global warehouse capacity crunch
- Fruit and vegetable shortages in Australia
- Lenovo’s innovative sustainability work with Maersk
- Increased near-shoring in Mexico and elsewhere as companies seek shorter supply chains
Ukraine War and its Supply Chain Impact
Already reeling from the effects of the two-year COVID-19 pandemic, supply chains around the world, encompassing a wide range of industries, are now seeing increasing disruption caused by another massive crisis of our times, Russia’s war on Ukraine.
The impacts are widespread, and, at this stage, it’s impossible to know how much worse things will get. But, right now, after five months of armed conflict in Ukraine, economies worldwide, especially those in Europe, are beginning to feel the effects.
Trouble has arisen on three fronts. Firstly, the war is having a direct impact on ports and routes. Secondly, materials and products originating in Russia and Ukraine are now in short supply, as they are simply not moving out of those countries. Thirdly, suppliers and buyers are finding it increasingly difficult to do business due to the need for compliance with the continuing barrage of harsh sanctions.
Everyone’s Suffering From Sanctions
The sanctions issue is affecting hundreds of thousands of companies globally because not only must they sever trading ties with Russian enterprises but also with partners anywhere in the world that don’t recognise or respect the sanctions.
Given that some Asian and South American countries have no compunction about continuing to do business with Russia, and that many companies in the West have trade relationships in Asia and South America, the sanctions have caught many Western companies’ supply chains in a stranglehold.
But the problems don’t stop there. Many Western enterprises unknowingly depend on Russian and perhaps Ukrainian companies as tier 2 suppliers.
As warfare and sanctions continue to affect those suppliers’ ability to export their products, more than 600,000 enterprises worldwide will suffer detrimental effects of the Russia-Ukraine crisis on their supply chains. Indeed, companies in the United States, Italy, Canada, Brazil, Australia, and China are already experiencing difficulties arising from tier 2 supply interruptions.
From Fuel to Fertiliser, Supply Shortages Start to Bite
Supply challenges arising from the war will hit many industries, with electronics being a prime example, since Russia and Ukraine are both sources of materials such as palladium and neon, vital for the manufacture of semiconductors. However, the longer the conflict continues, the greater the likelihood of severe impacts for a broader range of manufacturing industries, potentially including automotive, consumer goods, healthcare, and other sectors.
Rapidly rising fuel prices will bring about even more widespread supply chain disruption. The drivers of fuel cost increases include the West’s drive to boycott Russian oil, Russia’s retaliatory steps, such as choking the gas supply to Europe, and increasing challenges connected with supplying oil through Ukrainian pipelines. When the price of oil skyrockets, so does the cost of producing everything, leaving no industry unaffected.
Meanwhile, supplies of cooking oil, wheat, barley, and fertiliser, of which Russia and Ukraine were major exporters during less troubled times, are dwindling already, their prices are rising, and they will continue to diminish in availability as the war drags on. That spells big trouble ahead for food producers and agricultural enterprises reliant on such commodities.
Even if You Can Buy it, Can You Move it?
Even if there were no availability problems with the materials and products of Ukrainian and Russian origin, the logistics challenges that shippers are experiencing are throttling supply to the rest of the world.
For instance, the hangover from the pandemic, which has not yet permitted ocean freight from China to return to anything like normal service, is a problem that continued COVID outbreaks and associated port closures are exacerbating. Then there is the Russian blockade of Ukrainian ports with which carriers must contend.
The issues don’t stop there, however. The hostilities in Ukraine have severely disrupted the rail link between China and Europe and have even impacted air freight routes since flights must avoid airspace over Ukraine and Russia.
What’s a Business to Do, Then?
The war continues to induce a welter of problems that are adding up to a nightmare scenario for global business, and many companies must look expeditiously to mitigation strategies.
But unfortunately, in many cases, onshoring, near-shoring, and friendly shoring will not be sufficient or fast enough to implement, to protect supply chains already struggling with war-induced disruption.
Enterprises will also need to seek greater visibility of the entire supply chain, switch from single-sourcing to diversified supplier bases, and pivot supply chains towards agility while accepting the need to stockpile materials strategically.
Grain From Ukraine: Will it Start Moving at Last?
As a result of Russia’s invasion, the export of Grain from Ukraine is at a standstill, with some 20 million tonnes of barley and wheat idling in Ukrainian silos. Moreover, with this year’s harvest imminent, there will be no silo capacity to store the fresh grain if diplomatic efforts to clear the backlog fail.
However, emptying the contents of silos into the holds of ships is only one small part of the problem. The vessels must be given safe passage through heavily mined Black Sea waters and without obstruction by Russia’s naval blockade of Ukrainian ports. That’s a big ask, despite reports that four-way grain export talks between Turkey, the United Nations, Ukraine, and Russia finally appear to have reached a breakthrough.
