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Koray Köse is a senior director analyst in Gartner's Supply Chain Sourcing and Procurement team, focusing on enabling procurement leaders to deliver maximum value by optimizing risk, augmenting capabilities and competitiveness in strategic sourcing. He covers risk management, procurement transformation and digitization through innovation, disruption, collaboration and technology utilization.
David Maloney, Editorial Director, DC Velocity 00:01
Russia invades Ukraine. How will the war affect supply chains? New efforts to loosen tight freight markets. And logistics costs continue to rise. Pull up a chair and join us as the editors of DC Velocity discuss these stories, as well as news and supply chain trends, on this week's Logistics Matters podcast.
Hi, I'm Dave Maloney. I'm the group editorial director at DC Velocity. Welcome.
Logistics Matters is sponsored by Beckhoff. Discover intralogistics automation without limits. Beckhoff offers a complete ultra-compact motion-control system for automated material handling equipment, including a range of space-saving motor and drive solutions for BLDC, MDR, servo technology, and more. Make your move to better motion control by visiting Beckhoff.com/intralogistics.
As usual, our DC Velocity senior editors Ben Ames and Victoria Kickham will be along to provide their insight into the top stories of this week. But to begin today: We've all been glued to the news this week, viewing the devastation that's happening in Ukraine, and of course, major events like an unprovoked war ripple across the world and can impact economies and more. So, what exactly are the supply chain implications of the Russian invasion of Ukraine? To answer that, here's Victoria with today's guest.
Victoria.
Victoria Kickham, Senior Editor, DC Velocity 01:27
Thank you, Dave. Our guest today is Koray Köse, who is a senior director analyst in Gartner's Supply Chain Research and Advisory, and, as you say, he's here to talk with us about the Russian invasion of Ukraine and its effects on the supply chain. Welcome, Koray.
Koray Köse, Senior Director Analyst, Supply Chain Sourcing and Procurement, Gartner 01:43
Thank you for having me today, Victoria and team.
Victoria Kickham, Senior Editor, DC Velocity 01:47
This is obviously a fast-moving, changing situation, I'll just start by asking, you know, how is this—how has it affected global supply chains to date, and, you know, what can we expect to see in the coming days and weeks?
Koray Köse, Senior Director Analyst, Supply Chain Sourcing and Procurement, Gartner 02:00
We certainly saw an immediate impact into supply chains that are tied directly to the outputs of the conflict region. We see critical materials, specifically for semiconductor manufacturing, like the purified neon that is mainly supplied out of Ukraine, or even petroleum, coal, and natural gas prices to spike, and worries of the energy sector and the energy provisions for the manufacturing and the rest of —in the Western part of Europe. So, we saw that as an immediate impact, but alongside that, we're seeing reactions from large enterprises globally to cease the operations, along with the sanctions that were put in place. So, basically, economic trade between Russia and the world, almost, besides a few countries left like China, is interrupted and will be interrupted for some time now.
Victoria Kickham, Senior Editor, DC Velocity 02:59
You mentioned petroleum. Rising oil and gas prices, you know, were already a problem before this, this war. What are the primary effects of these rising prices on the supply chain, and can you talk about who will feel the greatest impact?
Koray Köse, Senior Director Analyst, Supply Chain Sourcing and Procurement, Gartner 03:15
So certainly, we will see that in the logistics sector, especially due to the fuel prices, and the, basically, uncertainty going forward. When we think about Russia's exports of about $400 billion, $250 billion is really fossil fuels, which is significant to the economy of Russia and its trade balance, but at the same time, it's important in the OPEC Plus context, where Russia is a member. And because of that, it creates an issue to counter the inability of exporting petroleum from Russia by increasing the manufacturing production in OPEC, because the ties are existing and the OPEC members are not yet ready to jeopardize the relationship with Russia, as also politics come into play where Russia is seen as a security force in Middle East and there is a bit of an awakening [on] how much influence actually the U.S. has on that, so we won't see, necessarily, oil prices come down as [in] many crises before, where we see a spike for a couple of weeks and then it comes down. So, something similar and even adverse to that during Covid. This one seems to last longer and have much more significant effects, so $100-plus is something that we can see as an extreme, but my prediction, even though if I can make one, is this is not going to go away as we have seen in past disruptions.
Victoria Kickham, Senior Editor, DC Velocity 04:56
Yeah, a long time to deal with this. Are there any other commodities or industries that you see as most at risk? You mentioned a few at the outset, but any particular industries you're seeing most at risk from this crisis?
