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War in Ukraine

From disruption to reinvention: The future of supply chains in Europe

May 23, 2022 10-MINUTE READ

RESEARCH REPORT

In brief

  • Due to the pandemic, companies were already struggling with supply chain disruption.
  • Economic losses due to supply chain disruptions in the Eurozone are estimated at €112.7 billion, or 0.9% of GDP.1
  • The war in Ukraine has compounded these challenges.
  • Energy prices and inflation, raw material shortages and logistics breakdowns, and talent shortages are exacerbating the shock to supply.

Disruption: Supply chain shocks and the accumulation of disruption

Depending on the length and severity of the war the cost of supply chain disruption in the Eurozone across 2022-2023 could amount to €242 billion (2% of GDP) in an ongoing war scenario, or €920 billion (7.7% of GDP) in a protracted war scenario.2

Supply chain shocks

Logistics breakdowns

Ports, vessels and containers are critical to trade. Around 90% of traded goods are transported by ocean shipping.8

The pandemic disrupted logistics networks, and the war is compounding everything. The result?

  • more pricing and availability issues in ocean freight
  • greater port congestion
  • longer air traffic routes and transit times
  • delays in road and rail transportation

Rising rates and severe port congestion

With Russia-bound containers stranded in Europe and lockdowns in the Chinese port of Shanghai, global port congestion was still close to peak levels in April 2022, causing delays and low arrival reliability.9
Container shortages and severe port congestion have driven shipping rates rising to nearly 10 times their level compared to June 2020.10
Liners have ordered over 500 new container vessels, but they won’t come online until 2023 or 2024.11

Lack of material supplies

Companies are increasingly concerned about the lack of intermediate inputs and critical components.

Supply of these is concentrated: Over half (52%) of the share of EU import value of the most foreign dependent products originates from China.12

  • Naturally, supply shortages have billowing effects across industries like automotive.
  • In Germany, car production in the first four months of 2022 was down 32% compared to 2019 as a result of a lack of primary product inputs.13

Material shortages are a rising concern

A tight talent market

The most complex and enduring supply chain disruptor is the talent challenge.

  • The skills the world needs are changing, along with demographics and employee expectations. The combined effect of these monumental shifts is here to stay.
  • To contend with tight labor markets, employers will need to continue to consider raising wages and improving working conditions as they attempt to attract and retain workers.

The changing world of work

-7.2m

Workers in Germany projected by 2035.14

1 in 4

UK workers are planning a job change.15

425,000

Heavy goods vehicle driver shortfall in Europe.16

62%

of supply chain leaders say their employees are not advancing enough in the new skills their companies need.17

Energy security

Energy security is difficult to protect, as both world and European economies are still heavily reliant on oil and gas. Together, oil and gas make up nearly 50% of the total energy supply in 2022.18

How can we reduce dependency? Increase industrial and building efficiency and switch to green electricity and low-carbon transport fuels. A few comparisons:

  • A combination of 20 million Electric Vehicles (EVs) and 200,000 heavy-duty trucks using renewable diesel can replace the equivalent of more than 150 million barrels of oil demand.19
  • Switching 15% of European aviation to sustainable aviation fuels (SAF) can reduce oil demand similar to the impact of ca. 10 million EVs in road transport.20

Potential actions to reduce dependency on petroleum-based energy

Risk: Value at stake and projected recovery

Primary market forces such as economic growth, inflation and consumer sentiment, already impacted by the effects of the pandemic, will be further influenced by the evolution of the war. As a result, we have considered a number of possible scenarios that may unfold, with varying levels of economic impact. Unfortunately, the controlled impact scenario has elapsed. The ongoing impact is the current baseline.

Controlled impact

  • Sanctions do not escalate and may even scale back as part of a negotiated truce, alleviating supply disruptions.
  • Commodity prices return to prewar levels.
  • Consumer and business confidence increases; companies and people return to prewar investment plans and spending.

 

Ongoing impact

  • Supply disruption of key commodities continues through 2022. Some countries continue to face oil and gas embargoes.
  • Commodity supply shocks cause short-term price increases.
  • Consumers cut back on some nonessentials and businesses focus on improving operating efficiency.

