Russia’s invasion of Ukraine is piling new troubles onto the world’s already battered supply chains, reports The Wall Street Journal (Feb. 28, 2022). The fighting has shut down car factories in Germany that rely on made-in-Ukraine components and hit supplies for the steel industry as far as Japan. It has severed airways and land routes that had become crucial since the pandemic began gumming up sea trade.
The conflict is also bottling up Ukraine and Russia’s vast commodity exports, sending the price of oil, natural gas, and wheat rocketing. Shipping from Ukrainian ports, an important corridor for grain, metal and Russian oil shipments to the rest of the world, has all but ceased. The decision by European nations to close their airspace to Russia will increase the cost of flying cargo from Europe to Asia, potentially making some routes commercially unviable.
If Russia cuts off supply of its products, it will hit supply chains that rely on components and little-known commodities from Russia such as neon gas and palladium, important ingredients to make semiconductors.
The car industry, which has long relied on extended cross-border supply chains, was among the first to feel the blow of the fresh economic dislocations. Leoni, which makes wire systems in Ukraine that it ships to European auto makers, last week shut its factories in Ukraine and sent 7,000 employees home. VW, no longer getting wiring systems produced in Ukraine, stopped production at factories that are most critical in its push into EVs..
Countries including the U.K., Poland and Bulgaria have banned Russian airlines from their airspace, and several freight forwarders have suspended services to and from Ukraine. Further airspace closures or airline-specific restrictions could cause delays, reductions in capacity and rate increases. Shipping giants FedEx and UPS suspended shipments into Russia, having earlier stopped doing so into Ukraine.
The disruption to transportation is worsening by the day. At least 22 tankers are clogging the Kerch Strait, a key Russian-controlled waterway, because ports are closed. Greece, which operates up to a quarter of the global tanker fleet, is urging shipowners to pull their vessels from Russian and Ukrainian waters in the Black Sea.
Classroom discussion questions:
- What are the main OM issues arising from this conflict?
- Can the decision tree illustrated in Supp. 11’s Example S1 be applied here?