Koray Köse, Senior Director Analyst, Supply Chain Sourcing and Procurement, Gartner 05:11
Besides the high tech, I think automotive industry will be certainly impacted by this, especially when we're thinking about the automotive sector also manufacturing in [the] region, and we know about the news that Foxconn decides to cease operations in Russia, GM is not selling there anymore, Volvo is not exporting there anymore. So, when we're looking at the key challenges overall, when we think about material shortages, material cost increase, demand volatility, the logistics route being closed and having now extreme capacity constraints from spillovers, and in addition to that, cyber security breaches, and overall, this impact in production capacity, you can easily mention the automotive industry. [It] probably will have spillovers in other manufacturing and industrials, all the way to pharma life sciences.
Victoria Kickham, Senior Editor, DC Velocity 06:03
As companies reroute and deal with these issues, what kinds of strategies are planning, planning strategies? Or should companies here in North America be putting into place, you know, to, to deal with this and to work around it?
Koray Köse, Senior Director Analyst, Supply Chain Sourcing and Procurement, Gartner 06:17
I think the most important fact is that visibility in supply chains [has] been abysmal. In good times, it really didn't hurt companies, but now during times of crisis and volatility, it is fundamental to know what companies you're working with in your supply chain. And unfortunately, even in the first year, visibility hasn't been great. Only about half of the companies have 90%-plus visibility in first year. That means direct ties, you get products and services, and you pay for those, and you don't even know all of them, and that's severe. If you think about second and third tier, that's where things fall apart drastically for all the industries I was just listing before, because now they see the disruptions. Of course, there's a lag until, in the lead times in between and the inventory on [the] ground covers that period until the hits are felt by the companies, but, quite honestly, this isn't something new to supply chains. It's not another crisis supply chains have to deal with. It's been the same crisis, and the crisis we call this the lack of resiliency in supply chain, the lack of resilient supply networks and ecosystems, and, fundamentally, the lack of visibility. And in order to counter that, it is imminent need to create full first-tier visibility and then determine your key failure nodes on your first tier, your direct ties, where you have immediate impact and influence. And then you should commit and secure for key volumes as a risk response, not irrational, just commit and secure to really what you need, because irrational buying just has a bullwhip effect, and that will last and come back like a boomerang and hit the companies that were doing that. And then of course, think always diversifying your sources and routes. Right now you have to diversify your routes anyway. The direct connections are not any more viable, so you have to go around. We will see congestions, for example, in the Suez Canal. We will see that the Black Sea route was actually a really important route that is blocked right now. You will see congestion transfer to other ports that need to now take those requirements of capacity in and plan for that. So, you need to think about your production plans, your delivery plans and and move them where you can to stretch the buffer that you have.
Victoria Kickham, Senior Editor, DC Velocity 08:52
Another issue that's come up in the context of all that's going on is the risk of cyber attacks and how that is rising. How can companies in the supply chain assess sort of whether or not those threats will affect them and and how far-reaching that might be?
Koray Köse, Senior Director Analyst, Supply Chain Sourcing and Procurement, Gartner 09:07
I think how it will affect them analysis is rather simple. As soon as you utilize the technology that exchanges critical information to move tangible goods, then you are at risk. If you have a technology baseline that is not necessarily resilient, then you are even at more risk. If you are in the supply chain of critical materials that are also tying into specific industries like aerospace and defense, for example, I think there is like, that's going to be DEFCON—I don't even know how many levels there are, but the highest there is. So, I think that is really important to consider. And cybersecurity does the following: It impedes your operational ability, so you you cannot necessarily move goods anymore. You cannot manufacture goods anymore. You may not be able to pay your suppliers. You may not be able to communicate. So, it can come from all angles. What it also can do, and often we think about cybersecurity in, in the IP world, where intellectual property maybe touched and taken out from the secure environment that drives competitiveness. That is still the case, though cyber security in this context is not primarily targeting IP that we have seen in the past maybe, but much more intentional attacks to bring supply chains down, and that means that you need to get with your IT department, your CIO, CFO, CEO, CIO, CPO. You need to huddle and figure out what kind of resilience do they have; what do they have at risk response strategies; how are, they're seeing maybe recovery strategies already being in place, ready action plans; and where is there information being used to drive operations? And those are the key failure nodes. When the information transferred moves the operations, and you don't have a resilient infrastructure there, from a cybersecurity standpoint, those are the weaknesses and vulnerabilities.
Victoria Kickham, Senior Editor, DC Velocity 11:21
Yes, as you as you said, just a minute ago, planning and visibility seem to be key. In all of this. Koray, thank you for being with us today. We really appreciate your insight.
