The situation in Ukraine and Crimea looks bleak, to put it lightly. We’ve been watching the discussions and negotiations unfold among the numerous parties involved, which include not only the interim Ukrainian government, the recently declared independent government in Crimea, and Russia, but also the EU, NATO, and the US. And we think the continued instability and potential military conflict is enough to upset the procurement, commodity management and supply risk applecart with implications for pricing, availability, lead times across a broad range of commodities, parts, components and finished products—with the impact going far beyond Eastern Europe.
As context, although Ukraine is neither a major oil producer nor oil consumer, it is the key “middle man” country for Russian energy exports, according to J.P. Morgan Commodities Research analysts. More than 70 percent of Russia’s gas and oil flows to Europe pass through its territory. In turn, Europe is the buyer for nearly 90 percent of Russia´s oil exports.
On the metals front, several key US manufacturers’ supply chains could feel reverberations due to their business in Russia (especially if US/EU sanctions directly affect them. For example, Boeing Co. buys nearly a third of its titanium for its planes (translating into an $18 million total spend) from Russia, mostly from VSMPO-Avisma, the largest titanium producer in the world.
Here are our takeaways and recommendations for procurement and supply chain practitioners:
- Set up a procurement and supply chain war room to closely monitor and follow activities in the region. This includes understanding the impact of potential instability and military activity on forecast demand, supply, availability, etc. For organizations with significant demand or supply exposure to the region, we recommend developing a formal scenario planning capability involving stakeholders from different parts of the business.
- Understand your commodity and lower-tier supply risk exposure to Eastern Europe, Russia, and nearby countries. Invest the time to develop supply chain maps for key products and categories to understand exposure, which would likely be from lower tier suppliers. Products from providers such as Resilinc, HICX, and Sourcemap can help organizations visualize the supply chain.
- Evaluate options to mitigate commodity price volatility that could result from continued uncertainty and conflict in the region. This could include hedging options both indirect (e.g., inquiring about any price premiums with distributors or suppliers to hold pricing for longer time periods) and direct (futures and forward contracts, swaps, etc.). Discrete manufacturers and metals buyers should evaluate commodity management strategies and technologies and learn from what leaders in the food and CPG space have done in regards to reducing commodity volatility and risk. Technologies providers in this area include EKA, Brady, and Triple Point technologies.
- Invest in direct material sourcing solutions that make it easier to on-board, qualify, and manage new suppliers in a manufacturing environment in new regions. These tools can greatly speed up the time to qualify alternative suppliers, which becomes a critical strategy for those organizations most ahead in terms of mitigating supply risk. Solutions from providers such as Directworks, Fullstep, Pool4Tool, Allocation Network and others can be invaluable in this regard.
- Develop a quantitative forecasting capability (e.g., commodity price forecasting) that focuses as much on explaining the reason for underlying price movements as the actual predictions themselves – to allow others in the organization outside of procurement, trading, and supply chain to come together and explore potential decision paths. We encourage you to explore MetalMiner’s proprietary models and approaches in this area, including how best to apply them in uncertain environments.