The EU’s soon-to-be-implemented deforestation regulation is now a hot topic for many manufacturing and retail companies, as well as machinery and equipment manufacturers. The sustainability initiative, which has a broad impact on procurement and the order-to-delivery chain, also requires input from IT departments, says Gofore’s management consultant Miina Koponen-Eskola.
The deforestation regulation is a significant sustainability action in the EU, and preparing for it will require considerable work from many companies this year. The regulation aims to ensure that products consumed in the EU do not cause deforestation or degradation of forests in their production areas, as well as to mitigate climate change and biodiversity loss. The goals of the regulation are important, but there has been criticism regarding the lack of sufficient ready-made solutions provided by the Commission for the data transfer required by the regulation.
Order-to-delivery chain revolutionized
The deforestation regulation obliges companies to verify that products placed on the market in the EU and exported from the EU comply with requirements and that local legislation and labor regulations have been followed in the production of raw materials.
– In practice, all products subject to the regulation that are manufactured or imported into the EU must be recorded in the EU system. Every time the product is sold, the sale must be registered, including internal transactions within groups. The regulation affects not only procurement but the entire order-to-delivery chain, sales, and IT systems, Miina Koponen-Eskola notes.
The regulation applies to companies that use cocoa, coffee, rubber, wood products, soy, and palm oil in their products – in other words, many companies.
– If we take a sofa as a product example; each of its wooden parts likely comes from different locations. For each raw material, it must be ensured that its production does not cause deforestation, illustrates Miina Koponen-Eskola.
Deadline approaches for large and medium-sized companies
Large and medium-sized companies must be ready in accordance with the deforestation regulation by the end of this year, leaving them with relatively little time to prepare. Small businesses are given until 2026 to comply.
The tight schedule for the regulation’s implementation has raised concerns about how well companies will be able to respond. In particular, building the IT infrastructure required by the regulation takes time. The implementation of the regulation has already been postponed once due to the threat of serious disruptions in supply chains caused by the overly tight schedule.
After the deadline, companies must have a so-called DD system, which is used in inter-company transactions and from which the required checks are made. Products must have codes added that refer to the respective raw material’s DDS (Data Distribution Service) code. The acquisition of codes does not operate in real-time, and there may be delays in obtaining them ranging from minutes to three days. Products imported into the EU after 2025 cannot be sold unless they have DDS codes. In practice, all products subject to the regulation that are manufactured or imported into the EU must be recorded in the EU system.
Preparation requires customization
There is no one-size-fits-all model for preparing for the management of DDS codes, as its implementation depends on how the company purchases, what the company’s structure is, what its supply chain is like, and whether the company exports from the EU, imports to the EU, or both.
Management of the deforestation regulation must be integrated into the company’s order-to-delivery process. The company must build information systems that include at least supplier management and DDS code management. The system architecture of different companies dictates what options are available for data processing. Typical options are an ERP system, a real-time data warehouse integrated into ERP processes, or a separate information system specifically for processing this data. Especially if the company acts as an importer and is responsible for tracking the location data of product batches, the regulation may even require the implementation of a completely new information system.
Gofore has familiarized itself with the deforestation regulation and its requirements and can assist its clients in preparing for them. Gofore has various preparedness concepts for companies in the retail sector and manufacturing industry. Gofore can also assist throughout the entire preparation process, starting with identifying the different variations of raw material flows the company has, as well as how regulated products are sold and how DDS codes can be delivered to customers.
***
DDS PROCESS IN PRACTICE
The deforestation regulation requires an importer to the EU to demonstrate that the product does not cause deforestation. This is done by recording the batch’s production location in the EU’s Traces system and ensuring that no deforestation occurs at these locations. After the first entry, all buyers of the product made from this raw material and those manufacturing and selling it must apply for a new DDS code before selling the product, referencing the batches used in production or purchasing.
Example: Company A purchases plywood with the DDS code DDS1 and wooden parts with DDS codes DDS2 and DDS3. The company makes wooden chairs from these, which is a regulated product. Before the company can sell the chair, it must request a new DDS code from the EU’s Traces system, referencing the DDS1, DDS2, and DDS3 codes. There is always a slight delay in obtaining the DDS code, and at worst, the EU may require the batch to undergo special inspection, during which the manufacturer cannot sell the product until the inspection, which can last up to 72 hours, is completed.
The company must provide this new code to customers who receive products made from these same raw materials or from the same locations. If a company’s raw materials always come from the same locations, the regulation allows for the DDS code to be issued for the entire year at once. However, this is likely a rather marginal possibility in today’s global supply chains.
The biggest challenges in implementing the regulation are for companies that do not track the products they receive, manufacture, or sell on a batch basis. In such cases, implementing the regulation may require significant changes in the handling of goods upon receipt, in production, and in storage. If, on the other hand, the company already handles product batches and uses EDI messages in all regulated purchases and sales, the changes required by the regulation in the supply chain may be relatively minor.
For more information
Tommi Rasinmäki, Head of Management Consulting
tommi.rasinmaki@gofore.com
p. +358 40 847 9032