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The year 2022 is a challenging year, while the recovery from Covid-19 just began, comes another big issue of the Ukraine-Russia War. It is no longer an issue of invasion between the two countries, but hitting economies around the globe. The wholescaled Russia’s Invasion of Ukraine has begun on 24 February 2022 and has added to mounting concerns of a sharp global slowdown of the economy, surging global inflation and debt, and following with a spike in poverty levels, in accordance to the World Bank in the recent Economy updates.
Yet to have many studies on the economic effects subsequence of the Ukraine-Russia war. However, Peterson K. Ozili, in an article published in SSRN Electronic Journal (May 2022) clearly mentioned that the war has a direct impact on the global economy. The Ukraine-Russia invasion had spill-over effects on the global economy through global supply chain disruption. The energy prices, commodity prices, and food prices are soaring, leading to a drastic rise in global inflation. Malaysia, located more than 5 thousand miles or more than 8200 kilometres away from Ukraine also affected.
The logistics company that I am currently working with, is a global brand of Logistics provider, born in Japan. The core business in Malaysia consists of airfreight consolidator, trucking, ocean freight, warehousing, and distribution services. Dealing with international freight and transportation, we cannot run away from its fate, which has been affected. Due to the war, the fuel price rose like a skyrocket above USD100 per barrel. In early March, Brent crude even reached up to $130 a barrel. As the fuel price rises, the fuel charge for international freights is rising simultaneously. The operation cost becomes higher than ever, and the sales and marketing team has the challenge to sell at a higher freight rate, if sell at the old freight rate, the business deals will have a deficit.
Since the outbreak of the Ukraine-Russia war, there have been a series of restrictions on transport through Russia and Ukraine. Russian airspace is closed to 36 countries. In response to the Russian invasion of Ukraine, several countries took measures to restrict Russian Airlines’ operation worsening the shortage of freight space in the Europe lane. At the same time, parts of the Black Sea and the Sea of Azov are unpassable and dangerous for vessels. There are reported cases of missile attacks on vessels, and lane closures for commercial shipping.
Though I am the Human Resources in the company, I do have the chance to expose to how our team overcomes these challenges through the mouth of words from our Sales Manager, Miss Chong Chai Hun who has worked closely with the Operation Team and the counterpart of the Company. She disclosed that the war has gave an immediate impact and a long-term impact on our operation and business in Malaysia.
A brief business impact analysis is in place, which leads by the Airfreight Product Head. The business impact analysis measures the impact in the event of such a disruption. Depart from here, we try to identify the recovery priorities, resources required, and the departmental staff to deliver and support the activation of the business continuity planning. The business impact analysis revealed that though the percentage of sales revenue from the Europe lane is approximately 10% of the total sales revenue for our Malaysia Offices, the impact is there in terms of loss of sales income, delayed delivery, and increase in cost (example: staff overtime, higher fuel surcharge cost, terminal charge), potential customer dissatisfaction and delay of the business expansion plan for Europe lane.
Right after the war started, our company was unable to send the shipments to Europe areas, and services are subsequently suspended particularly for air freights. This situation continues for almost two to three weeks. The usual routes for all airplanes flying to Europe from Asia shall pass by the Ukraine sky space. Due to the war, a lot of the carriers like ANA, and FEDEX stop flying to Europe, while SQ Airlines cancel the flight to Denmark when the initial stage of the war started. Some carriers still flying but reducing their trips to Europe countries. Subsequently, carriers’ capacity to Europe is reducing. With the limited supply available, the freight rate is hiking drastically. The sales revenue is therefore significantly affected for the Europe business lane. The sales revenue for the Europe lane is on average 10% of the total sales revenue per month. Since the Ukraine-Russia invasion in early 2022, the sales revenue was less than 7.5% of the total sales revenue.
At the same time, the freight operation division was affected. Some of the Clients decided to hold the shipments for further observation of the unpredictable invasion. Some inquiry for other alternatives of delivery. Shipments on the way shall need to be re-routed or transited or even change to another transportation mode to avoid the usual route to Europe. In addition, the operation has engaged with carriers with “blocked space agreements” (BSA). Unable to sell off utilised the space blocked, means that a fixed cost shall need to be absorbed by the company. Just imagine, no shipments delivery but still need to bear the operational cost. Take our KLIA Operation as an example, we engaged for the BSA approximately 40 tons per month for the Europe lane.
No one knows when the war will be ended. From a long-run perspective, the war caused uncertainty in business. The skyrocketed fuel price directly affected the operation cost. The Sales personnel found it difficult to sell the freight space with the high fractured fuel rate. The existing sales agreement was no longer applicable. If blindly applied to the existing agreement rate, the business deals will affect the profit margin and even worst with having loss in figures.
The war also affected the plan of our Malaysia offices in expanding the Europe lane (Airfreight) in these three to six months. Shippers need to observe and evaluate the potential risk before deciding to move the shipments. The risks to be considered are the potential of risk cargo being delayed, cargo damaged during the delivery process, risk of cargo missing due to transit and freight rescheduling at the transit ports, etc. while having to bear the high freight cost. Generally forecasted that the invasion will take a longer period to resolve, the international trade with Europe will be a slowdown.
