War in Ukraine: the supply chain impact

Posted on 3 May 2023 by Joe Bush

The war in Ukraine is now well over a year old. The conflict has brought about disrupted supply chains and shortages of raw materials. As once reliable imports became less certain, every manufacturer was left rethinking how best to achieve viability and sustainability. Here, Elena Frandino, Managing Director at Sedamyl, shares her thoughts on the impact on food and beverage manufacturers.

The last year has been a very challenging one for the UK food and drink industry. As we have now passed the 12-month anniversary of Russia’s invasion of Ukraine, it’s interesting to compare how the sector is performing now, compared to before the conflict began, in February 2022. The impact of the war on global food markets has been severe, because Ukraine – known as Europe’s breadbasket – was among the world’s top agricultural exporters prior to the unprovoked Russian campaign against it.

The country accounted for 50% of the planet’s sunflower seed oil, 18% of its barley, 16% of global maize production and 12% of our wheat. In 2021, Ukrainian farmers sowed almost 17 million hectares of spring crops, which is more than the combined area of Austria and Czechia. Last year, this was down by nearly a quarter (22%). And it’s not simply an issue of lowered output on the ground. Getting the produce out of the country to eager international markets has been hampered by Russian military vessels blocking Black Sea ports, while domestic transport lines to export points have often been stopped.

So, with the war disrupting supply lines and making exports less reliable and harder to secure, the price of foodstuffs has increased – at a time when they were already at their highest levels in a decade.

The perfect storm

The conflict also sent energy prices through the roof. Already accelerated because of a faltering economy after the pandemic slowdown, they were driven even higher after the invasion, because export bans took gas, coal and three million barrels of Russian oil a day from global supplies. The perfect storm nudged up interest rates that had been static for years and sent inflation soaring, creating a sharp cost of living crisis.

The food and drink industry is no stranger to constant change. Consumer behaviours shift rapidly, with fresh demands placed on manufacturers and retailers incessantly, as an ever more sophisticated, ethically-driven public has become increasingly aware of the significance of its purchasing decisions – on their own personal outcomes, society, legislation and the planet. It might see shoppers wanting to eat more healthily, seeking to protect the environment or expressing their concerns about factory farming and animal welfare more broadly.

As such, many players in the food industry were anticipating the changes that might come with the beginning of a war in Ukraine. However, that’s not to say it didn’t also bring many challenges. While consumer behaviour and intentions are monitored assiduously to make reliable predictions of upcoming trends, a major conflict in Europe big enough to shock international markets was unprecedented in nearly 80 years – and it unfolded quickly.

Because of the rapid rise in the cost of living – food, clothes, energy, transport, big ticket items, mortgages and rents – shoppers have been more cautious and judicious in both what they spend their money on and how often. And customer loyalty has eroded massively: if a supermarket doesn’t have a line, customers will go elsewhere; if a brand disappears or is only available sporadically, they will switch to another without compunction.

It means that the onus is on food producers to maintain delivery of the products that are needed to ensure that retailers get what they need, when they need it, in sufficient quantities for customer retention.

Maintaining supply

As such, the security of our raw material supply chains is something that we must be especially vigilant about. A secure logistics management system is one of the biggest assets a manufacturer can have, so understanding how to meet the demands of the market amidst the disruption is something that became a top priority for all of us.

We have also had to interrogate the reliability of our supply lines, which changed because of the conflict. Just as our business has had to look at reprioritising different operational functions, so did those of our suppliers – which caused a ripple effect that has subsequently caused inflation rates to rocket.

Fleet-footed and adaptable manufacturers realised that shortening and reducing complexity in their supply chains would future-proof their organisations against any ongoing damage caused by the war. A very effective way of doing this is by increasing local sourcing – taking more from our suppliers nearby, regionally and across the UK, as well as increasing the number of domestic UK merchants.

Reducing the distance that raw materials must travel doesn’t just secure the immediate and long-term future of a food manufacturer’s supply chain. It also cuts air and road miles for dramatically boosted environmental protection and significant freight cost savings – important in keeping the price of finished products as competitive as possible. In addition, the reliable delivery of ingredients we have established has allowed us to grow our stockholdings for increased resilience as the conflict continues.

Strength in numbers

While we turned to more local sourcing of raw materials, we also looked to strengthen the relationships we have with our providers. Together, we were both able to help secure our organisations and work closely to make the relationships work for all parties.

For example, tapping into suppliers’ 61 knowledge and tips on market dynamics has often helped us anticipate and avoid problems or take advantage of predicted opportunities. In addition, many manufacturers have introduced more ‘just-in-time’ delivery from local suppliers, which has allowed them to reduce inventory holding costs and increase inventory turnover. This is also important if they have space restrictions or other operational reasons for not holding large amounts of stock.

Undoubtedly, the conflict in Europe has put massive restrictions on the supply of critical raw materials to the world. Arguably the most important industry there is – food and drink manufacture – has adapted quickly and effectively and has managed to operate well in a much more pressured ecosystem than existed just a year ago.

Collaboration, relationship building and a willingness to help colleagues, including competitors, have been crucial in keeping the shelves stocked and hedging against rising prices as much as is possible. Producers and their suppliers have been reliably inventive and resourceful throughout the Ukrainian conflict and are devising new ways to meet future challenges and uncertainty. The world has changed, but their determination to do the best by their buyers and end customers hasn’t.

For more stories on Leadership click here.