Supply Chain Superintelligence Newsletter: July 2024
Welcome to the latest edition of the Supply Chain Superintelligence newsletter, where we delve into the complexities and evolving landscape of global supply chains. In this edition, we explore the lasting impact of the "Ever Given" incident in the Suez Canal and the ongoing geopolitical tensions disrupting maritime routes, as well as the imminent EU Deforestation Regulation (EUDR) and its implications for businesses. We are also thrilled to share our latest milestone, which will help us further revolutionise the future of supply chain risk management.
Reflections on Supply Chain Disruptions: Lessons from the Suez Canal and Recent Geopolitical Events
Navigating New Challenges in Global Shipping
Three years on, the image of the cargo ship "Ever Given" blocking the Suez Canal for six days remains vivid in our minds. The economic fallout was immense, estimated between $1 billion and $10 billion. While the exact impact on subsequent shipping prices remains unclear, one thing is certain: when a system is already stressed—such as maritime shipping was due to COVID-19—any additional pressure can push it to a tipping point.
Current Disruptions: The Houthi Attacks
Recently, many are questioning:
- Will the Houthi attacks further disrupt global value chains?
- Will shipping costs surpass the highs seen during COVID-19?
To assess these probabilities, let’s examine real company disruptions caused by detours due to these attacks:
- Tesla: Factory shutdown near Berlin for 14 days.
- Volvo: Assembly line idled in Ghent, Belgium, for three days.
- Suzuki Motor Corp.: Hungarian plant halted for a week, waiting for parts from Japan.
Europe is particularly sensitive to these detours, as many goods arrive via the Suez Canal. This raises the question: did reliance on Just-in-Time (JiT) planning leave companies vulnerable, or were other factors at play? The automobile industry, known for its JiT supply chains, provides a crucial case study.
Developments Since November 2023
Since the Houthi attacks began in November 2023:
- 429 drones and missiles launched by Houthis.
- 28 vessels hit.
- 40%-50% reduction in transits through the Suez Canal.
- Shipping punctuality dropped to 53.3%.
- Rates increased by 44%.
- Transit times increased by 60% (or more) for some routes.
The geopolitical impact is notable. Russia and China have engaged in diplomatic talks with the Houthis to secure safe passage for their ships. Despite these efforts, a Chinese tanker was attacked, highlighting the unpredictable nature of the conflict.
Future Freight Rate Increases: A Comparative Analysis
Reduction of Shipping Capacity:
- Red Sea disruptions have effectively removed 6%-7% of shipping capacity due to increased transit times.
- During COVID-19, shipping capacity was reduced further by port closures and supply chain misalignments.
- Today, we do not face the same extent of staff and port closures. Additionally, the shipping fleet has increased by nearly 30% in container capacity, with new ships expected in 2024-2026.
Demand Dynamics:
- Current demand exceeds expectations, which could strain shipping capacity.
- Companies are securing capacity early to avoid missing holiday season sales, driving up prices.
- Potential port strikes may further force early shipping, exacerbating capacity strains.
- This dynamic can become self-perpetuating, as increasing prices drive a rush to secure capacity, which further elevates prices.
Given these factors, while it is possible that we may avoid the extreme disruptions and high shipping costs experienced during the COVID-19 peak, this remains an initial assessment. We must prepare for various scenarios, understanding that new issues could still arise.
Strategies for Resilience
Early Alerts:
- In a stressed situation, early awareness of potential strikes, insolvencies, and natural events is crucial.
Long-Term Contracts:
- Though subject to surcharges, long-term contracts can cap some risks and enable better planning.
Proactive Resilience:
- Just-in-Time planning, particularly in dynamic situations, can backfire. Companies must balance efficiency with redundancy. Safety stock is key.
Proactive Communication & Partnerships:
- Aligning with stakeholders early and building strong relationships can help navigate tough situations.
Building resilient supply chains means preparing for the unknown while acting in ways that make us robust against future surprises. No one can predict the future, but we can certainly enhance our resilience against it.
