Impact of the Supply Chain Due Diligence Act (LkSG) on Procurement
Impact of the Supply Chain Due Diligence Act (LkSG) on Procurement
The Supply Chain Due Diligence Act (LkSG) affects German companies in specific industries with at least 3,000 employees, as well as smaller companies facing customer requirements.
Procurement departments responsible for supplier selection are likely to be most affected by the LkSG's impact.
LkSG compliance includes risk assessment, remedial actions for violations, and improving transparency in the supply chain.
Collaboration with suppliers is crucial, requiring training, risk management, and sustainable supply chain development.
Communication with stakeholders (reports, active communication, audit results) is necessary.
Implementing the LkSG means increased time and costs for procurement departments.
Software solutions (e.g., risk management, intake, workflow management, collaboration) can provide support and relief (for software recommendations, scroll down or read on 😊)
Companies should be prepared for LkSG requirements, allocate necessary resources, and leverage software tools.
The Supply Chain Due Diligence Act (LkSG) is a milestone in German legislation. It obliges companies based in Germany or with branches operating in specific industries and employing at least 3,000 employees toexercise comprehensive due diligence in their supply chains. This due diligence encompasses the observance of human rights and environmentalstandards throughout the supply chain. Companies must implement an appropriate system for risk analysis and assessment and take remedial measures in the event of non-compliance.While the LkSG, by law, applies only to companies with more than 3,000 employees (or from 2024, 1,000 employees), in practice, it often also affects smaller companies because their customers require LkSG compliance. In our whitepaper, "The State of Indirect Procurement," wherewe surveyed procurement experts from companies of various sizes, the LkSG was recognized as one of the top four priorities in procurement. This is because the LkSG has significant implications for procurement
While the LkSG, by law, applies only to companies with more than 3,000 employees (or from 2024, 1,000 employees), in practice, it often also affects smaller companies because their customers require LkSG compliance. In our whitepaper, "The State of Indirect Procurement," wherewe surveyed procurement experts from companies of various sizes, the LkSG was recognized as one of the top four priorities in procurement. This is because the LkSG has significant implications for procurement departments, which are typically responsible for selecting and engaging suppliers.
In this article, we won't bore you with the formalities of the LkSG but instead guide you through its various aspects and associated to-dos.
Compliance with Legal Requirements
Companies must comply with the requirements of the LkSG to avoid legal consequences. This includes implementing an appropriate system for risk analysis and assessment and executing remedial actions in cases of non-compliance. While the legal text lists some clear to-dos, other aspects maybe found between the lines.
Improving Transparency and Control of the Supply Chain
Companies must have a comprehensive understanding of their supply chain to identify potential risks. This involves analyzing supplier relationships, conducting audits, and developing risk mitigation measures.
Supplier Relationship Analysis:
A crucial component of implementing the Supply Chain Due Diligence Act (LkSG) is the analysis of supplier relationships. This analysis requires procurement departments to take a close look at their existing relationships with suppliers. It's not just about counting the number of suppliers but also assessing the quality of these partnerships. This includes factors such as the duration of collaboration, the reliability of suppliers in adhering to contracts and agreements, and the quality of products or services delivered. This in-depth analysis helps identify potential risks and improvement opportunities and forms the basis for effective risk mitigation measures.
Another critical step under the LkSG is conducting audits. These are systematic reviews and evaluations of suppliers to ensure their compliance with social and environmental standards. These audits examine various aspects, including compliance with labor regulations, environmental regulations, and ethical practices. These examinations can be conducted on-site at the supplier's location and can be performed by internal or external teams. The audit results are used to identify weaknesses in the supply chain and develop measures for improvement and risk reduction.
Developing Risk Mitigation Measures:
A central aspect of the LkSG is the identification and mitigation of risks in the supply chain. Procurement departments are obligated to develop and implement appropriate risk mitigation measures. This means that companies need to create plans to respond to potential human rights violations or environmental impacts if they occur in their supply chain. These measures may also include dialogue with suppliers to improve their practices and the development of contingency plans to manage unexpected supply chain disruptions. Developing risk mitigation measures is crucial for ensuring LkSG compliance and making the supply chain more resilient to unforeseen events.
Collaboration with Suppliers
Meeting the requirements of the Supply Chain Due Diligence Act (LkSG) not only requires companies to rethink their own practices but also necessitates close collaboration with their suppliers. These partnerships are critical to ensuring a responsible and ethical supply chain.
Collaborating with suppliers to achieve the goals of the LkSG goes beyond mere compliance with legal requirements. It creates a win-win situation where companies and suppliers are jointly held accountable while strengthening their business relationships. This collaborative approach reflects the growing importance of ethics and sustainability in today's business world and demonstrates how companies, through their collaboration with suppliers, can drive positive change throughout the supply chain. Let's take a closer look at how companies and suppliers can work together to achieve the goals of the LkSG.
