- 4 min reading time
The Supply Chain Act and how companies can benefit from it
The new Supply Chain Act obliges companies to review and comply with human rights and environmental protection throughout the entire procurement process. It means some effort, but also brings opportunities. We take a look at the details and explain what needs to be considered and what competitive advantages companies can gain from this.
What is the Supply Chain Act?
On January 1, 2023, the Supply Chain Duty of Care Act - or Supply Chain Act for short - came into force. For the first time, it regulates corporate responsibility for compliance with human rights and environmental protection criteria in supply chains. It obliges companies to implement defined due diligence obligations.
These obligations apply to the company's own business area, to the actions of a contractual partner and to the actions of other (indirect) suppliers. The responsibility of companies no longer ends at their own factory gates, but exists along the global supply chains.
The law comprises a catalog of eleven international human rights conventions. The legal rights protected there are used to derive behavioral guidelines for corporate action in order to prevent violations of protected legal positions.
These include, in particular, protection against child labor, slavery and forced labor, compliance with occupational health and safety standards, payment of appropriate wages, respect for the right to form trade unions, access to food and water, and protection against deprivation of land and livelihoods.
Which companies are affected by the Supply Chain Act?
The law applies to companies that have their head office, principal place of business, administrative headquarters or registered office in Germany. Since the beginning of 2023, it has applied to companies with at least 3,000 employees (including temporary workers). From 2024, it will also apply to companies with at least 1,000 employees (including temporary workers).
What controls compliance with the Supply Chain Act?
The implementation of the law is monitored by the Federal Office of Economics and Export Control (BAFA). Companies must submit their report at least four months after the end of the financial year; the authority checks the reports and also carries out inspections at companies.
The authority is equipped with effective enforcement tools and extensive control powers to monitor companies' supply chain management. For example, it can enter business premises, demand information and inspect documents as well as request companies to take specific actions to fulfill their obligations and enforce this by imposing fines.
How can companies comply with the Supply Chain Act?
In principle, the law stipulates the introduction of seven binding measures:
- The adoption of a policy statement and anchoring of prevention measures in the company's own business area and vis-à-vis direct suppliers
- The establishment of a risk management system and the definition of internal responsibilities
- Carrying out regular risk analyses
- Taking preventive and remedial measures
- The establishment of a complaints procedure
- The implementation of due diligence obligations in relation to risks for indirect suppliers
- Documentation and reporting
Firstly, companies must identify, assess and prioritise the risks in their supply chains. Based on the results, a policy statement is published and measures are taken to prevent or minimise human rights violations and damage to the environment.
What would be the consequences of non-compliance with the Supply Chain Act?
If companies fail to comply with their legal obligations, fines of up to 8 million euros or - for companies with an annual turnover of more than 400 million euros - up to 2 per cent of their global annual turnover can be imposed. It is also possible to be excluded from the award of public contracts if a fine is imposed.
What advantages and opportunities does the Supply Chain Act bring?
Compliance with the law benefits people in the supply chains, consumers and the companies themselves. This is because they receive legal certainty and a reliable basis for sustainable supply chain management with resilient procurement channels. The law gives consumers the certainty that large companies in Germany in particular will now place an even stronger focus on fair production.
Even if the preparations for compliance with the Supply Chain Act mean some new efforts, the benefits and opportunities it brings outweigh them:
Advantage raw materials
The actual costs of a product - especially the human and environmental costs - have usually remained hidden until now. As a result, goods with dubious production have been able to assert themselves. The Supply Chain Act changes this and strengthens the value of regional and fair products. "Environmentally friendly supply chains help to preserve our livelihoods. But you can't tell by looking at a product where the raw materials come from or the noise, emissions and wastewater pollution caused during production," says Steffi Lemke, Federal Minister for the Environment, Nature Conservation and Consumer Protection. "With the Supply Chain Act, the ecological rucksack of a product becomes more visible and the sustainable practices of companies more transparent."
Advantage of delivery reliability
Precise knowledge about the origin and suppliers of products within the supply chain ultimately gives companies more security. They can rely on receiving their goods and raw materials from trustworthy and fairly traded sources. This reduces both the risk of questionable suppliers and incalculable losses. Relying on regional and local suppliers prevents this. Numerous large companies have had to deal with supply difficulties and bottlenecks during the coronavirus crisis and have taken precisely this approach: Increasingly working with regional raw materials and manufacturers to mitigate risk calculations. The requirements of the new Supply Chain Act only make this decision more future-proof.
Compliance advantage
Compliance with legal requirements, in particular the protection of fundamental rights laid down in international agreements, is an essential part of a contemporary understanding of values and a compliance culture. By complying with the Supply Chain Act and making positive contributions to people and the environment, companies can not only promote this, but also demonstrably document it.
Advantage of supply chain stability
Promoting and monitoring compliance within the supply chain is in the fundamental interest of companies. It serves to safeguard the company's own values and the general stability of the supply chain. The Supply Chain Act provides valuable impetus for intensifying cooperation with suppliers and expanding and better utilising the innovative power of the supply chain.
Initially, this may well restrict the pool of potential suppliers, but this will almost inevitably lead to qualitative consolidation - also through the integration of regional suppliers with controlled raw materials and sustainable production methods.
And finally: new competitive advantages
Companies can also use the requirements of the Supply Chain Act to create competitive advantages and develop in-depth purchasing analyses that allow them to integrate external value creation even better into their own value creation process.
It is helpful to think ahead and not just do what is necessary to comply with the law, but to use the legal obligations to create or expand effective and sustainable supplier management. The aim is to combine sustainability and profitability and thus gain new competitive advantages.
You can find further answers to the Supply Chain Act on the Information portal of the Federal Government on the topic of business and human rights and Federal Office of Economics and Export Control (BAFA).
Um den Vorgaben des Lieferkettengesetzes zu entsprechen und den eigenen Einkauf nachhaltig zu gestalten, ist es sinnvoll, einen praktischen Ansatz zu wählen. Beachten Sie hierzu die aufgeführten Punkte in unserer Checkliste. Sie können die Checkliste hier herunterladen.