At the time of writing this article, Ukraine and Russia have finally signed a deal allowing grain exports from both countries to recommence.
The agreement, sealed after two months of talks, could provide much-needed reassurance for impoverished countries that rely on Ukrainian or Russian grain—and the operators of some 70 cargo vessels currently under blockade in Ukrainian ports.
Agreement Signed, But Can it Hold?
Some sources close to the talks are less than convinced that Russia will adhere to the agreement, which should remain in effect for 120 days. As part of the export deal, Vladimir Putin’s forces must maintain a truce with Ukraine in the vicinity of the ports to allow ships to arrive and depart and be guided through mined waters by Ukrainian pilots.
The caution is understandable, given the unreliability of Russian pledges, as evidenced by Putin’s assurances early this year that he had no intention of invading Ukraine.
As if to confirm the unlikeliness of compliance with the accord, Russian missiles struck the port of Odessa within hours of the document-signing ceremony. Therefore, at this point, the rest of the world can only wait and watch to see if Russia honors this particular agreement.
Warehouse Capacity Under Pressure
If the war in Ukraine encourages companies to stockpile inventory, it is only the latest of several factors driving divergence from the once-dominant lean supply chain model. Increased warehouse demand was an inevitable result of the rapid rise in ecommerce over the last couple of decades, but the COVID pandemic accelerated its progression exponentially.
The anti-COVID measures increased demand for ecommerce, but they also triggered a seismic shift in supply chain strategy. That shift has seen enterprises distance themselves from just-in-time and lean practices and hedge against supply shocks by judicious inventory stockpiling.
The nature of ecommerce, too, means companies make greater use of available warehouse capacity. It is a business model that often involves processing high volumes of direct-to-customer sales orders, with picking and packing operations sprawling over large areas of floor space.
With new market entrants emerging continually and existing enterprises expanding their ecommerce operations, the demand for warehouse capacity is outstripping supply.
Hoarding Warehouse Space? Yes, it’s a Strategy
So acute is the shortage of warehouse space that some companies are not merely stockpiling inventory. They have also begun to hoard warehouse capacity by buying or leasing space even if they don’t currently need it, in readiness for times when they believe they will.
Meanwhile, others, finding it impossible to acquire the necessary space, are setting up temporary storage in outdoor areas such as on farmland or in empty buildings not specifically designed to store bulk goods.
However, the smarter money is being invested in warehouse innovation and optimisation, including:
- Greater use of vertical space
- Multi-story facilities with truck ramps and docks on each floor
- Minimisation of the floor space required for movement and processing (to gain more storage space).
The one problem with such investment is that acquiring warehouse capacity to optimise requires a lot more smart money than it might have a few years ago.
For example, in Canada, the cost per square metre of warehouse space has more than doubled over the last seven years. In 2015, it stood at around $5.40. Now it is more than $12.00. And with ecommerce continuing to burgeon, the squeeze is only likely to get tighter in the years to come.
Australia Supply Chain: Fruit and Veg Shortages
Far from the madness in Europe, Australia has not escaped supply chain disruption, thanks to its perfect storm of climate and coronavirus catastrophes. As a result of the pandemic, coupled with extreme and unseasonable weather, including widespread flood devastation, the country’s fruit & vegetable supply chains are faltering. Shortages of products such as tomatoes, green beans, zucchinis, lettuce, spring onions, spinach, and berries have been afflicting consumer goods retailers since June at least, and look set to continue into September.
With heavy rainfall earlier in the year, the planting and harvesting of crops have fallen behind the usual annual schedule, and the latest bouts of flooding and extreme cold have only exacerbated the hardships for the agriculture industry.
There is little to be done, save for retailers to support growers where possible, while ultimately, consumers shoulder the costs of the problem in the shape of inflated prices. However, retailers such as Coles have promised to bring prices down as soon as possible once availability improves.
Supply Chain Sustainability: Lenovo and Maersk Eco Delivery Partnership
In 2019, shipping giant Maersk launched ECO Delivery, a carbon-zero ocean shipping product that rewards its customers with CO2 credits. The idea is to engage shippers with carbon footprint reduction as Maersk gradually shifts its vessel fleet from conventional fuel to biofuel.
Since its launch, demand for the ECO Delivery product has grown 170%, and the shipping line’s biofuel consumption has increased by more than 150%.
As part of its sustainability commitment, PC and smart product manufacturer Lenovo has recently become one of the global enterprises to sign up as an ECO Delivery customer.
A Mission Against Emissions
Persuaded by the knowledge that Maersk’s biofuels produce less than 20% of the emissions attributed to conventional fuels, Lenovo will use ECO Delivery to ship its products to Europe and the Asia Pacific region from its manufacturing centres in China.
