It’s now more than four months since the beginning of the war in Ukraine. The impact it’s having on people living both inside and outside the region continues to be the most tragic and important issue at hand.
Yet, for organizations across sectors, the effects are also being felt in other ways. After the disruptive impact of COVID-19, the war has further underlined that we no longer live in a world of business as usual. As individuals, communities and businesses, we are seeing the “normal” ways of doing things challenged and uprooted yet again, at pace.
An already highly challenged global supply chain has been stretched beyond capacity. Indeed, a combination of rising demand and a shortage of vital commodities — from fuel and food to metals and microchips — has contributed significantly to increases in the cost of living for consumers and business operations.
The introduction of new international sanctions is also limiting companies’ ability to fund supplies, labor and operations. Meanwhile, new regulatory requirements have added fresh complexity to trade flows and business relationships that manufacturers and supply chains were ill-equipped to handle. There is concern that the war may lead to a new wave of cyberattacks on public infrastructure and private organizations alike.
A running start?
The impact is being most keenly felt in the areas of energy, raw materials and logistics. Russia previously provided much of the oil used in Europe along with substantial portions of the world’s palladium for catalytic converters, nickel for EV batteries and platinum for smartphones. Meanwhile, Ukraine’s largest seaport, Odessa, which manages more than 40 million tons of cargo annually, remains at a standstill.
For manufacturers, the consequences are clear and severe. Having first acted swiftly to protect their people and factories working in the region, they now face the enormous task of finding new ways to power their production facilities, manage their supply network and deliver their products. And they must do so at a time of customer expectations around price, personalization and service.
They should have a head start, at least. With the challenges of the pandemic, many companies were already shifting their operating model to focus on agility, resiliency and data-driven decision-making. Now, alongside the traditional crisis response to what’s happening in Ukraine, they must act quickly to consolidate and accelerate this transition.
First and foremost for manufacturers, that means rethinking where they source components and raw materials, even considering whether they can change the make-up or design of their products to reduce dependency on the world’s most volatile and dynamic places. Likewise, they must build greater flexibility into where they make their products, diversifying geographically to mitigate specific, location-based challenges in the production cycle.
Geographical diversification, although necessary, will complicate manufacturers’ operations since it means navigating a patchwork of constantly evolving sanctions, trade flows, ecosystem relationships and regulatory requirements in multiple countries. Even so, the upsides of developing the ability to navigate disruption is worth the effort.
To do this, companies must build a distributed manufacturing model that balances cost management and risk management as they redesign their manufacturing footprint to lessen dependence on a particular geography. Collaborating with stakeholders throughout their ecosystem will enable them to effectively identify, evaluate and respond to an ever-evolving operating landscape.
To seamlessly manage the complexity that needs to be reintroduced into global manufacturing networks requires a control tower approach, a NASA-style command center (albeit on a smaller scale!) that provides management full visibility of their supply chain. This tower should combine technologies like cloud, predictive analytics, machine learning and AI with a multifunctional team of experts who design, monitor, and manage the distributed manufacturing environment. That includes everything from cost optimization and contracts to manufacturing planning, transportation logistics and warehouse management. And in each case, it also means analyzing real-time Internet of Things data to identify potential issues, spot opportunities and plot the right course of action.
The new normal
For decades, manufacturers have focused on globalization and optimization — an approach that has boosted revenues, generated jobs and positively impacted local and national worldwide.
Yet the days of streamlining costs by holding low, fast-turn stock inventory and consolidating supply chains are being re-evaluated. Not as a temporary measure the war in Ukraine is resolved, but permanently so that when the next problem arises — be it a pandemic, international conflict, natural disaster, or something else — the company will have the operational flexibility to rapidly adjust in response to changing circumstances.
In addition to the profound humanitarian impact, the war in Ukraine confirms that disruption and unpredictability are now part of everyday life. Whether it’s the ability of staff to get to work, the cost and availability of materials, how they power the shop floor, or the process of getting goods into customers’ hands, today’s (and tomorrow’s) manufacturers can no longer avoid risk. Instead, they must set themselves up to manage it.
The views reflected in this article are those of the authors and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.