Germany’s Supply Chain Act – what you need to know

It’s no secret that ESG issues are a top priority for many procurement departments and executives globally. According to the 2021 Deloitte Global CPO Survey, the importance of CSR saw the largest rise compared to other topics within the last two years.

Despite regular airing at board level and an overall understanding of the importance of the issue, ESG compliance is still a voluntary measure, and most organisations grapple with creating a clear strategy around it.

This is all set to change in Germany, however, with the introduction of the Supply Chain Due Diligence Act, which comes into effect January 1, 2023, and which is designed to minimise the risk of infringements of human rights and environmental standards.

While Germany isn’t the first European country to require organisations to police their supply chains (the UK’s Modern Slavery Act dates from 2015), the German Supply Chain Act stands out thanks to its much greater breadth and given the magnitude of Germany’s manufacturing sector.

The law is likely to serve as a template for a draft law for Europe-wide supply chain regulation, which the EU Commission plans to present soon.

German Supply Chain Act – what is it and who is affected?

Under the German Supply Chain Act, companies must take responsibility for the actions of their supply chain partners – from suppliers of components to the businesses that further process or sell the products manufactured.

From 1 January 2023, all companies that have their central administration, HQ, or registered offices in Germany and employ at least 3,000 people will have to comply.

This is expected to be around 700 companies. The threshold will then be lowered to 1,000 a year later, on January 1, 2024, and refer to both German and foreign companies – with the number of companies subject to the Act expected to increase to 2,900.

Companies that operate globally and have complex supply chains are particularly affected, like those from the pharma and chemical industries, automotive manufacturers and tech groups.

These companies – of which there are around 600 in Germany as of January 1, 2023 – are required to monitor their supply chains for specified human rights and environmental risks, and they must then report and act on any violations or risk fines of up to €8 million or 2% of global turnover.

Among the specified risks German companies will need to identify and report are: child labour, forced labour, occupational health and safety, problematic employment and working conditions, freedom of association, discrimination, minimum wage, health, unlawful seizure of land and waters, torture, and environmental damage.

Solutions – risk-aware procurement processes

Companies must therefore invest in solutions that enable them to remotely monitor their suppliers’ facilities from providers like Aravo.

Aravo for supply chain resilience is a SaaS solution that combines a supplier-oriented view of hazards that could impact your supply chain with the business process automation needed to respond quickly.

By leveraging Aravo’s robust workflow, the solution can alert you to potential issues, automate supplier business impact assessments, and manage your response, whether that’s mitigation or identification of alternative suppliers.

Another provider ARCHE Advisors expertly assists some of the world’s largest brands in managing the social and environmental impacts of their globalised supply chains. They offer audits and specialised field assessments, as well as advisory services.

SAP can also help companies of any size and in any industry to comply with this new law – helping them establish risk-aware procurement processes.

They share up-to-date supplier risk scores within supplier selection activities in the spend management process; and to achieve a comprehensive supplier risk profile across all immediate suppliers, they work on incorporating many internal and external data sources. Once identified, risks should then be reduced and documented in close collaboration with suppliers.