The decision to work with Maersk might be a significant sustainability move, but it’s merely one step towards Lenovo’s sustainability pledge.
The company is committed to removing a million tons of environmentally harmful emissions from its supply chain by 2026. For Maersk, it is a resounding endorsement of the ECO Delivery concept, with Lenovo joining other prestigious customers such as fashion retailer H&M Group, and Australian paper and packaging company Visy.
Kazakhstan in Tit for Tat Spat Over Russia Sanctions
After a June forum in St Petersburg, at which the president of Kazakhstan refused to recognise the independence of Ukrainian breakaway states Luhansk and Donetsk, Russia took steps to obstruct oil exports from Kazakhstan to Europe.
Now the government of Kazakhstan has announced its intention to ban all shipments of goods bound for Russia and Belarus, which are subject to Western sanctions, from passing through its territory.
If the ban goes into effect, sanctioned goods will no longer be permitted to cross the Kazakh border into Russia. While that may be good news for the United States, United Kingdom, and European Union, as well as for Ukraine, it will be a regrettable step for companies that currently use the rail system linking China and Europe for imports and exports. Sadly, the operation of rail freight services using that network will suffer untold disruption arising from the decision.
Industrial Relations Issues Adding to Container Woes in India and Germany
As if container shipping hasn’t been fraught with enough problems since COVID crippled the world’s freight networks, port congestion and delays caused by industrial relations issues currently add to shippers’ troubles. Port congestion has been building in Germany and India, where transport and port workers are engaged in squabbles with employers.
In Germany, successive rounds of negotiation between German port companies in Hamburg and Bremen, and trade union ver.de have failed to yield an agreement over pay, with the union rejecting the offer of a 12.5% increase in wages.
As a result of the dispute, more than 2% of ocean freight imports to Germany are currently idling in the North Sea due to port congestion.
Meanwhile, in India, transport workers at three ports in Chennai engaged in four days of strike action that left around 8,000 containers stranded, while vessels continued to call at the ports creating a daily increase in congestion levels.
With the action at the time described as being for an indefinite period, shippers who would usually import via Chennai were advised to consider different routes into India for the time being.
The strike was lifted after an agreement was reached on July 8th, but clearance of the container backlog was expected to take several days.
Near-shoring, Onshoring Trend Gains Momentum in the West
Speculation about the likelihood of firms moving away from offshore production in far-flung countries such as China became rife as the COVID-19 pandemic took hold in 2020. However, for quite some time, it was just that; speculation.
Early indications led many to believe that fears of an onshoring and near-shoring trend were so much paranoia. But then, two years and several global supply chain-related shocks later (including the ship stuck in the Suez Canal and the Ukraine war), there is tangible evidence of such a trend—and it’s gaining momentum.
For example, in Mexico, this year’s investment in production from North American companies looks likely to double against 2021, already a good year for Mexican near-shoring. That may be because U.S. companies are starting to recognise that they can access low-cost manufacturing and production relatively easily compared with Asian partnerships by choosing Mexico as a near-shoring destination.
Outsourcing to the East: Is It Losing its Appeal?
Overall, enthusiasm for outsourcing manufacturing to China and, to a lesser extent, other Asian countries appears to be on the wane.
For one thing, it’s readily apparent that even two years on, the supply chain disruption caused by COVID is far from over. Continuing uncertainty is driven by China’s zero-COVID policy that recently saw further shutdowns of industry and port trouble in Shanghai, a once-popular location for outsourced manufacturing partnerships with Western companies.
For another, the recent cooling of diplomatic relations between China and the West, amid spats over the former’s apparent expansionism in the South China Sea and a swelling fear that its government intends to make aggressive moves on Taiwan, is not helping to encourage new offshoring investment.
Like the Bear, the Tiger Has Teeth
Meanwhile, the Russia-Ukraine situation has highlighted the risks of commercial reliance on countries not traditionally aligned with Western capitalist ideals.
With that in mind, caution is to be expected among companies that, a few years ago, would have jumped at the chance to contract manufacturing to Chinese partners.
Even the perception of what might constitute a pioneering attitude to supply chain operations has somewhat changed in recent times. More are the media stories hailing companies sourcing locally as the heroes of the hour, and fewer are those celebrating offshore manufacturing decisions as potential success stories in the making.
Stay Up to Date in These Tumultuous Supply Chain Times
Yes, folks, as that last story indicates, the times they are a changing—again—in the supply chain management world, and here at Logistics Bureau, we intend to keep you updated with developments via regular news roundups like this one.
Remember to check back here on our blog for new updates and, of course, for articles and guides to help your business keep its supply chain at the peak of fitness and—especially critical in current times—robustness.
You can also hear more about these stories and their latest developments by participating in the next Logistics Bureau webinar, coming up on August 10th, so why not register now to secure your place?