Dealing with this sudden tragedy is not an individual departmental issue. The department cannot act in SILO to get a turnaround from the situation. Out of the three key functions in the organization, Sales and Marketing and Operation are working closely to address the challenges, for the soonest business recovery as per the Company Business Continual Planning (BCP). The objective of the Business Continual Planning is to minimize disruption and mitigate risk to the operations and ensure that our business remains viable during the unforeseen circumstances outbreak. The contingency process is activated as a precautionary measure, to mitigate the risks of loss of customer trust and loss of business. In between, crisis communication is crucial and needs to be in place immediately, promptly, and accurately. Under such an emergency, the customer will want to know how they will be impacted, how their cargo delivery status, and so on. We are proud that we are overcome the disruption with minimum impact for our Malaysia offices.
During the initial time of the incident, all the shipments to Europe are delayed schedule in the process of delivery whether on the move of delivery locally to export, on the freight frying tofrom Europe, or hold at the halfway transit point on the route tofrom Europe. The Freight Operation Team and Customer Service Team shall need to get the first-hand information on carrier delivery suspended, information on delays in delivery, the real-time information regards to counterpart operation disruptions, and get the customers (shippers and consignees) notified on the progression cargo delivery status as soonest and prompt as possible. We clearly understand that the cost associated with service failures is much more than a commoner can expect. Failing to be responsive to the customers will lead to losing trust and customers will not return in the future. Therefore, information is shared to all stakeholders both internal and external by making use of Global I-net, and escalation of Customer Advisory by publishing on the KWE Group Website, via emails, faxes, and phone calls as well.
While getting fewer and fewer carriers flying to Europe, the operation team though no movement of shipments, started to look for alternative carriers that still flying. Of course, while we are responsive so, the other competitors are acting the same, competing secure the limited space to move the cargoes. The freight rate has increased and dealing with the rising price, the Sales and Marketing shall need to deal with the customer to update the issue and the rising freight cost and try to get the customer to buy off with the new quotation to move the cargoes to Europe. Everything has to be acted in a fast manner. Delayed in acting we will lose the chances to secure the limited space available for cargoes to move to Europe to the competitor.
The situation is gradually improved when the airlines and carriers come up with new detour routes, new drop points, and avoiding flying passing the Russia and Ukraine airspaces. The new routes to Europe are farther than the usual route. Shipments from Malaysia to Europe are either flying to the east to Japan and transit point at Anchorage, Alaska then ahead to Europe avoiding Russia, or flying to the West pass the Turkey airspace, a more southern route, ahead to Europe avoiding Ukraine. A clear picture as per Appendix 2. Both new routes will take a longer distance and longer flight time. It is more costly as the carriers are imposed fuel surcharges. It is more economical to fly using the west route.
Again, our freight operation has fierce competition in securing the freight space. Though carriers resume flying to Europe, most countries are facing a situation that a large backlog and excess demand for cargo that need to be transported. The freight Operation Team needs to act aggressively to check the available carriers, new detour routes, new gateways, additional flight schedules, negotiate with the carriers for a good rate and enter into the Blocked Space Agreement after due negotiation. That is all about the supply chain management in the Operation. The war, not only giving a big cost impact due to the farther distance to be, extra fuel surcharge, also cost rising in packaging where there is need for extra packing procedures to protect the cargoes from damage during the long-distance delivery.
Dealing with the gradually improved situation, with the hiking costs, the sales team shall then play its role to negotiate with the customer a new sales rate to import or export to Europe, to approach the customers to use our services for transporting the cargoes. The Sales Agreements for transporting the cargoes to Europe previously signed are no longer applicable, and inadequate to cover the operation and transporting cost.
In addition, special circumstances require special handling, the Customer Services representatives shall need to close monitor the movement of the Europe shipments and keep updating the customer (shipper and consignees) and the counterpart. They are briefed on the most recent market updates, and disruption status from time to time enables them to respond to customers’ inquiries.
This is how we respond to the challenges due to the Ukraine-Russia war’s impact on our business thus far. Our shipments to Europe are now gradually back to normal. Reviewing back on the effort put in to overcome the impact of the outbreak of the Ukraine-Russia war, we prove to ourselves that we are successfully minimizing the impact on our Malaysia offices. However, the operation management strategies and marketing strategies still have room for improvement. We shall make use of our strength as a Japan-born Logistics brand, continuing in searching and expanding the choice of the carrier for our customers. Existing carriers to Europe in use are middle-east carriers that offer a cheaper rate than the Asia carriers. The operation team shall continue to explore more choices of carriers to cope with the reoccurrence of such unforeseen circumstances in the future and get prepared for the worst for the business continuality. This will enable the company to keep a step ahead of its competitors during the crisis and grab the opportunities that the other competitor incapable to compete.
Crisis and disaster could happen anytime, anywhere, which is out of our prediction. We have learned this in the past and ongoing. The coronavirus epidemic will not be the only plague ever in human history; the Ukraine-Russia war will not be the last conflict in the civilized world. For an organization to stay sustainable, the only way is well-prepared as early as possible, need to have a comprehensive Business Continuity Planning in place, it can reduce the impact and damage when risks arise. No one knows when the next black swan appears, shocking the globe. Therefore, it is important to stay alert, learned from current experience, and be prepared for future challenges always.
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