The Impact of the Ukraine Crisis on Global Supply Chains
On 24th February 2022, the world watched in horror as Russia began its invasion of Ukraine.
The shared determination to punish Russia economically for its illegal invasion of Ukraine restores faith in the West and in businesses that believe in ethics and human rights, despite some being rather slow in taking action.
While the human cost is obviously the most pressing cause for concern, the impacts on global supply chains are also worryingly far-reaching.
Since Putin’s decision to invade, the predictability and costs of logistics and global supply chains have been spiralling out of control, with many speculating about the level of damage these consequences will have on the global economy. The bottom line? As we acclimate to another ‘new normal’, the hard work is far from over for those in procurement.
But as businesses and government authorities continue to increase the level of sanctions against Russia, what do you, as a procurement professional, need to think about going forward?
Well, before we do this, let’s just remember one other piece of legislation that is going to further complicate the way we react to the war.
The German Supply Chain Act
Brought in to protect human rights and enhance Corporate Social Responsibility (CSR), the German Supply Act dictates that businesses need to understand human rights issues and demonstrate how they are being addressed within their own operations and supply chains. If you are a supplier to a business that has any base in Germany, it affects you.
The Act isn’t just about child and forced labour (including slavery). It also requires you to ensure that your supplier is not disregarding labour protection laws; it is upholding freedom of association, acting to stop inequality and ensuring the payment of adequate wages. It goes further still because it also requires you to check that your supplier is taking action to ensure a safe environment, including preventing pollution, protecting against land deprivation, and having no association with torture and cruel, inhuman or degrading treatment anywhere in their supply chains.
Quite simply, there are implications for any business under the Act using Russian suppliers. So if you are subject to the German Supply Chain Act, you should also be asking yourself what you need to do if you are being supplied by Russian businesses, especially if those businesses have any relationship with the Russian State.
It may not necessarily be easy or convenient, but when there is sufficient evidence of human rights violations or environmental violations, businesses are obligated to carry out risk analysis and preventative and corrective actions, even when these are indirect suppliers.
What does this mean for the future of procurement?
The Covid pandemic highlighted the fact that procurement hasn’t been getting the attention it deserves. The impact of the invasion of Ukraine has further solidified this idea.
But how will this shape the future of procurement? In truth, it’s still too early to say exactly what will happen as we enter a new unsettled phase of geopolitics and, therefore, a shift in global business relationships.
However, procurement can play a key role in the short term to protect businesses, and this may well lead to organisations being more likely to recognise the significance of procurement within their organisation and strive to counter risk by delegating bigger budgets, better skills and smarter technology to manage it effectively.
In the long term, you can expect a positive shift in how we approach overall category strategies and how we access market intelligence. Luckily there are already a few tools and approaches out there that organisations can harness in order to transform their procurement processes now and in the future.
Meanwhile, here are some simple checklists that you can action to determine the risks you might be facing as a result of the war in Ukraine:
Whether you are subject to the German Supply Chain Act or not, you need to protect your business from the risks of having suppliers that breach Human Rights:
- Map your suppliers – do you have a list of all of your suppliers?
- Determine which country your suppliers are based in and what category of goods they supply?
- Use a “traffic light” rating to identify any that might be a higher risk, e.g. Russia – RED, but also textiles globally have significant problem areas.
- Speak to all of the “REDS” and decide how to reduce the risk. Do you stop using? Do an audit? If they are subject to sanctions, you must stop now.
- Once the “REDS” are under control, tackle the ambers.
- And finally, document everything!
Even if you are not supplied directly by businesses in Russia or Ukraine, you need to act now to ensure Business Continuity:
- Ukraine is a key supplier of cereals, steel, oils, ores, neon, machinery, timber, fertilisers, and animal feeds; Even if you don’t buy these directly, your suppliers will
- Use your Supplier List and ask your suppliers, starting the most important ones to your business, if they purchase these categories from Ukraine and whether they have any supply problems.
- Once you know where your problems are, work out a plan to ensure continuity of supply.
- In parallel, transport and energy costs are going to be severely impacted, so make sure you understand your risks in both categories.
If you have any questions about how the Ukraine crisis could be impacting suppliers to your business or if you simply want to de-risk your supply chain for the future, feel free to get in touch.