Big Challenges Global Supply Chains Are Facing in 2024

While COVID-19 wasn’t the first challenge to global supply chains, it’s been the kickstarter to an ongoing (and increasing) array of snarls that continue to threaten supply chain continuity.  Sudden labor shortages, low inventories, fluctuations in demand, constricting chokepoints, and the headline-grabbing quagmires at shipping container ports have all contributed to a tumultuous, hazard-riddled environment for manufacturers, shipping lines, and production buyers. 

While many of the logistical complexities roiling supply chains in 2021 and 2022 have gradually resolved themselves, a new wave of challenges is materializing for production buyers—a group that was almost certainly hoping for a stretch of relative calm and predictability in their respective supply chains. And while the new year might not necessarily present quite the same slew of intractable, existential threats posed by COVID-19, it’s still poised to present a formidable landscape of geopolitical, environmental, and regulatory obstacles supply chain professionals need to be sufficiently prepared for. 

1. Pirates of the Red Sea 

The brutal and highly polarizing conflict in Gaza between Israel and Hamas has reverberated across much of the world in a range of complex, turbulent ways. The October 7 massacre and subsequent military campaign has incited a barrage of cross-border strikes in the region; embroiled the U.S. and the Biden Administration in growing allegations of complicity in the escalating Palestinian death toll; and even spurred the South African government to bring charges of genocide against Israel at The Hague’s International Court of Justice. But few, if any, of these ripple effects were as unforeseeable and utterly singular as the violent and abrupt emergence of Houthi rebels onto the world stage. 

The Houthis, a religious movement whose armed insurgency toppled Yemen’s government in 2014 and subsequently triggered a long and bloody civil war in the nation, began carrying out attacks on cargo ships traveling through the Red Sea and the Suez Canal in November. The Houthis are using drones, airstrikes, and speedboats to shell, ambush, and hijack ships in what the Yemeni faction is framing as a campaign of revenge against Israel and its supporters for the military offensive in Gaza. While the group has been staging these destructive incursions nearly every day since early December, the repercussions are extending far beyond the two dozen or so ships that have fallen victim to the organization’s sophisticated piracy. 

The Red Sea is a major maritime gateway to the Western Hemisphere—around a quarter of all global container ships pass through the Suez Canal, often traveling from Asia to Europe. That makes the narrow, 120-mile stretch a critical chokepoint for global trade, and the Houthis and their patrons—namely Iran and Hezbollah—are exploiting it to sabotage cargo flow and strike back at the West and its perceived unconditional support for Israel. So far, the unconventional, “asymmetric” warfare has been working. As of late January, the volume of container ships traveling through the Red Sea has all but collapsed, dropping by 75 percent, and most of the world’s largest shipping lines—including Maersk, CMA-CGM, and Evergreen—have stopped transporting cargo through the increasingly dangerous route. 

Such significant, protracted disruptions present serious challenges to production buyers dependent on established supply chains that run through the Suez Canal. For now, shipping companies are redirecting their vessels south, around South Africa’s Cape of Good Hope. The longer route adds around two weeks to a container ship’s journey, pushing up the cost of everything from fuel to insurance premiums for the voyages. Buyers operating in this fractured supply chain environment must entertain contingency plans and maintain flexibility as they navigate higher costs, longer transportation times, and a higher degree of logistical volatility. Looming over a myriad of difficult decisions is the question of whether and how much to pass these increased costs to consumers, who’ve already had to grapple with two long years of sticky, sprawling inflation. 

2. Generational Drought in the Panama Canal  

Although not nearly as vital as the Red Sea to maritime trade flow and the innumerable industries that depend on it, the Panama Canal is another key chokepoint in the global supply chain. Around 2.5 percent of all seaborne cargo travels through the Central American canal, and 2023 saw roughly 14,000 passages through the waterway. What’s happening in the Panama Canal is far more straightforward than the proxy-war morass playing out in the Red Sea, though. The canal depends on freshwater from the nearby Gatun Lake, and a severe drought in the region has decreased the lake’s water levels to the lowest on record. As a result, the Panama Canal Authority (ACP) is being forced to restrict daily usage of the route by about 40 percent compared with 2023 figures. The decision, which is costing the ACP an estimated $100 million per month in lost toll revenue, has major shipping lines rerouting their container ships and even incorporating rail transport into their logistics. 

As with the embattled Red Sea, the shrinking access to the Panama Canal is forcing production buyers to accept more expensive shipping routes and transportation costs or else rethink their existing supply chains altogether. Because around 14 percent of all maritime cargo coming to and from the United States passes through the manmade corridor, the ramifications of the canal’s constriction are going to be disproportionately felt by American companies and their buyers. The narrow period for these stakeholders to make critical adjustments is right now, and the window is rapidly closing. Key players must weigh decisions regarding alternative routes and changes in purchasing patterns while working up speculative assessments on when the canal will resume preexisting trade capacity. 

3. Clamping Down on Forced Labor

Twenty twenty-three represented a landmark year for regulations protecting human rights in supply chains. Germany entered into force the first phase of its Supply Chain Due Diligence Act (SCDDA), while the EU made substantive progress on its Corporate Sustainability Due Diligence Directive (CS3D). This year looks to continue the trend of governments increasing regulatory pressure on businesses to root out forced labor and other human rights abuses in their supply chains.

