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Logistics – market challenges in the face of the war in Ukraine

Author: Antoni Zbytniewski, Business Development Manager, Fresh Logistics Polska

Since February 24, 2022, we have been witnessing events that we perceive as the greatest crisis in the history of 21st century Europe. Russia’s invasion of Ukraine is an unprecedented situation in Europe since World War II.

The war in Ukraine is primarily a drama and a tragedy for millions of Ukrainians. The invasion has also created extraordinary economic phenomena that are having far-reaching impacts on logistics and supply chains.

In Poland, we have been observing a huge increase in diesel prices since the end of February. Never in the 21st century have we dealt with such high stakes and with such rapid growth dynamics. A factor contributing to the increase in diesel oil prices in Poland is the fall in the value of the Polish zloty against the euro and the US dollar. It is therefore not surprising that oil purchases settled mainly in US dollars have become more expensive.

Logistics contracts are based on fuel adjustment mechanisms that absorb the effects of fuel price increases. With these mechanisms, the high prices are not the main problem. Fuel adjustment mechanisms are most often based on monthly average fuel prices, less frequently on quarterly or annual prices. In the monthly adjustment mechanism, the level of fuel adjustment for the current month is calculated on the basis of the average fuel price for the previous month. Accordingly, the level of fuel adjustments in March was calculated on the basis of average February prices. At the same time, in March, diesel prices increased by 30% – 40% in a very short time. We had a situation where the rates for services did not cover the costs of activity. Large entities are prepared to absorb this type of momentary disturbance. Problems arose with carriers financing fuel purchases from current revenues, and with them come special expectations towards customers. To maintain the continuity of transport operations, both logistics operators and the market had to react quickly by implementing payment mechanisms to maintain business continuity for such carriers.

For clients with contracts not including fuel adjustments, March 2022 was a month of marked increases. Logistics operators and carriers, seeing the sharp increase in fuel prices, were forced to take immediate action to maintain the profitability of their operations. These actions are understood by most clients.

The war in Ukraine, along with the increase in fuel prices, led to an outflow of drivers who returned to fight in the Ukrainian Army and Territorial Defense. With the shortage of drivers, this has had a huge impact on the continuity of supply chains. Due to the shortages in our labor market, approximately 105,000 people from Ukraine have been employed as drivers of international transport.* Many of them overnight decided to leave Poland and return to their homeland, leaving the carriers without hands to work. At the moment, thousands of trucks cannot leave their bases and operate because there are not enough drivers on the market to replace those who have left. The labor shortage also applies to warehouse workers, which also poses a great challenge for the continuity of the flow of goods.

Moreover, Ukraine and Belarus are the main suppliers of EUR pallets to European markets. Sanctions and destroyed factories will lead to a shortage of this commodity. In addition, restrictions on the supply of steel and the high prices of steel materials will have a huge impact on disruptions in the production of trucks and trailers, as well as the construction of warehouse facilities.

Taking into account the above factors, the coming months will be a time of great challenges for the logistics industry. This will translate into an increase in service prices, while fighting for the availability of resources. Not the price, but the ability to ensure continuity of supply becomes the key decision-making factor for customers. The role of a logistics operator is to meet market expectations, regardless of the difficulties. We are convinced that thanks to the continuous optimization of processes with the use of lean management tools and the creation of an engaging work environment, we will be able to face the current challenges. Such activities cannot be carried out ad hoc – only a strategic approach is a guarantee of success, i.e. the satisfaction of even the most demanding customer.

At Fresh Logistics, we have been implementing the Better Everyday business improvement program for many years. As part of the program’s implementation, using lean tools, together with our clients and partners we analyze the processes in terms of their complexity, standardization or possible waste. Joint efforts in the search for cost and process optimization are a must nowadays and will help all participants along the supply chain to achieve their business goals in a highly competitive market, especially in the face of the current challenges.