 

Protracted impact

  • A wide Russian oil and gas embargo leads to significant structural supply disruption.
  • Commodity prices remain high and volatile into 2023.
  • Sustained price increases reduce consumer spending power, contributing to a notable decline in consumer and business confidence and a slowdown in growth.

 

Market force: Economic growth

The current view among economic forecasters is that the war will lead to a material deceleration in growth.21

Under the ‘ongoing’ scenario, Oxford Economics forecasts that the Eurozone will avoid recession, but Eurozone gross domestic product (GDP) will be 1.1 percentage point lower in 2022, relative to prewar forecasts made in January of 3.9%.22

The Eurozone’s trade relationships make it vulnerable to a slowdown

Market force: Inflation

Inflationary pressure may lead to potential upward pressure on wage inflation in some countries and industries.

Under the ongoing scenario, Oxford Economics forecasts that inflation will rise by 5.9 percentage points in 2022 and by 1.2 percentage points in 2023.23

Inflation is forecasted to rise in the Eurozone

Inflation impacts differ by industry

Industries bearing the most exposure to inflation are those in which material inputs, energy and labor represent a large part of the overall cost structure.

Take the chemicals industry, where material costs tie mainly to the cost of petroleum. Similarly, the high-tech and industrial sectors (excluding logistics/freight) rely on energy-intensive material inputs.24

The critical question: Is it possible to pass increased costs onto customers?

Cost structure of selected industries in Europe (% share of inputs)

The supply chain is the nerve center of the European economy

Up to 30% of total European value added relies on functioning cross border supply chains, either as a source of input or as a destination for production.25

We see particular exposure to supply chain shocks in manufacturing sectors, and even more in industries like high tech (e.g. 80% of final value added comes from inputs sourced across borders, while 75% of demand for final products comes from non-domestic markets), automotive and aerospace.26

Industry exposure to supply chain disruption varies

The value at stake

A protracted scenario could cost up to €920 billion in lost GDP for Eurozone economies as a result of supply shocks.27

Recovery time by scenario: supply chain disruptions could take up to 24 months to ease in a protracted scenario, versus approximately 12 months in the ongoing impact scenario.28

Reinvention: How to reinvent supply chains for a new era of perpetual uncertainty

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A paradigm shift

From: Optimizing for Cost To: Optimizing for Value and Resilience
  • Energy, material, transportation as a commodity – availability is more important than source.
  • Global networks that prioritize efficiency.
  • Sustainability is an afterthought. Products and processes designed with a linear mindset - responsibility ends when the product is purchased.
  • Reimagined networks that focus on security of supply and services, tier-1 and beyond, prioritizing sourcing diversification.
  • Supply chains prioritize increasing relevancy to customers, with a holistic definition of value, markets/customers proximity.
  • Sustainability as a ’must have' embedded by design – supply chains become circular.
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Redesigning for the new era

To contend with an uncertain future and build long-term value, European businesses need to redesign their supply chains around three key ideas: resilience, relevance and sustainability.

Resilience

Modern supply chains must minimize day-to-day risk but also absorb, adapt to, and recover from catastrophe whenever and wherever it strikes. Organizations can proactively manage risk and boost resilience by building intelligent and resilient supply chains that are risk-aware, secure, transparent, adaptive, fast-moving and optimized.

 

86%

of European C-level Executives are planning fundamental changes to their operations as a result of the crises.29

Resilience is enhanced by a combination of visibility, agile processes and robust networks which also offer additional benefits in the mid- and long-term, such as achieving sustainability goals and complying with supply chain regulations.

How to get there

Address operational risk

Respond to sudden supply chain changes with improved dynamic visibility, risk identification and mitigation solutions.

Address tactical risk

Adapt to evolving supply and demand with scenario planning and risk/opportunity analysis as part of sales and operations planning.

Address strategic risk

Manage uncertainty by boosting flexibility and capacity through network modeling and simulation, stress tests, strategic buffer sizing and multi-sourcing options.

Benefits

  • Early detection of logistics challenges, demand spikes and material shortages.
  • Dynamic visibility of the supply chain to respond to disruptions as they happen as well as help achieve sustainability targets and regulatory compliance.
  • Potential to offset investment costs, as the same technologies you use to build your intelligent supply chain can provide mid- and long-term benefits to sustainability and compliance.

