The Supply Chain Act Will Push Your Company’s ESG Standards

by Henning Hatje28.03.2021

The clock is ticking for a legally compliant supply chain

It is no secret that environmental, social and governance (ESG) issues are a top priority for many procurement departments and executives globally. According to the 2021 Deloitte Global CPO Survey, the importance of Corporate Social Responsibility (CSR) saw the largest rise compared to other topics, within the last two years. This underlines the decisive role of procurement in shaping an organisation's ESG footprint. Despite regular discussions at the board level and a prevailing general understanding of the importance of this issue, ESG compliance is still a voluntary measure and most companies struggle to turn this into a clear vision or strategy. In Germany, this will change with the introduction of the Supply Chain Act that will apply from 2023 onwards. The German law also serves as a template for a draft law for Europe-wide supply chain regulation, which the EU Commission plans to present soon.

This is an urgent topic for procurement departments as they have just under 9 months left to cope with the extensive requirements and to create a legally compliant supply chain.

In this article, we will provide you with the most significant information that procurement departments need to be aware of!

Who is affected?

The Supply Chain Act (SCA) was passed in June 2021 and will be effective from 1 January 2023. It applies to all companies that have their central administration, headquarters, or registered offices in Germany and employ at least 3,000 employees. Starting 2024, the threshold will be lowered to 1,000 employees for both German and foreign companies, which is expected to increase the number of companies subject to the Act from around 700 in 2023 to 2,900 in 2024.

The Act imposes, for the first time, a binding obligation on these companies to establish, implement and update due diligence procedures to improve compliance with specified core human rights and environmental standards in their supply chains.

The German Federal Office of Economics and Export Control (Bafa) will monitor compliance with the due diligence obligations and impose sanctions in the event of violations. Administrative penalties and fines can be imposed, ranging up to EUR 8 million for companies with annual sales of less than EUR 400 million. For higher sales, a fine of up to two percent of annual sales may be imposed. Above a certain amount, a company can additionally be excluded from public tenders for three years.

How should companies prepare now?

Companies that operate globally and have complex supply chains are particularly affected, such as companies from the pharmaceutical and chemical industries, but also automotive manufacturers and technology groups. The requirements apply to their own business operations (i.e., all subsidiaries and affiliates) as well as to their direct suppliers. In this case, the respect for human rights and the corresponding control mechanisms must be contractually guaranteed and defined. Companies are also obliged to conduct a risk analysis at least once a year and offer development and training programs.

For indirect suppliers, the due diligence requirements are only monitored passively. However, if a company becomes aware of a possible violation at an indirect supplier, it must immediately conduct a risk analysis, implement a concept for minimization and avoidance, and establish appropriate preventive measures.

Scroll down for a brief overview of the individual obligations.

Supply Chain Act - Obligation or opportunity?

The urgency to act is obvious and companies should have already started focusing on implementing new procedures. However, the corona crisis has left many struggling with supply chain bottlenecks. They have pushed aside future obligations and are afraid of confronting suppliers with new compliance requirements. Apart from the current market environment, companies affected by the Act are also facing capacity constraints. Setting up a risk management system to determine which suppliers may be at risk of violation is a complex and time-consuming process, especially when the number of suppliers is in the hundreds of thousands. CPOs are now urged to look closely at the quality of their current risk management systems and identify weaknesses within their processes.

Although procurement executives consistently rate risk management as a top priority, many leaders are simply not aware of all the end-to-end supply chain risks. Setting Up appropriate systems still remains a challenge. A survey by Deloitte conducted in 2021 indicates that around 70% of CPOs believed that they had good visibility of the risk that existed in their direct suppliers. Yet, only 26% of the respondents were able to confidently predict risk within their supply chain and only 15% had visibility into indirect suppliers or beyond.

Despite all the challenges, the new regulations can also be seen as an opportunity. Companies are now forced to act and can not push these tasks away for much longer. Setting up improved and transparent risk management mechanisms will be a competitive advantage as those who have a better understanding of their suppliers also have a better data basis for their supply chain management. In that sense, the Act not only entails an accumulation of obligations but can become a driver for the optimisation of a company’s entire supplier network.

Lhotse sheds light on your tactical procurement processes

Across firms of all sizes, the focus lies on the strategic spend. What is often overlooked is the tactical spend, although it comprises around 80% of all suppliers and purchasing orders within most companies. As a consequence, the majority of a company’s supplier base is often unmanaged and opaque. Against the backdrop of the Supply Chain Act, it is therefore all the more important to have a transparent overview of your indirect suppliers as well.

We at Lhotse offer a simple execution platform for tactical procurement. Our solution can help you to shed light on your company’s indirect spend and make compliant sourcing easy and intuitive. Lhotse consolidates your non-strategic suppliers and de-risks your supplier base. Regulatory data is integrated directly into the sourcing process to ensure compliance with company-relevant procurement policies, such as the Supply Chain Act.

In short, Lhotse offers a simple solution to bring 100% of your tactical spend under management.

If you wish to find out more about how Lhotse can help you to improve your procurement processes, book a demo with us today!


Copyright © 2023 Lhotse. All rights reserved