The initial phase of Germany’s SCDDA, rolled out in January 2023, required all companies that were based in Germany and had at least 3,000 employees to comply with the new regulations. Beginning on January 1 of this year, the directive’s scope expanded significantly, and now applies to all businesses with at least 1,000 employees. (For perspective, this year’s expansion increased the number of companies under the directive’s remit by around 500 percent.) While we covered the SCDDA in detail in December, the act requires companies to protect 11 internationally recognized human rights conventions by implementing eight distinct measures, including creating a risk management system and establishing a human rights officer within the company. 

In addition to the second phase of Germany’s human rights directive, this year Canada’s own legislation aimed at combating forced labor practices comes into effect. The Forced and Child Labour in Supply Chains Act will require covered organizations to submit annual reports to the Minister of Public Safety outlining their efforts to reduce and mitigate forced and child labor within their supply chains. According to the Canadian government, entities under the law’s purview include “any corporation, trust, partnership or other unincorporated organization whose activities include producing, selling or distributing goods in Canada or elsewhere importing goods into Canada, or controlling an entity engaged in any of these activities.” Further inclusion criteria include thresholds for assets, revenue, and total employees. 

Organizations complying with the Forced and Child Labour in Supply Chains Act must cover several specific areas in their annual reports, including due diligence processes, measures to assess forced and child labor risks in their supply chains, and concrete steps taken to mitigate such risks. The first reports to the government are due on May 31, 2024. 

Production buyers based in the US and doing business in Canada will need to be aware of the newly enforced reporting requirements and comply with their business’s corresponding policies and due diligence measures. Adhering to their new obligations may require buyers to deepen and enhance visibility into their supply chain and learn to recognize signs of forced and child labor risks. In the event that labor exploitation is discovered, organizations will need to develop and deploy contingency measures—including implementing modifications to their supplier networks and utilizing dual sourcing—that eliminate labor abuses from their procurement processes. 

4. EU Embraces ESG 

ESG is a framework for analyzing and evaluating a corporation’s performance in fulfilling three central pillars: environmental, social, and governance. The environmental pillar refers to a company’s efforts to reduce its negative impacts on the environment, including through shrinking its carbon footprint, implementing a viable climate change strategy into its operations, and embracing waste-reduction processes that promote circularity. The social pillar focuses on how a corporation treats human beings, emphasizing ethical practices like fair pay, equal opportunities for employment, and responsible supply chains free of exploitation and other labor abuses. Finally, governance encompasses the ways in which a corporation holds itself accountable to external regulations and internal policies, including compliance, best practices, and guardrails for potential conflicts of interest.

The concept of ESG and the ideals it espouses have gained considerable traction over the past half-decade or so. Over that time, investors, governments, and the wider public have increasingly trained their attention on the extent to which organizations are acting with integrity and making a good-faith shift toward more ethical, sustainable business models that don’t focus exclusively on profits. The European Union’s Corporate Sustainability Reporting Directive (CSRD), which entered into force in January 2023, is intended to codify these new principles into legally binding regulations that obligate companies in the EU to meet unprecedented levels of transparency with respect to ESG.

The EU is using a phased approach in its rollout of CSRD. Beginning this year, organizations with at least 500 employees operating in an EU market must start adhering to the directive. CSRD encompasses a comprehensive breadth of disclosure and reporting requirements related to ESG and its pillars, which have been established in the form of the European Sustainability Reporting Standards (ESRS). The ESRS are broken up into 12 ESG-related categories, including—but not limited to—climate change, pollution, biodiversity and ecosystems, and workers in the value chain. All disclosures must be made publicly available, typically through a company’s website, and organizations must submit to third-party auditing to verify the accuracy of the information being disclosed. 

One final note on CSRD and the nature of its requirements. In-scope businesses must collect and submit information that reflects the idea of “double materiality.” Briefly, this means that disclosures should account for both the organization’s impact on human beings and the environment (referred to as either “impact materiality” or the “inside-out” perspective), and how the organization’s goals for reducing that impact and achieving sustainability objectives will affect their own financial health (“financial materiality” or the “outside-in” perspective). 

Disruptions and Directives for Production Buyers in 2024 

Buyers moving into 2024 are being confronted with two primary themes challenging their sourcing and procurement efforts. First, there are the escalating disruptions that are squeezing international trade routes and complicating logistics for companies worldwide. Notably, the implications of these issues for the global supply chain are not abstract potentialities but concrete realities happening right now, with tangible negative impacts on costs and transit times for industry professionals. As with most abrupt, turbulent events along the supply chain, the prevailing hope is that these crises will eventually resolve themselves and recede from view, restoring stability and continuity to these two longstanding corridors so firmly embedded in seaborne trade flows. 

The second theme, the expanding regulations in Europe and North America, possesses no such ephemerality. It is in some ways the precise opposite of the maritime supply chain disruptions currently wreaking havoc along the Red Sea and the Panama Canal. Instead of sudden, unanticipated events, the new compliance directives approach at a slow, steady, and eminently predictable place–providing businesses and their procurement professionals with the time and bandwidth to respond and adjust accordingly. Once these labor and ESG regulations are in place, however, they are not fleeting interruptions that temporarily thwart the status quo. Instead, they’re positioned to transform the dynamics and responsibilities of professionals operating along the global supply chain for good, compelling them to embrace transparency, visibility, and due diligence in a deeper, more granular way than they ever have before. 

The result—or at least the scenario the governing bodies enacting these regulations are aspiring to—is that businesses and buyers are more ethically engaged with the dense network of human beings and natural environments that are directly affected by the work that they do.