Koray Köse, Senior Director Analyst, Supply Chain Sourcing and Procurement, Gartner 11:32
Thank you for having me.
Victoria Kickham, Senior Editor, DC Velocity 11:34
We've been talking with Koray Köse of Gartner. Back to you, Dave.
David Maloney, Editorial Director, DC Velocity 11:39
Thank you, Koray and Victoria. Now let's take a look at some of the other supply chain news from the week. And Ben, you wrote this week about new efforts to loosen up the tight freight markets in the trucking sector. Can you share some details?
Ben Ames, Senior News Editor, DC Velocity 11:53
Yeah, exactly, and this echoes some of the points that Koray was just making about the importance of planning and visibility. Of course, he and Victoria are talking about global trade, but within the U.S., as U.S. market—states continue to cautiously emerge from pandemic conditions, we're seeing that many markets are strong—particularly retail sales just keeps going and stock investing, largely—but it remains tough in many places to move freight from point A to point B. We've done a lot of stories, here at the magazine and on the podcast, about the conditions at seaports, where import containers are stacked up and delayed. Some new pop-up yards seem to be loosening that knot lately. But it's also true, with this freight delay issue on the highways, where there are shortages of truck drivers, trucks, and replacement parts, and those have all combined to make one of the most constrained road freight markets in years. In turn, that's driving up prices for retailers and for certain goods, even making it hard to keep inventory on the shelves sometimes. So, this week, we learned about a new effort to add some extra capacity to trucking freight. That comes from an agreement between the American Trucking Associations, or the ATA, and the U.S. Department of Labor. It's part of a larger effort with the Biden administration focused on solving supply chain and infrastructure problems. There are a whole lot of problems there. In fact, many people have heard the President, perhaps, talking about supply chain issues this week in his State of the Union address, and that's not usually a place where you hear the word "supply chain," so... . But this initiative establishes ATA as an official Registered Apprenticeship sponsor, and what that means is that the ATA—or its member companies, which are trucking fleets—can now provide the ability to offer apprenticeships to job applicants. That's significant, because that approach could generate a new pipeline of workers to fill really high-demand jobs right now, like diesel technicians and the truck drivers themselves. It would work by supporting what's called an "earn while you learn program," so as ATA President Chris Spear said, it's more than just a paycheck, but rather, apprentices are eligible for things like childcare and housing allowances and other support as they begin to learn how to follow a new career path.
David Maloney, Editorial Director, DC Velocity 14:25
Well, Ben, that sounds like a promising way to address the truck-driver shortage that fleets have talked about now for many years.
Ben Ames, Senior News Editor, DC Velocity 14:33
Yes, it does, but it may run up against another hurdle, and that's an ongoing shortage of the trucks themselves. We saw two reports on the transportation sector this week that found that auto manufacturers accepted orders to build new vehicles in February, only at a muted rate, and that reveals that automakers lack confidence that their supply chains will improve in the short term, despite the industry's roaring demand to get more money. tractor-trailers on the road. One of the studies, from a transportation analyst group called FTR, said that there's a severe shortage of new and used trucks. However, the economy continues to generate steady freight growth in all segments. So, you can see those two variables are out of balance. And the February statistics, however, were not good news for future production. FTR said that by not booking more orders, those OEMs, those original equipment manufacturers, are signaling that their supply chain remains clogged, and they don't anticipate being able to ramp up production in the next couple of months. So, on the one hand, you know, we may, from the government initiative, have more truck drivers and technicians coming in, but there looks to be still a shortage of the actual vehicles, so we'll have to see how the tension plays out.
David Maloney, Editorial Director, DC Velocity 15:51
Yeah, definitely not an easy problem to solve. Thanks, Ben.
Ben Ames, Senior News Editor, DC Velocity 15:56
Glad to.
David Maloney, Editorial Director, DC Velocity 15:57
And Victoria, you wrote this week about how logistics managers continue to grapple with the rising prices. What more can you tell us?
