Like many, I’m overjoyed when I see young children being inquisitive.
During a family dinner last week, my 7-year old son became intrigued about his heavy-duty insulated plastic cup he was drinking out of. He asked my husband and I if we knew how they could get the logo inside the cup and then began speculating on how it could be done.
We explained to him that manufacturing something as simple as a cup is actually harder than one might imagine – how oil is needed for the plastic, molds are needed to form the cups, and let’s not forget transporting the cups to the store for us to buy. This little lesson reminded us of a children’s book entitled The Miraculous Pencil that we had read with him on how everyday things are produced.
Based on the essay I, Pencil written and first published in the 1950s by Leonard Read, the book follows the Tuttle Twins, Ethan and Emily, on a school field trip to a pencil factory. What they soon learn is that producing something as simple as a pencil involves more than you might initially think. (Don’t worry – I am not going to give away any more hints!)
But I realized during our conversation with our son that the book and essay can be great tools for helping your company understand how the supply chain is so complex.
(If you have kids over the age 5 or so, The Miraculous Pencil is a great story for helping them learn about the “invisible-hand” processes responsible for producing the goods that we often take for granted.)
Even though it was written for kids and does an excellent job of breaking this concept down to their level, this book was an eye-opener even for me on just how extensive and complex supply chains are.
Recent and ongoing events in Ukraine and Russia have brought supply chain issues to the forefront once again…
It seems like we have already been talking about supply chain woes, doesn’t it?
Just as the world economy and supply chains are starting to recover from the impacts of COVID-19, a new crisis in the form of armed conflict has emerged and is exacerbating an already delicate situation.
As I discuss in a previous article outlining strategies for navigating supply chain shortages, the supply chain is more than your immediate vendors, but rather consists of 3rd, 4th, and even 5th party suppliers. Your vendors will have their vendors all the way down to whomever supplies critical raw materials.
As fighting rages in Ukraine and sanctions, trade, and financial restrictions against Russia take effect, supply chains are coming under even more stress, or as Craig Fuller, founder of FreightAlley stated in a Tweet this past weekend:
“As the world isolates Russia – supply chains are about to experience a whole new crisis – Russia is one of the largest producers of raw materials like nickel, copper, iron, platinum, palladium, oil, nat gas, neon, and agricultural products.”
— Craig Fuller 🛩🚛🇺🇦 (@FreightAlley) February 27, 2022
Both Russia and Ukraine may not export much in terms of finished goods, but each country constitutes a significant enough portion of raw materials. This can cause massive disruptions in ways we can’t entirely fathom at this juncture, but to elaborate on some of the areas listed in Craig’s tweet:
- Oil and gas – Russia supplies a significant amount of energy, especially to Europe. While flows have not stopped, tight supplies and price increases were leading to disruptions even before this crisis. For example, a fertilizer plant in the UK had to scale-back production due to high energy prices last year before the current crisis. The Nord Stream 2 pipeline to transport gas from Russa to Germany has been put on hold indefinitely.
- Base and precious metals – both Russia and Ukraine export enough of the world’s base metals that any disruptions can be chaotic. Whether it is aluminum, copper, palladium, these metals play a critical role in the manufacturing of everything from cell phones to automobiles, washing machines, and even lifesaving medical devices. Aluminum prices have now passed their all-time high from 2008 while palladium is up over 80% since mid-December.
- Agricultural products – Russia exports a significant amount of the key ingredients for making fertilizer while both Russia and Ukraine export close to a quarter of the world’s wheat. Ukraine also accounts for close to 20% of the world’s sunflower seed or cottonseed oil exports. And of course, higher energy prices will increase the cost of eating, which can be an expensive prospect for developed countries but devastating for poorer countries.
- Financial sanctions – the US, UK, and the EU have placed bans on both personal and business transactions involving Russia’s central bank and have cut off many of the country’s commercial banks from accessing the global SWIFT payment system. While payments for energy are not being affected as of yet, these restrictions are sure to create additional headaches for companies who purchase raw materials and goods from Russia.
And let’s not forget the impacts these supply disruptions are going to have on already record-high inflation.
Raw materials for manufacturing and other “inputs” are just one side of the supply chain coin…
As I discuss in my previous article, a supply chain consists of both inputs and outputs.
Your company may not have any issues with obtaining raw materials or rely on anything from Russia or Ukraine.
But as a client who manufactures medical devices reminded me in a conversation earlier this week, there are challenges with transporting finished products into both Russia and Ukraine.
Here is the current state of many major shipping companies:
- U.S. based UPS and FedEx are halting deliveries into both countries,
- German-based DHL is currently avoiding Ukrainian airspace while hostilities are ongoing,
- Maersk is not currently accepting cargo bound for Ukraine, and
- CMA-CGM Group is currently redirecting its shipments to Romania, Lebanon, or Greece.
Also, as of this writing, Russian forces are closing in on the major Ukrainian port city of Odessa on the Black Sea. If fighting erupts there, expect even more hiccups when it comes to shipping.
It’s clear from this tragic situation just how fragile the global supply chain is and why it is important to look at it in totality as opposed to focusing on your Tier 1 or direct vendors.
This unpredictable situation is yet another example of the extreme uncertainty gripping today’s world. As I’m always saying, along with thought leaders like Hans Læssøe, the world is experiencing an unprecedented level of change, and this is especially apparent when it comes to the supply chain. Again, Craig Fuller of FreightAlley:
Companies who are able to adapt quickly will certainly benefit…besides finding new suppliers and new markets, companies can consider alternative materials or processes that do not rely on raw materials from potential hot spots around the globe. This is a situation where tools like scenario planning can be helpful in understanding potential trouble spots and what could possibly occur.
Doing so could lead to building a competitive advantage where none existed before.
How is your company being impacted by disruptions caused by the Russia-Ukraine war and how are you handling those impacts?
To share your thoughts, please don’t hesitate to leave a comment below, email me privately at comments@strategicdecisionsolutions.com, or join the conversation on LinkedIn.
Also, if your company is reeling from supply and other disruptions or wants to simply understand where potential chokepoints exist, please feel free to contact me to discuss your specific issues today.
Last but not least, regardless of the causes of this conflict, our thoughts and prayers are with the innocent civilians and others bearing the direct impact of this war. We earnestly hope that hostilities can cease immediately and the parties involved can resolve their differences peacefully.
