War in Ukraine drives up prices and accelerates inflation


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02/24/2022 – Category: Trade

Procurement BMESource: 3dmitry – iStock

A current BME member survey gives a dramatic picture of the mood in procurement. After that, many industrial buyers are rethinking their current activities in the crisis region.

German companies are following the escalation of the Russia-Ukraine conflict with great concern and seeing it as a growing threat to their own business. Many of the companies in the procurement sector recognize the critical situation and are making appropriate preparations to keep the damage as low as possible. “A current member survey has given us a precise picture of the mood in view of the expected negative effects on international supply chains and procurement processes,” explained Gundula Ullah, CEO of the Federal Association of Materials Management, Purchasing and Logistics eV (BME), at the presentation of the “BME Pulse Check on the Russia-Ukraine conflict”.

Procurement: conflict for restricting trade routes

According to the survey, which was conducted before the war broke out, almost half of those surveyed rated the current situation as highly explosive. This applies in particular to a military conflict between the two conflicting parties. In the event of Western sanctions, around 30 percent see the restriction of trade routes and the stop of the Baltic Sea pipeline “Nord Stream 2″ as having a direct impact on their business operations.

“Our respondents currently regard financial market restrictions as less dangerous. However, these sanctions could have a serious impact on all trade flows and should therefore not be underestimated,” warned BME Managing Director Dr. Helena Melnikov. According to the survey, more than 90 percent of companies expect significantly higher purchase prices, which will further increase inflationary pressure. Energy and raw material costs in particular are likely to rise sharply. It is also to be expected that the end products will become more expensive.

Companies initiate strategy changes

Some of the respondents are considering a change of strategy in their companies. 64 percent want to switch to alternative procurement and sales markets. Almost 13 percent are toying with the idea of ​​reducing their foreign direct investments in Russia and Ukraine. 23 percent check the security of their logistics routes, procurement sources and cash flows. In the survey, the BME also wanted to know whether the buyers could promptly replace the goods and raw materials procured in Russia and Ukraine with supplies from other regions. Here, the survey found that only a minority of companies (15 percent) would not be able to source these goods elsewhere.

Look for alternative procurement options

The respondents have already taken specific measures to minimize risk or are planning to do so. The search for alternative procurement options (double sourcing) was intensified. At the same time, many companies (39 percent) are increasing their inventories – as far as this is at all possible given the already tense procurement situation. The substitution of raw materials and materials will also be examined more intensively in order to reduce dependence on Russia and Ukraine. “The switch in procurement away from the spot and towards the futures market was also mentioned. Above all, this can keep the risk of price increases within acceptable limits,” reports Ullah.

A good fifth of those surveyed fear that the supply chains will be completely torn apart as a result of the conflict between Russia and Ukraine. However, more than 75 percent of the participants expect that their companies will face restrictions or that the procurement costs will increase. “It can be the monetary expense as well as human resources and processes that are becoming more complicated,” added Ms. Melnikov. The outbreak of war also highlights global developments: more than 70 percent of the participants see significant risks in relation to the trade routes of the new Silk Road.