Relevance

Customer needs are accelerating and changing – especially in terms of value, choice, and convenience. Relevance requires that companies are there for their customers’ “moments that matter” by prioritizing the customer experience.

 

71%

of executives say that technology is giving them the opportunity to reimagine the fundamentals of their business.30

The relevant supply chain is intelligent and agile, able to anticipate and adapt to shifting business conditions and remain applicable to customer expectations, stakeholder demands and ecosystem potential with data, analytics and automation at its core.

How to get there

Learn from the future

  • Capture new data sets that come directly from customer interaction, including real-time data, from inside and outside your organization and across the value chain.
  • Process data using automation and artificial intelligence (AI) to identify new data patterns rapidly and improve decision-making.

 

Reinvent the organization

  • Move to a flatter, faster organizational structure, where the corporate center and C-suite focus on making cross-cutting decisions together.
  • Jointly define organizational purpose, set strategy and allocate capital for key initiatives.
  • Work backwards from the customer – embed capabilities into business processes that directly benefit the customer experience.

Embed intelligence in the enterprise

  • Transition to intelligent processes, products and platforms.
  • Apply a cloud-first approach as the key tenet of your supply chain transformation.
  • Use tools like zero-based cost management to overcome the ongoing effects of inflation.

 

Benefits

  • Mitigates supply chain challenges for materials, logistics and labor
  • Allows you to manage service levels and costs while providing an infrastructure and governance model to unleash innovation and growth

Sustainability

Every business must now be a sustainable business. Companies must pursue improved environmental, social, and governance (ESG) performance by transforming their operations to be circular, net zero and trusted.

63%

of European executives state that becoming a truly responsible/sustainable business is a top priority over the next three years.31

The sustainable supply chain factors in current and future needs of all stakeholder groups including business leaders, employees, customers, investors, ecosystem partners and society at large.

How to get there

Reach net zero and beyond

  • Find ways to get your value chain to zero environmental and social impact. From there, look for ways to become net positive. A deep understanding of the impact of your internal operations and those of partners and suppliers is vital.

 

Engage in circular business models

  • Shift from linear processes to closed-loop, circular processes that minimize waste. Recycling, reuse and repurposing must replace a “use once” mindset.

 

Find creative ways to nurture talent

  • Redesigning for sustainability calls for a rethink of workforce skills. Moving toward more empowered, multidisciplinary teams means people may need to take on more complex roles.

 

Build trust through transparency

 

Benefits

  • Helps ensure a habitable world and the availability of resources for future generations.
  • Reduces global socioeconomic inequities and unlocks the power of all employees.

The decade to deliver

Finding ways to grow amid uncertainty is the new perennial leadership challenge.

For leaders and their organizations, there is no return to the relative comfort and safety of the not-so-distant past. The war in Ukraine, on top of the effects of the pandemic, has made clear that many of the comfortable certainties on which business leaders have long relied are no longer there.

Success may ultimately depend on how well leaders adapt to the demands of this new, testing environment. More than ever, their resolve will be critical.

Disclaimer

The material in this document reflects information available at the point in time at which this document was prepared as indicated by the date provided on the front page, however the global situation is rapidly evolving and the position may change. This content is provided for general information purposes only, does not take into account the reader’s specific circumstances, and is not intended to be used in place of consultation with our professional advisors. Accenture disclaims, to the fullest extent permitted by applicable law, any and all liability for the accuracy and completeness of the information in this document and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit, or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professionals. Accenture and its logo are registered trademarks of Accenture.

This document refers to marks owned by third parties. All such third-party marks are the property of their respective owners. No sponsorship, endorsement or approval of this content by the owners of such marks is intended, expressed or implied.

Copyright © 2022 Accenture. All rights reserved.

