Magazine 07: Supply Chain Laws

Supply chain traceability is high on the agenda everywhere – be it the Modern Slavery Act in the UK, the Child Labor Due Diligence Law in the Netherlands, the German Supply Chain Act or the Loi de vigilance in France. How companies are supposed to implement the requirements still remains a mystery to many.

On the other hand, the law may also mean that companies are strangled by red tape and forced to pay expensive penalties, suddenly at a clear competitive disadvantage compared with foreign competitors. The idea is both right and necessary: after all, its intention is to ensure that human rights are respected and to apply appropriate pressure on international suppliers as well. What is often not clear, however, is exactly how companies are supposed to go about this. After all, supply chains are widely ramified, and in the long term, companies should also influence downstream suppliers.

Identifying Actions Early

In most cases, companies must ensure that they implement the relevant specifications within their individual business areas as well as asking the same of their direct suppliers. This means that companies should get involved with indirect suppliers if they become aware that one of these suppliers is not complying with human rights. Creating and maintaining an overview of every direct and indirect supplier will be quite a challenge for companies and many will have to completely rejig their internal processes. But the good news is that it can be done – provided that companies get to work immediately.

Smaller suppliers should also be aware that larger ones will be passing the pressure onto them. If an automotive OEM, for example, has to audit its supply chain for human rights standards and other sustainability criteria, it will make sure that any smaller companies that it works with are also observing those specifications. Therefore, even though laws in some countries are linked to company size, ideally all companies should be prepared to meet new sustainability and human rights requirements.

SMI Customer Magazine 02/2021: PROFESSIONAL RISK MANAGEMENT – anticipate and navigate hazards”

From port closures and raw materials price increases to the crisis on the semiconductor market: The current situation shows the importance of a good risk management very clearly.

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Using Effective Risk Management as a Starting Point

Companies should start by taking a look at their existing risk management systems. In some cases, this will involve taking a self-critical stance and deciding whether a structured risk management system is actually in place, or whether the company has simply reacted to previous crises. Major corporations tend to be well organized already, but they should still audit their existing system to identify any areas where expansion might be required.

Procurement is in an ideal position to implement supply chain laws. No other company department has a close enough relationship with suppliers to gain a good overview and identify risks. This means that procurement has even greater responsibilities and is a more important link than ever between company departments and suppliers.

Bringing Suppliers on Board

The next step is for companies to inform their suppliers about the new requirements and then request the necessary data. It might, in many cases, mean that they need to extend their contracts or even to renegotiate them from scratch. Additional audits are therefore unavoidable for companies who have to come up with specific questions to check how far their suppliers are meeting these requirements. Fundamentally, this involves adding qualitative factors to existing audits. Procurement can then classify suppliers into a range of categories: who is

at risk of failing to meet their obligations, who needs to be put under pressure and who would the company prefer to get rid of completely? But convincing suppliers to support the new requirements is where it gets complicated – or even difficult or impossible when it comes to suppliers from Asian countries such as China. At the moment, all we can do is hope that the legislation will recognize that companies do not have greater leverage. Initially, it will be crucial for companies to follow proper processes: announcing new regulations, requesting documentation, conducting extended audits and then reassessing suppliers.

CONCLUSION: Every Cloud has a Silver Lining

All of these measures involve increased time and effort, of course, so companies should start by focusing on their direct suppliers. When they audit these suppliers, they should also ask them about the situation with their suppliers. If this does not produce any information about potential violations of human rights or flouting of environmental standards, then at the moment companies will not need to do any further investigation. Smaller companies in particular also have the option of working together – for example, sharing information about supplier risks – to share the load. Risk management software can also help to shed light on the darker areas.

Despite all the uncertainty, and criticisms, companies should try and see the opportunities that these laws create: they can actively help to implement global social and environmental standards which will also create economic advantages for them in the long term.

About the Author:

Dr. Gökhan Yüzgülec:

Dr. Gökhan Yüzgülec is a Managing Director at INVERTO in Hamburg. With a doctorate in mechanical engineering, he is an expert in supply chain risk management, and deals with the optimization and design of order-to-delivery processes.

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