One of the first steps in collaborating with suppliers is to ensure they understand the requirements and standards of the LkSG. Companies can provide training and training materials to help suppliers become aware of issues such as human rights, environmental regulations, and ethical business conduct. This enables suppliers to expand their knowledge and adjust their practices accordingly.
Supporting the Implementation of Risk Mitigation Measures:
Implementing risk mitigation measures throughout the supply chain requires close collaboration between companies and suppliers. This can involve the development of guidelines and procedures for risk assessment and mitigation. Companies can also leverage their experiences and resources to assist suppliers in implementing measures aimed at identifying and addressing risks.
Joint Development of Sustainable Supply Chains:
The pursuit of sustainability and responsibility in the supply chain presentsan opportunity for companies and suppliers to work together on innovativesolutions. This may include the development of more environmentally friendly production processes, the use of renewable energy, or the promotion of fair working conditions. Through this collaborative development, companies and suppliers can build a long-term partnership that not only meets the requirements of the LkSG but also makes a positive contribution to society.
Communication with Stakeholders
Companies must inform their stakeholders about their efforts to implement the LkSG. This includes customers, employees, investors, and the public. There are various ways to do this.
Publication of Reports:
A proven way to make efforts to implement the LkSG transparent is by publishing reports. These reports can be made available on the company'swebsite or in other public documents. In these reports, companies provide insights into their supply chain practices, progress in complying with human rights and environmental regulations, and initiatives for risk mitigation. This not only promotes transparency but also accountability to stakeholders
The law encourages companies to actively communicate with their stakeholders about the implementation of the LkSG. This communication can take place through various channels, whether through conversations, official letters, emails, or social media. Companies that choose this approach can establish direct contact with their stakeholders and better understand their concerns and expectations.
Sharing Audit Results:
Conducting audits and other risk mitigation measures are essential parts of the LkSG requirements. Companies that transparently report the resultsof these audits demonstrate their commitment to accountability. This can help strengthen stakeholder trust in the company while highlighting potential areas for improvement.
Increased Time and Costs for Procurement
By now, it should be clear that implementing the requirements of the LkSGrequires significant time and additional costs for procurement departments. According to a survey by Gesamtmetall, the resources demanded by affected companies have exceeded all expectations.
The good news is that procurement departments are not left to handle thischallenge alone. The market is filled with numerous software providers that comprehensively support companies in all aspects of the LkSG.
Improving Transparency and Control of the Supply Chain: Risk Management & Intake Software
Risk management software provides valuable assistance in identifying and assessing risks in the supply chain. Some examples of risk management software include:
EcoVadis: offers a comprehensive platform for monitoring and evaluating sustainability in the supply chain, enabling companies to intensify their efforts in this area.
Sedex Supplier Ethical Data Exchange (SMETA): a powerful online tool that assists companies in conducting supplier audits to assess compliance with social and environmental standards.
CSRHub: allows companies to assess and track the sustainability andsocial responsibility of their suppliers.
Intake software plays a crucial role in capturing and analyzing information about suppliers and their supply chains. Here are some examples of data management software:
Lhotse: supports companies in capturing and analyzing data related to purchase requisitions and associated suppliers.
Oracle Fusion Procurement: enables companies to collect and analyze comprehensive data about suppliers and supply chains.
Microsoft Dynamics 365 Supply Chain Management: provides features for capturing and analyzing data about suppliers and supplychains.
Process automation is key to enhancing efficiency in implementing the LkSG. Workflow management software offers the possibility to automate manual processes. Here are some examples of workflow management software:
Lhotse: Lhotse automates certain steps of the workflow – the process always starts with a structured purchase requisition (BANF), which is then approved and automatically routed through steps like supplier evaluations.
Microsoft Power Automate: allows companies to automate manual processes as part of LkSG implementation.
SAP Process Orchestration: assists companies in automating manual processes in the context of the LkSG.
Supporting Collaboration with Suppliers
To improve collaboration with suppliers, collaboration software solutions can be employed. Here are some examples of effective collaboration software:
Microsoft Teams: the all-time favorite.
Slack: a modern alternative to Microsoft Teams.
Confluence: particularly well-suited for collaboration on joint projectswith suppliers
All of these software solutions offer diverse capabilities to efficiently meet the requirements of the LkSG and optimize collaboration with suppliers. They are an essential part of the toolkit that companies can use to successfully build a responsible and ethical supply chain.
The LkSG has far-reaching implications for procurement. Procurement departments must adapt to the new requirements and allocate the necessary resources. Implementing the LkSG presents a challenge that companies are best equipped to address not in isolation but with the help of various types of software that can assist in creating transparency and relieving procurement teams, allowing them to focus on value-added tasksrelated to the LkSG.
If you're interested in learning more about how Lhotse can support you in implementing the LkSG,book a demo with us now!