Supply chain legislation: Strategies for procurement and SCM

From 2023, the German Supply Chain Act will require companies to uphold basic human rights standards along supply chains. Further supply chain legislation is also on the cards, with a draft European Supply Chain Act, which would be far stricter than the German one, presented in the EU Parliament at the end of February 2022. Ensuring compliance with legislation offers a great opportunity to simultaneously strengthen sustainability, resilience and value creation through transparency in the supply chain.

Trinity of value creation, resilience and ESG

The German Supply Chain Due Diligence Act (known as the LKSG) was hotly debated and highly controversial before it was passed in the Bundestag. The concern was that this law would impose obligations on companies based in Germany that would weaken their competitiveness. We see it differently: when intelligently embedded in a company’s own sustainability strategy, compliance with the new legal requirements can serve to:

Create transparency in the supply chain with the help of professional risk management
Increase resilience and security of supply in the supply chain
Achieve ESG goals
Create innovative products through close cooperation with suppliers
Improve value creation

With the experience from numerous procurement and SCM projects, our experts support you in analyzing your supply chain and setting up your supplier base in a sustainable manner and in compliance with supply chain legislation.

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A brief performance check shows the extent to which you are already operating in compliance with the Supply Chain Act

Governance & Strategy

Which requirements of the Supply Chain Act are already included in the Code of Conduct, which are missing?
To what extent are environmental and human rights standards already integrated into your category and supplier strategies?

Organization & Processes

To what extent are environmental and human rights standards already aligned and consistent across all corporate functions?
Have the standards of the Supply Chain Act already been defined and established in everyday processes (e.g. supplier management, procurement)?

Risk & Supply Management

Across all categories, are social, environmental and ethical risks identified, classified and known?
Are suppliers already audited in compliance with supply chain legislation and are you integrating the audit into the procurement process for new suppliers?

Digital & Analytics

Which risk analysis tools are already in use? Do these cover the requirements of the Supply Chain Act?
Will the information be checked and updated regularly? Does an active dialog with NGOs/associations take place?

Human Resources

Have you integrated risk management into the training plan for procurement?
Do you already have a contact person for risk management in procurement?

Controlling

Have you defined qualitative and quantitative KPIs to track compliance, are there escalation mechanisms?
Do you report on your sustainability goals (e.g. CSR reports) both internally and externally?

Fields of action within the framework of the Supply Chain Act

The German Supply Chain Act provides for strict due diligence rules depending on three levels of impact:

Policy statement
Risk analysis (annual): Procedure for identification of adverse impacts on human rights
Risk management (incl. preventive and remedial measures) to avert potential negative impacts on human rights
Training of relevant business units
Transparent public reporting
Grievance mechanism

Contractual assurance to respect human rights
Contractual control mechanisms
Offer training and development programs
Training of relevant business units
Annual risk analysis

Duty of care in the event of a specific cause:

Carrying out risk analysis
Plan for minimizing and avoidance of risk
Anchoring of appropriate preventative measures

In addition to supplier and risk management, the law requires specific measures in the areas of corporate communications and compliance. There is also an annual documentation and reporting requirement. Companies must now publicly state which risks have been identified and how they have responded to them. In addition, an easily accessible complaints office must be set up to which those affected can, if necessary can make direct contact

Your journey to SCA compliance

In principle, various approaches can be taken to embed the Supply Chain Act. Depending on the maturity of the existing supply chain law compliance, available resources and possible time frame, three concepts are possible:

If the maturity level is low and resources are limited, it is best to work with model 1. Companies achieve a more sustainable and greater value contribution by automating their processes and introducing comprehensive ESG risk management. In any case, it is not too late for anyone, and even latecomers have the chance to move from the simple to the comprehensive approach if they have done their have done their homework.

The Supply Chain Act shouldn’t be seen as a burden, but rather as an opportunity to create transparency in your supply chain – not only in terms of sustainability, but also in order to offer competitive and innovative products together with your suppliers in the long term. Procurement plays the role of value driver and interface manager: In dialog with a team from Compliance, Quality, Production and other specialist departments, it develops the commodity group and procurement strategies and is responsible for supplier management. Regular risk analyses, preventive and remedial measures are also part of the procurement department’s tasks.

In our experience, many companies have established a professional risk management system or optimized their existing one since the start of the Coronavirus pandemic. This risk management now serves as a basis for identifying risks that may arise as a result of the new due diligence requirements. If required, we advise on the selection and implementation of digital tools that support risk monitoring.

If risks or even violations are identified, it does not always make sense to immediately terminate the cooperation with a supplier. Instead, targets should be agreed and solutions identified to end grievances. Regular audits and voluntary commitments by suppliers support purchasing in incorporating the criteria of the Supply Chain Act into the existing supplier assessment.

In addition to risk and supplier management, we also analyze your company’s procurement processes and support the implementation of relevant measures at all levels.

We are happy to work with you to develop an adequate risk management system or optimize the existing risk management system with regard to the Supply Chain Act. We also provide support in developing a sustainability strategy that includes environmental and climate protection targets in addition to human rights aspects, and work with you to design the path to decarbonization.