Supply Chain Blog

FMCG Manufacturing, Sourcing and the Ukraine-Russia Unrest

Posted by Dave Jordan on Wed, Sep 24, 2014

The unrest – what a terrible BBC understatement that is – in Ukraine does not look to be going away in the near future and will possibly be hanging over us for considerably longer. The “unrest” is not localised and it obviously involves many other countries and regional bodies with political, economic and territorial interest in the area. One recent escalation has been to ban the sale of EU goods inside Russia which is rather a throw-back to Cold War days when the same rule applied to iconic western branded goods like Coke and Wrangler jeans.

In Cold War times big brand name FMCG consumption behind the iron curtain was probably driven by the efficiency of the black market and wider Russia was probably just a tempting white spot on the corporate globe. Now it is a different matter as Russia is a little bit more important, if you allow me to adopt some BBC understating diction. As part of the BRIC countries Russia is important in driving the growth aspirations of many of the world’s largest FMCG companies. Or it was.......

Most of the large companies have developed pan-European sourcing strategies and gone are the days when each individual region or even country had its own small “local for local” factory operations. This means that tea maybe sourced from Russia for EU countries but olives are imported from EU into Russia, for example. Companies with a local for local approach in Russia will be largely immune to the EU ban whereas others may actually have exports to Russia as a critical part of their businesses.

What can companies do about this? Well, legally and above board, not a lot. There is always someone willing and able to get passed all manner of regulations and restrictions but usually not in significant volumes and certainly not at the same overall cost of supply. Organisations with local manufacturing operations may well keep the Russian market supplied without hindrance and with little impact on cost and efficiency.

Mfmcg factories russia ukraine resized 600eanwhile, those big names relying on exports into Russia from EU may be far less comfortable as they may be saddled with higher costs as production reduces and fixed costs have to be reallocated across residual volumes. In turn this makes factory gate prices higher for existing EU MSO buying offices if sourcing units do indeed pass on the full hit and wood-panelled HQ does not put its hand in its pocket. Turnover of the Russian MSO is also hit as it cannot get hold of products to sell.

“Really not very good at all” says the man from Aunty Beeb in a clipped English accent brimming over with deep concern and gravitas.

As the region is so important to FMCG growth is it just remotely possible that Russia will come out of this conflict with a far larger local manufacturing footprint and a huge amount of western investment?  Indeed, that may sound ridiculous now but will this turmoil force or persuade more companies to be present on the ground and behind the invisible curtain?

Image courtesy of exdos4 at freedigitalphotos.netfreedigitalphotos.net

Tagss: FMCG, Dave Jordan, Manufacturing Footprint, Supply Chain, Sales