1 Accenture Research analysis of Oxford Economics data

2 Oxford Economics Global Economic Model results for scenarios designed by Accenture Research

3 “Commodity Markets Outlook April 2022”, World Bank (2022)

4 Everest data, used with permission

5 “Commodity Markets Outlook April 2022”, World Bank (2022)

6 Oxford Economics data

7 “Russian and Ukrainian seafarers make up 14.5% of global shipping workforce, according to ICS," International Chamber of Shipping (2022), used with permission

8 “Ocean shipping and shipbuilding," OECD

9 “Container shipping: Volume growth calms, tariffs remain strong,” ING Bank N.V. (2022)

10 “Harper Peterson Charter Rates Index,” Harper Petersen, used with permission

11 “Container shipping: volume growth calms, tariffs remain strong,” ING Bank N.V. (2022)

12 “Strategic dependencies and capacities,” European Commission (2021)

13 VDA Press Release (“Production and market also down in April,”), from 4 May 2022, used with permission

14 “Nur mit einer jährlichen Nettozuwanderung von 400.000 Personen bleibt das Arbeitskräfteangebot langfristig konstant,” Institute for Employment Research (2021)

15 “The great resignation: 69% of UK workers ready to move job,” Randstad (2021), used with permission

16 “European road freight rates index up 4.3 points in Q1, hitting a new record,” IRU (2022), used with permission

17 “Skilling the future supply chain workface is easier than you think,” Accenture (2022)

18 Thunder Said Energy 2022, used with permission

19 “The war in Ukraine: A moment of reckoning for the oil and gas industry,” Accenture (2022)

20 ibid.

21 Accenture Research analysis based on Morgan Stanley, Barclays, Goldman Sachs, BNP Paribas, Credit Suisse and J.P. Morgan 2022 GDP & Inflation Outlooks

22 Oxford Economics Global Economics Database. Prewar refers to forecast as of January 2022

23 ibid.

24 Accenture Research analysis of OECD World Input Output tables

25 Accenture Research analysis of OECD TiVA and Oxford Economics Industry Databank

26 ibid.

27 Oxford Economics Global Economic Model results for scenarios designed by Accenture Research

28 ibid.

29 Accenture Survey of 1,100 C Suite executives in Europe; 10th December 2021 – 21st January 2022

30 Accenture Survey of 300 C Suite Executive in Europe, 10th January – 28th February 2022

31 Accenture Survey of 545 C Suite Executives in Europe, 1st October – 30th November 2021

1 Accenture Research analysis of Oxford Economics data

2 Oxford Economics Global Economic Model results for scenarios designed by Accenture Research

3 “Commodity Markets Outlook April 2022”, World Bank (2022)

4 Everest data, used with permission

5 “Commodity Markets Outlook April 2022”, World Bank (2022)

6 Oxford Economics data

7 “Russian and Ukrainian seafarers make up 14.5% of global shipping workforce, according to ICS," International Chamber of Shipping (2022), used with permission

8 “Ocean shipping and shipbuilding," OECD

9 “Container shipping: Volume growth calms, tariffs remain strong,” ING Bank N.V. (2022)

10 “Harper Peterson Charter Rates Index,” Harper Petersen, used with permission

11 “Container shipping: volume growth calms, tariffs remain strong,” ING Bank N.V. (2022)

12 “Strategic dependencies and capacities,” European Commission (2021)

Methodology

13 VDA Press Release (“Production and market also down in April,”), from 4 May 2022, used with permission

14 “Nur mit einer jährlichen Nettozuwanderung von 400.000 Personen bleibt das Arbeitskräfteangebot langfristig konstant,” Institute for Employment Research (2021)

15 “The great resignation: 69% of UK workers ready to move job,” Randstad (2021), used with permission

16 “European road freight rates index up 4.3 points in Q1, hitting a new record,” IRU (2022), used with permission

17 “Skilling the future supply chain workface is easier than you think,” Accenture (2022)

18 Thunder Said Energy 2022, used with permission

19 “The war in Ukraine: A moment of reckoning for the oil and gas industry,” Accenture (2022)

20 ibid.

21 Accenture Research analysis based on Morgan Stanley, Barclays, Goldman Sachs, BNP Paribas, Credit Suisse and J.P. Morgan 2022 GDP & Inflation Outlooks

22 Oxford Economics Global Economics Database. Prewar refers to forecast as of January 2022

23 ibid.

