War. What Is It Good For? Absolutely Nothing In The Supply Chain – Transport

As the first land war touching Europe in decades, Russia’s
invasion of Ukraine is what many are calling the start of
WWIII—let’s hope not. Starr’s song lyrics lament the
many, many negative impacts of war. Beyond the obvious impacts,
this post will focus on the negative consequences war and political
tension will have on global supply chains and manufacturing
operations.

In 2020 and 2021, manufacturers weathered unprecedented supply
chain woes. Now, 2022 is kicking off with additional challenges
resulting from Russia’s invasion of Ukraine. Given the
interconnectedness of the world marketplace, even supply chains
without direct ties to the region will be impacted. For
example:

• Oil Prices Rising Mean Universally Higher
  Transportation Costs: Oil prices already leapt 6%. This
  means higher transportation costs for all, which will have the most
  significant and pervasive impacts on manufacturers that source from
  afar.




• Tariffs, Embargoes and Other Sanctions:
  President Biden already announced harsh sanctions against Russia.
  Whether they are in the form of tariffs, sanctions, or outright
  embargoes, they all result in unavoidable additional costs that
  must be absorbed by manufacturers somewhere in the supply
  chain.




• Precious Metals Inputs – Even More
  Precarious: Ukraine is rich in precious minerals,
  including palladium, nickel and neon gas—all are used to make
  electronic chips. This region became “Plan B” for a
  number of companies looking to mine precious metals from locations
  other than China in the midst of the semiconductor shortage of the
  pandemic. This will be a big (and negative) impact to the slow, but
  positive progress that was made in the semiconductor market. The
  automotive industry, which is continuing to rebuild supplies of and
  make investments in semiconductors, will inevitably continue to be
  adversely impacted.




• Wheat Exports: Ukraine is the second largest
  exporter of wheat. Does this mean that the whole world is going
  gluten-free? No. But, the disruption will certainly trickle up
  through the supply chain to result in higher costs for consumers
  for many products containing wheat.

So, what can companies do to navigate this fluid and
ever-changing market in the face of war-related impacts? Continue
employing the risk mitigation strategies that they have been honing
for the last two years. These include:

1. Diversify Supply Chain Inputs: There
   are undoubted efficiencies associated with sourcing from a single
   supplier (sole-source supplier), such as economies of scale, cost
   savings based on volumes, and streamlining logistics. However, a
   sole-source supplier also makes a company’s supply chain more
   sensitive to interruption. To fairly assess the source of its
   supply chain, a manufacturer should look at lower layers of it
   supply chain. For example, even if a manufacturer has a sourcing
   arrangement with two different suppliers in two different
   locations, if both suppliers source raw materials from the same
   Ukrainian sub-supplier, then there could be threats to the
   continuity of manufacturing operations as the situation
   worsens.




2. Warehousing, Inventory Banks & Safety
   Stock: For all of the same reasons that a
   Just-In-Time (JIT) model is incredibly efficient, it is also
   incredibly tenuous if there are any breaks in the supply chain.
   Identify key inputs that may be impacted and begin amassing safety
   stock and inventory where possible.




3. Lock in Transportation and Shipping Rates to the
   Extent Possible: Given the volatile fluctuations in
   oil pricing, which will have impacts on all forms of
   transportation, lock in transportation and shipping rates as soon
   as possible. Many companies are partnering with third-party
   logistics providers in order to defray some of the increasing
   volatility across labor, warehousing, transportation and other
   logistics.




4. Review Contract Rights and the Other
   F-Word: For customer and supplier relationships that
   could be impacted, it is once again time to get out those contracts
   to see: (a) whether the contracts contain a force
   majeure provision; (b) whether the force majeure
   provisions cover events such as war, embargoes, etc.; and
   (c) assess whether the force majeure clauses provide
   termination rights and what the associated notice requirements are.
   Finally, even if there is no force majeure provision in
   the applicable contract, the parties may have certain rights to
   suspend performance under the doctrine of commercial
   impracticability, depending upon the particular circumstances.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.