Leading the Way: Navigating the EU Deforestation Regulation (EUDR)
Ensuring Compliance and Environmental Stewardship
As of 30 December 2024, the EU Deforestation Regulation (EUDR) will mandate that certain products and commodities imported into, traded within, or exported out of the EU be accompanied by due diligence statements confirming their deforestation-free and legal status. This regulation underscores the urgent need to map, analyse, and evaluate global supply chains to mitigate adverse environmental and social impacts.
Potential Delays and Industry Implications
Recent discussions suggest potential delays in the EUDR's implementation. Peter Liese, the environmental lead for the European People's Party (EPP), has called for a postponement, emphasising the need for thorough preparation to ensure effective enforcement. While the regulation is critical for environmental protection, a rushed implementation could present significant compliance challenges for businesses, necessitating further clarifications.
Current Status and Key Challenges
Outstanding Supporting Documents: The European Commission has committed to issuing supporting documents, including detailed guidelines and an updated FAQ, to assist stakeholders. While these will partially rely on existing EU Timber Regulation Guidelines, many documents remain unpublished, hindering businesses' preparation efforts.
Country Benchmarking System: Expected in Q4 2024, this system will classify countries based on their risk of producing non-deforestation-free commodities. As of June 2023, all countries are assigned a standard risk level, which may change with forthcoming assessments.
Competent Authorities: Although there is a list of Competent Authorities in EU Member States responsible for enforcing the EUDR, some countries have yet to designate their authorities. This inconsistency must be addressed to ensure uniform enforcement across the EU.
Global Forest Cover Map: The EU Observatory on deforestation has released the first version of the Global Forest Cover Map for 2020. However, debate continues over its legal sufficiency for compliance purposes.
Due Diligence Statement Information System: Currently in the testing phase, this system for submitting due diligence statements adds to the uncertainty surrounding compliance processes.
Empowering Change: Support Initiatives in Action
The European Commission has launched several financial programmes to support smallholder cocoa farmers, who often face income instability and inadequate farm investments. Notable initiatives include:
Team Europe Initiative: €70 million allocated for financial and technical support to enhance deforestation-free supply chains, with an emphasis on smallholders’ needs.
SAFE Programme: €40 million dedicated to similar objectives.
These programmes aim to bolster smallholder farmers' capacity to comply with the EUDR by providing necessary resources and support.
The High Stakes of Non-Compliance
Non-compliance with the EUDR can lead to substantial penalties, including fines of up to 4% of a company’s annual turnover in the EU and the confiscation of non-compliant products and revenues.
Your Path to Compliance Starts Now
With the EUDR deadline approaching, it is imperative for businesses to act promptly. Prewave offers specialised expertise to guide you through the complexities of EUDR compliance, ensuring your operations meet the highest standards of sustainability and legal adherence.
- Watch our webinar series on EUDR: Prewave YouTube Channel
- Download our white paper: EUDR Whitepaper
Join us in leading the way towards a sustainable future. Together, we can ensure compliance, protect the environment, and support global supply chain resilience.
Exciting Milestone for Prewave: Announcing Our €63M Series B Funding Round
We are thrilled to announce that we have raised €63M in our Series B funding round, led by global VC investment firm and strong partner on our global growth journey, Hedosophia . We are also proud and grateful for the strong participation of our existing investors Creandum , Ventech , KOMPAS VC , Speedinvest , and Working Capital Fund.
Since inception, our mission has been clear: to make the world's supply chains more transparent, resilient, and sustainable. With geopolitical instabilities, persistent violations of human rights in global supply chains, and increasing environmental dangers, this mission is more critical than ever. Powered by cutting-edge AI technology, we embed superintelligence into every facet of our operation and ensure that our clients’ supply chains are resilient and sustainable.
This exciting milestone will fuel our next phase of global growth, solidifying our leadership position in Europe and supporting our expansion into other markets. We will invest further in AI research and development to keep delivering a best-in-class solution to our clients.
We hope you enjoyed this edition of the Supply Chain Superintelligence newsletter! For more updates, follow us on LinkedIn or visit us at prewave.com.
About Prewave
Our mission has always been clear: to make the world's supply chains more transparent, resilient, and sustainable. Since our inception in 2017, Prewave has become synonymous with supply chain risk management excellence. Today, we are the world's leading end-to-end supply chain risk management platform, ensuring transparency, visibility, and compliance—all in a single platform.