Everything you need to know about the German Supply Chain Act
Scoutbee Newsroom
Lieferkettensorgfaltspflichtengesetz – nothing like a big scary German word to get your day off to a good start! But, while you might not be able to get your tongue around it, as a procurement professional, you’ll have to get your head around it. Thankfully, it’s also known as the German Supply Chain Act and we’re here to tell you everything you need to know about it in order to prepare your organization.
What is the German Supply Chain Act?
In a nutshell, the Supply Chain Act is aimed at improving respect for human rights, including banning child and forced labor, and reinforcing environmental protection (for example, with regard to mercury or waste management) in global supply chains. Since 2023, the Act has applied to companies in Germany with at least 3,000 employees and, since January 1, 2024, to those with at least 1,000 employees (around 3,000 companies). Smaller companies and foreign suppliers do not fall under this law; however, it could have an indirect impact on businesses that supply to German buyers.
What do procurement organizations have to do to comply?
Buyers must prove that they have properly applied “due diligence”. This means not only checking the quality of the product but also ensuring that certain requirements have been met at all stages of the supply chain in relation to human rights (decent wages, workplace safety, etc.) and environmental standards.
In short, a company’s responsibility no longer ends at their own front door but extends along the entire supply chain. This can be broken down into eight areas of obligation:
1. Risk management: This involves putting in place a management system to observe due diligence. It must clearly define who in the organization is responsible for these requirements and be made part of daily operations.
2. Risk analysis: Procurement organizations must analyze whether their operations could lead to human rights or environmental standards violations. The risks must then be assessed and prioritized accordingly.
3. Measures: If risks are uncovered, measures must be put in place to prevent or resolve these issues. Buyers and suppliers should work together to decide on the necessary procedures to mitigate or minimize any identified risks.
4. Complaints procedure: This needs to be established so that any human rights-related or environmental risks can be reported.
5. Reporting: In the interest of accountability, the organization publishes an annual report on how it has realized its due diligence obligations. This is available to the public and the responsible authorities in Germany.
6. Scope: The due diligence obligations apply to organizations’ own operations and to their direct suppliers. They also apply to indirect suppliers in the case of complaints about risks or violations.
7. Rights of people affected: People who have been impacted by human rights violations can be represented in a German court by German NGOs or trade unions. If the violation is environmental, it can be reported to the German Federal Office of Economics and Export Control (BAFA).
8. Monitoring: The monitoring body checks whether due diligence obligations have been observed. If the body finds that due diligence obligations have been violated, it can impose substantial penalties or fines.
What are the fines for non-compliance?
You might want to hold onto your hats at this point… The Supply Chain Act specifies a range of fines in the case of violations. The penalty against natural persons may go up to €800,000; against companies, fines of over €400 million and up to 2% of the average annual turnover can be imposed. In relation to administrative offenses, an organization’s managers, but also, for instance, the human rights or compliance officer, can be addressees of the fines.
So, it’s probably wise to make sure that your company is compliant…
What’s the current state of affairs?
Due to the Supply Chain Act, as well as other factors such as growing demand from consumers and increasing pressure from investors and other stakeholders, it’s imperative that businesses up their ESG game. Complete transparency along the entire supply chain is no longer a nice-to-have but a must-have in meeting ESG criteria.
However, in many organizations, this transparency is still in its infancy, withinformation about their own supply chains often based on self-reporting by suppliers or cumbersome Excel spreadsheets. Knowing that ESG violations will lead to greater reputational damage and increasingly hefty fines or penalties in the future, what can organizations do?
Help is at hand
As a procurement professional, you’re well aware of how difficult it can be to quickly find new, compliant suppliers if you do find risks or weaknesses in your supply base.
With Scoutbee Discovery, you can save yourself the hassle of resorting to tedious, time-consuming methods like googling, spreadsheets, or trade publications. Instead, use our advanced AI-powered solution to help you find best-fit suppliers - in a fraction of the time. Our solution provides a sustainability score for the suppliers we find, making sure that you always have information you can trust on your new suppliers.
As Hubertus Heil, German Federal Minister of Labor and Social Affairs, compellingly states, “We need to change to an economy and way of life that respects the natural limits of our planet. To do this, we need to better enforce international labor, social, and environmental standards. The Supply Chain Act is a milestone in this regard.”
Make sure your organization is ready by giving your procurement team the tools they need to be part of the change. Your customers, stakeholders, and the planet will thank you for it. Check out how Scoutbee can help you - request a demo today.