By Gary A. Smith, CPIM-F, CSCP-F, CLTD-F
“Yes, and how many times must the cannonballs fly
before they’re forever banned?” --Bob Dylan
I’ve been a Supply Chain Professional my entire career although for the longest time it was not called that. In the early days it was physical distribution. Then it was in logistics. Now at the mature phase of my career, we are referred to as Supply Chain Professionals. So that’s what I do – I build supply chains and I build them to the best of my ability. I am good at it and proud of what I do. And as a supply chain professional, I believe I along with my supply chain brethren can claim at least a small part of the credit for building an incredible world economy. See table below.
Until about the 1980’s extreme poverty levels grew in direct proportion to general population growth, although at a slower rate. Then beginning in the late 20th century, extreme poverty rates began to decline significantly. There are many reasons for this, however I believe that one significant reason is the economy that the world has built in the last 40 years. The rise of globalism, the fall of communism, and the explosion in world trade and technology has lifted millions and millions of people out of extreme poverty. But civilization has paid a high price for this prosperity. We have depleted our natural resources, clogged our seas with plastic and garbage, and have pumped the atmosphere full of greenhouse gases (GHGs) due to our dependence on fossil fuels. The result has been a worldwide climate change crisis and has jeopardized the future of this planet and all its inhabitants as it hurtles through space.
While it’s been a struggle, human beings have come to recognize the dangers of climate change and have been making efforts to mitigate it. I wrote about ways that supply chain professionals can reduce the carbon footprint of their supply chains in a previous column. The challenge is that it seems that although we have made a lot of progress on the climate front, recent events have occurred that have forced us to take one or even two giant steps back.
The world has experienced three massive supply chain shocks in less than a decade. It began with the China – US trade war that began in the last decade. The second shock was the Covid-19 pandemic, which virtually shut down global trade for months. Both traumas are still felt today and will be for some time. Now, we have a third, the Russian invasion of Ukraine. This shock, especially when combined with the other two, could spell real disaster for supply chains everywhere and the entire world economy.
There are several reasons for this. One, is that the trade war with China had already economically weakened the two largest economies in the world. Prices skyrocketed for many commodities including steel, aluminum, chemicals, fertilizer, rubber, and wood. In the US, this impacted many industries, but hit the automotive, building trades, agriculture, and tech sectors the hardest. The situation was compounded as Covid-19 spread around the world. Alone these two economic shocks hit hard at the elements of supply chain management, people, equipment, material, and space causing long-term shortages in capacity that have led to worldwide service delays, material shortages, and the inevitable inflation of prices.
Now the Russia-Ukraine war is the sucker punch the world did not need. Foreign wars have always affected the economies of non-combatants, but never like this one. Emotions and politics aside, this war affects the lives and livelihoods of nearly everyone on the planet because it impacts three commodities critical to the modern world: energy, commodity metals, and food.
Energy
Russia is the largest exporter of natural gas and the second largest exporter of oil in the world. While the US imports only about 3 percent of its oil from Russia, the EU imports nearly 40 percent. This means that the US’s recent embargo of Russian oil will have little effect here especially if production increases internally but could have a much more serious effect on EU countries should they decide to embargo oil. If that happens, the EU could end up in a game of chicken with Putin, who might simply wait them out.
At this point energy costs continue to rise, with oil and natural gas prices increasing nearly 30 percent since January. While measures are being taken, some may be politically unsavory, as oil prices have already doubled in the last 3 months. The Biden administration is currently talking to Saudi Arabia and Venezuela to induce them to increase oil production and help to stabilize energy prices. In the meantime, the world is facing the largest energy price shock since the Arab Oil Embargo of 1973.
Commodity Metals
Prices for commodity metals such as nickel, copper, and aluminum are also increasing rapidly, and shortages are already occurring. Russia is the source of 10 percent of the world’s copper and aluminum and nearly half of its uranium. The graph below shows that metal prices are up about 27 percent since January. Recently nickel was removed from the London Metals Exchange as its price went through the roof.
These metals are key ingredients in aircraft parts, ships, electronics, power lines, high-rise buildings, tools, wire, pipe, appliances, and batteries.
Food
Ukraine is known as the “Breadbasket of Europe.” Russia and Ukraine account for nearly 30 percent of total global wheat sales and prices have already increased 30 percent since the war began. They will almost certainly increase as wheat harvests have been down in the last 5 years and global wheat stocks are off 31 percent. Most experts agree that this year’s harvest in Russia and the Ukraine will undoubtedly be poor as well.
That said, Russia and Ukraine together account for 12 percent of the world’s calorie consumption. They are key producers of oilseeds, cereals, and key fertilizer ingredients. This is cause for much concern in developing countries since they spend a much higher percentage of their household budgets on food. As food insecurities rise, so does the chance for political instability. The Arab Spring uprising in 2010 was not caused by food shortages, although food shortages and price increases were certainly a contributor.
The fallout of the War in Ukraine will certainly include the global disruption of grain shipments, low yields in Ukraine and Russia, and another poor harvest worldwide.
War and Supply Chains
Supply Chains and wars share a complicated history. Armies rely on their supply chains. Wars are won and lost based on how efficiently and effectively supplies can get to the front. At the same time, the goal of war, other than killing the enemy, is to destroy the enemy’s supply lines and infrastructure. To do this, combatants must burn massive amounts of fossil fuels to operate the various and sundry machines of war, greatly contributing to greenhouse gases (GHGs) expelled into the atmosphere. This is in addition to the GHGs that the civilian population supporting the armies, are also burning to keep their economies afloat. Call this the pollution premium of war.
On the other hand, war and the environment share no such complications. War is always bad for the environment; of that we are certain. Just look at pictures of a battlefield after a battle. The immediate effects of disease, destruction, famine, and death last for years and for the people affected the memories can last a generation. Environmentally it can take a century to come back from war.
Make Supply Chains, Not War
Supply chain professionals are builders. We build supply chains. We build efficient, effective, and innovative supply chains, and when allowed and given the resources, we can build environmentally sustainable ones. The direction we commit to has to continue bringing people out of extreme poverty as we saw in the table above, to ensure that future generations can enjoy the benefits of modern society. That includes building sustainable circular product life cycles leveraging continuous change and technological advances.
I’ve spent a lot of time in recent years mentoring young supply chain professionals and am constantly in awe of their dedication to their profession, their thirst for knowledge, and their capacity for creativity and innovation. I think of the Louis Armstrong song, “What a Wonderful World” and remember the line, “They’ll learn much more than I’ll ever know.” It is true and I welcome it. So, when we realize what we have already accomplished in building a truly great world economy and lifting millions of people out of poverty, just think of what future supply chain leaders can do once they are given the opportunity to succeed!
It would be a crime if the next generation of supply chain professionals do not get the chance to prove what they can really do.
Gary welcomes your comments and feedback. You can email him at gary@supplychainmavens.net.