Victoria Kickham, Senior Editor, DC Velocity 16:05
Yes, that's right. And this is in the context of some reporting we did on industry growth and expansion. The logistics economy continued to expand in February, and it was fueled by the continued strong demand for warehousing and transportation that we've seen these last many months. But the supply chain, as you say, is also dealing with rising prices. And this is all according to the February Logistics Managers' Index report, or the LMI, which was released on Tuesday. And what they reported was that this was the industry's 13th straight month of what they're calling "significant growth," which essentially means the index has remained at a very high level for more than a year, above a reading of 70. The threshold is 50. Below that is contraction, and above it is expansion. We report on the LMI frequently, but for those who are unfamiliar with it, it's a monthly report based on a poll of logistics managers from across the country, and the goal is really to gauge conditions in transportation and warehousing. An interesting aspect of this most recent report was their note about the impact of geopolitical issues on the supply chain, particularly Russia's invasion of Ukraine, which we've already talked about today. The high prices that have plagued the industry over the past year continued to accelerate in February, and the researchers said it was driven in part by the crisis in Europe, and they expect this, obviously, to continue, particularly the effect on energy prices. As I think we probably all saw, oil prices surged this week, I think surpassing $115 a barrel at one point, which is a level not seen in many, many, many years. The logistics managers surveyed for the report said they expect transportation prices, in particular, to continue at those high levels for the next 12 months. So, essentially, there's a lot of concern out there about the high prices and inflation that we're seeing, and how those issues will continue to affect the industry.
David Maloney, Editorial Director, DC Velocity 18:02
Right. Did they give any other insights on where this may be headed?
Victoria Kickham, Senior Editor, DC Velocity 18:07
Yeah, other than, you know, sort of the 12-month expectation of more of the same, not really, but I think some background really helps here. Transportation prices have been climbing since the summer of 2020, essentially, and they've hit record highs over the past year, particularly since early 2021. And the LMI researchers said this week, they expect—and I'm quoting here—"broad and very strong upward pressure" on transportation prices across the supply chain, again, especially in light of geopolitical events. I spoke to a handful of logistics professionals about the Russia-Ukraine war for a separate report, and they all noted the same concerns. The invasion is obviously stalling supply chains in the region and will have ripple effects globally, but most agree that the most immediate impact on businesses will be energy-related, particularly fuel prices, and we touched on this with our guest. Shippers and carriers can expect to pay more in the near term, and that's according to many people I spoke to, but in particular, Ryan Closser of FourKites, which is the supply chain visibility platform. They're tracking all of this movement, as are other tech companies. And he put it pretty simply, you know, he said it costs more from go to go from point A to point B this week than it did last week, and it's going to cost even more next week, so companies have to prepare and deal with those effects. He also said it'll be—effects will be felt across all modes, and it could especially be hard on air freight, which, when I spoke to him this week, he said was already seeing rate increases. You know, not only is it more costly to buy fuel, but as companies reroute around the conflict in Europe, they're also faced with longer transit times, which will drive up costs in addition to creating delays, of course. So, again, just a lot of concern about the high cost of doing business and where all this is headed.
David Maloney, Editorial Director, DC Velocity 20:05
Yeah. And as we said earlier with our worldwide supply chains, events have long-reaching effects. Thanks, Victoria.
Victoria Kickham, Senior Editor, DC Velocity 20:13
You're welcome.
David Maloney, Editorial Director, DC Velocity 20:15
We encourage listeners to go to DCVelocity.com for more on these and other supply chain stories. And check out the podcast Notes section for some direct links on the topics that we discussed today. Thanks, Ben and Victoria, for sharing highlights from the news this week.
Ben Ames, Senior News Editor, DC Velocity 20:29
Always enjoy it.
Victoria Kickham, Senior Editor, DC Velocity 20:31
You're welcome.
David Maloney, Editorial Director, DC Velocity 20:32
And again, our thanks to Koray Köse of Gartner for being our guest today. We welcome your comments on this topic and our other stories. You can email us at podcast@dcvelocity.com.
We also encourage you to subscribe to Logistics Matters at your favorite podcast platform. Our new episodes are uploaded each Friday.
And speaking of subscribing, we encourage you to check out our new sister podcast series, Supply Chain in the Fast Lane, coproduced by the Council of Supply Chain Management Professionals and Supply Chain Quarterly. The initial series looks at the state of logistics. It premieres this Tuesday with a discussion on the current state of inventories. Subscribe to Supply Chain in the Fast Lane wherever you get your podcasts.
And a reminder that Logistics Matters is sponsored by Beckhoff. Discover intralogistics automation without limits. Beckhoff offers a complete, ultracompact motion-control system for automated material handling equipment, including a range of space-saving motor and drive solutions for BLDC, MDR, servo technology, and more. Make your move to better motion control by visiting Beckhoff.com/intralogistics.
We'll be back again next week with another edition of Logistics Matters, when we will look at new truck-driver recruitment efforts, so be sure to join us. Until then, please stay well and have a great week.
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