24 Accenture Research analysis of OECD World Input Output tables

25 Accenture Research analysis of OECD TiVA and Oxford Economics Industry Databank

26 ibid.

27 Oxford Economics Global Economic Model results for scenarios designed by Accenture Research

28 ibid.

29 Accenture Survey of 1,100 C Suite executives in Europe; 10th December 2021 – 21st January 2022

30 Accenture Survey of 300 C Suite Executive in Europe, 10th January – 28th February 2022

31 Accenture Survey of 545 C Suite Executives in Europe, 1st October – 30th November 2021

Methodology

Oxford Economics estimated the impact of supply disruptions for 2021 in two stages, focusing on energy and non-energy bottlenecks separately:

STEP 1: The impact of non-energy bottlenecks (logistical disruptions, and shortages of labor and materials) was estimated:

  • We ran a counterfactual scenario on the Oxford Global Economic Model, where developments in demand were allowed to feed through to sectoral output under ‘normal’ conditions. We then compared the counterfactual with the outturn in 2021 to estimate losses from these non-energy supply bottlenecks.
  • Results were sense-checked against country-level survey evidence on supply disruptions.

STEP 2: We estimated the impact of higher energy bills:

We ran another counterfactual scenario on the Oxford Global Economic Model to estimate how the economy would have developed if energy prices had remained at more ‘normal’ levels.

STEP 3: We then compared the counterfactual with the outturn in 2021 to estimate losses from these energy-related disruptions.

The estimated impacts resulting from energy and non-energy disruptions were combined to produce total cost estimates (based on output losses and measured in nominal Euro terms) for the Eurozone. These were then aggregated to estimate the total impact.

Industries of focus include manufacturing, construction, retail and wholesale trade and transportation and storage.

STEP 1: The Oxford Global Economic Model was used to project forward the path of the Eurozone economy under three alternative scenarios relating to the Ukraine conflict:​

  • Controlled impact scenario where sanctions do not escalate and may even be scaled back as part of a negotiated truce, alleviating supply disruptions. Commodity prices return to prewar levels and so does consumer and business confidence.​
  • Ongoing baseline scenario: The conflict in Ukraine proves to be relatively short lived, with a negotiated settlement achieved by the end of 2022. The major economic spillovers from the war on the rest of the world are via higher prices for commodities such as oil, gas, and wheat and wider financial market disruptions.​
  • ‘Protracted impact’ scenario: In this scenario, we assume that the fighting in Ukraine lasts into 2023 and the West imposes further sanctions on Russia. Gas prices spike higher, while uncertainty in financial markets and among consumers also increases, exacerbating the negative impact of high inflation.​
  • Prewar figures refer to forecasted figures as of January 2022 ​

STEP 2: Potential losses of the ongoing baseline scenario and those of a more protracted scenario are measured as the differential relative to prewar forecast, adding both 2022 and 2023 losses in real Euros. 

Recovery times are based on Oxford Economics baseline assumptions and draw on a range of Oxford Economics forecasts, market data, and other indicators of future supply capacity. ​

STEP 1: As demand impacts, we estimate the share of non-domestic demand for a country’s total production.  Using data from the OECD TiVA tables, for each industry in each country we estimated the following shares:​

  • Value added by source Country to Final demand World - Value added by source Country to Final demand Domestic / Value added by source Country to Final demand World​  ​

STEP 2: As supply we compute the share of value added of a country’s final demand that comes from inputs of rest of the world. Using data from the OECD TiVA tables, for each industry in each country we estimated the following shares:​

  • Value added by source World to Final demand Country - Value added by source Domestic to Final demand of the country / Value added by source World to Final demand Country.​ ​
  • Analysis covers all 19 Eurozone countries  ​
Jean-Marc Ollagnier

CEO – EMEA

Jean-Marc is the chief executive officer of Accenture in Europe and is a member of Accenture’s Global Management Committee.

Kris Timmermans

Lead – Supply Chain & Operations

Kris leads Accenture’s Supply Chain & Operations function and is a member of the company’s Global Management Committee.

Michael Brueckner

Lead – Strategy, EMEA

Michael leads Growth & Strategy for Europe, overseeing all aspects of Accenture’s strategy In Europe.