How to successfully implement the Supply Chain Act and use it for your benefit
It’s a done deal. On January 1, 2023, the new Supply Chain Due Diligence Act (LkSG) came into force. The law requires German companies to implement far-reaching measures to protect human rights and environmental standards along global value and supply chains. However, it is unclear how exactly companies should go about this. Supply chains are widely ramified, and until now only a few companies have precise information on where their direct suppliers are purchasing. But in the long term, companies should also look to influence downstream suppliers.
However, companies based in Germany are not alone in facing this challenge. Other countries – such as France, the Netherlands and the United Kingdom – are also aiming for climate neutrality and no longer want to achieve Western prosperity at the expense of the people in the supply chain. The EU is also planning a law that, according to the current draft, will be stricter than the German regulations.
Some are concerned that the LkSG could lead to them being lost in the German bureaucratic jungle, having to pay high penalties or even having clear competitive disadvantages compared with competitors from abroad. Others see the law as an opportunity to gain a competitive edge, as customers and employees attach importance to criteria such as sustainability and human rights.
For procurement, the law means that in In addition to ensuring resilience and optimizing value creation, corporate and social responsibility must also come to the fore. Our White Paper gives you an overview of the Supply Chain Act and shows you how and where you can best use the provisions of the Act to your advantage.
PROCUREMENT: LET’S GET REAL!
Our expert on the supply chain act
The Supply Chain Act is often perceived as additional bureaucracy and a burden, but if you take a closer look, it is actually an opportunity to optimize your own business operations in terms of sustainability, resilience and digital transformation. Procurement plays the most important role here as a value driver and interface manager at the same time. Many successful companies, for example Patagonia and Tchibo, are already demonstrating that sustainability and profitability are not mutually exclusive.
A three step approach has proven to be the best way to get started. First, determine to what extent your own company already complies with the law. Second, a risk classification of the suppliers. And finally, third, the realignment of supplier management based on the sustainability criteria. The time needed is very dependent on complexity drivers.
- How many suppliers do I have?
- International setup of the company.
- And finally, how many parties are
- involved in the entire value chain?
We have seen three major challenges so far. First, responsibilities for implementation are unclear. Second, no transparency on supplier basis to conduct risk analysis. And third, last but not least, how to deal with detected risk. Often responsibilities for the implementation are not clear. Our recommendation is: Form an interdisciplinary team with a dedicated project leader. The implementation of the Supply Chain Act is a company wide task which involves procurement, corporate communications and the legal department and ultimately impacts the entire organization.
Project and change management capabilities should not be underestimated. There is a need for dedicated project resources. Many of our clients do not have full transparency about their supplier base, which is absolutely necessary to do a risk analysis.
How to overcome?
Use Digital Intelligence to support! Smart spend cube tools help to gain transparency and extract relevant supplier data from ERP systems. Some tools already use AI to propose a categorization and industry allocation of suppliers. Transparency is the key to narrow down your spend to high risk categories and suppliers. And for more in-depth analysis, suppliers of risk softwares such as Ecovadis or Prewave give insights. When we start projects with our clients, naturally, there is the wish that the outcome of the project is: Our suppliers already comply with the law. However, in reality, the analysis usually detects the one or another risk supplier. No need to panic.
Talk to your suppliers first. Part of adequate risk management is that countermeasures are to be prioritized. Is the violation so serious that the cooperation should be terminated immediately? We recommend to clarify where your suppliers perceive risk and compare this with your own findings.
Expand existing audits or change specifications and agree on countermeasures. And usually you are not alone with the problem. Teaming up with other affected customers and the moderation of supplier forums is a good way to exchange best practices.
The Supply Chain Act at a glance:
What is the Supply Chain Act?
Companies are required under the UN Guiding Principles on Business and Human Rights to determine the extent to which their business activities may lead to human rights violations and environmental pollution. With the introduction of the Act, the UN Guiding Principles will be enshrined in law.
What is the scope of the new supply chain law?
Companies’ due diligence obligations cover the entire supply chain – from raw materials to finished sales products. The requirements are graded according to the size of the company.
What is the goal of the Supply Chain Act?
- Improve the protection of human rights along global supply chains: e.g. prevent child labor, forced labor, slavery, and unhealthy and unsafe working conditions.
- Prevent environmental damage caused by business activities or make companies liable for any damage that occurs.
What liability and penalties are involved?
- Violations of the duty of care can be punished with fines in the case of simple negligence and with sanctions in the case of intentional acts
- Companies with sales of in excess of €400 million face fines of 2% of group sales. In addition, they can be excluded from public tenders for up to 3 years
- The German Federal Office of Economics and Export Control monitors compliance with the law
Three steps to SCA compliance
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