The German Supply Chain Due Diligence Act ("Lieferkettensorgfaltspflichtengesetz": LkSG) represents a major hurdle for many companies. The risks of non-compliance are high. But you can also derive opportunities for yourself from this.

Find out how important the law is for you and your customers and suppliers, the consequences of non-compliance, what is important in terms of content and how you can use the topic positively for yourself or your customers - even if you are not affected directly or only partially. Avoid typical mistakes with our tips.

The supply chain law at a glance

The law, the so-called "Supply Chain Due Diligence Act" (LkSG), was passed in the German Bundestag on June 14th, 2021 and affects international companies that have 3,000 employees or more (from January 1st, 2023) or 1,000 employees or more (from January 1st, 2024). It should be noted that an EU-wide supply chain law that will come into force in 2024 is already in the works and will provide for significantly stricter application requirements.

The aim of the law is to ensure that human rights are observed within the supply chain and to prevent environmental damage during the production, storage and transport of goods. In the event of non-compliance, there is a risk of a fine of up to 500,000 euros or for companiens having 400 million euros annual turnover or above up to 2% of their turnover.

Fines and introductory costs are high. It is therefore alarming that by the end of 2022, according to the Emarticon® Supply Management Survey, only approx. 35% of the German companies concerned had introduced appropriate measures!

What are the success factors?

Risk Areas

The law obliges affected companies to take prescribed care when dealing with suppliers in order to prevent human rights being restricted and environmental damage being caused.

– Human Rights –

With regard to human rights, prohibited is: child labour, forced labor or slavery, disregard for occupational safety and health or the "freedom of association" (i.e. union formation), endangering people through environmental pollution, the forced eviction or confiscation of land and the inappropriate use of security forces and disregard for legal positions. On the other hand, the principles of equal rights (eg origin, gender, ethnicity, age, etc.) and reasonable wages (eg minimum wage) must be respected.

– Prevention of Environmental Damage –

With regard to the prevention of environmental damage, in addition to the prohibitions mentioned in the Human Rights section, the law stipulates compliance with the chemicals directives under the Stockholm and Minamata Conventions and POPs, and the Basel Convention prohibiting the export of hazardous substances.

Both working conditions and environmental protection are inadequate in many supplier countries.

The law also applies in regard to subcontractors.

What does the law mean for your company?

It is therefore obvious that the catalog of regulations in the area of human rights is very broad and unclear. In contrast, a small area is covered in the area of environmental damage, which is, however, very clearly defined. Both approaches have advantages and disadvantages for affected companies:

The broad, vague risk area of human rights allows interpretation in order to be adequately designed for one's own business. However, this design is a) complex and b) in turn entails its own risks – if not everything has been thought of.

In the sharply defined risk area of environmental risks, there is not a great deal of effort for the design. However, the requirements for controlling the supply chain are all the higher, since the criteria are clearly specified.

The industry's criticism of the law was therefore primarily the vagueness of the human rights criteria. On the other hand, the criticism from environmental organizations mainly related to the fact that environmental protection was not considered universally and that small companies were left out.

How does your implementation succeed?

The implementation of the law is an extremely complex project for large companies, in which legal aspects have to be compared with, among other things, the specific business processes, the existing supplier portfolio and the procurement market of the respective industry. The project starts with a defined procurement strategy and charter, requires an effective risk management and cannot succeed without the efficient use of IT, ideally AI-based supply chain management and AI-based sourcing.

In certain industries, the risks are higher...

...also and especially in industrialized countries.

From our practice we recommend the following steps:

Define your own standards and write them down in your procurement charter or check your standards against the new legal framework.

  • It is important that your standards include due diligence not only for direct but also for indirect suppliers.

Define internally the necessary structures, in particular

  • the responsibilities and competences,
  • procurement risk management with regular risk analyzes and appropriate preventive measures in the company and at direct suppliers,
  • control mechanisms for your direct suppliers so that their supply chain, i.e. your indirect suppliers, meet the required standards,
  • complaint rrocedures & remedial actions,
  • supplier audits,
  • documentation and reporting.
Pay attention to the differences between the target groups in different parts of the organization, countries and management levels.

Design these steps and the implementation of the structures or control mechanisms as a separate project, your "LkSG project", with a project manager who reports the progress directly to the management or to a correspondingly appropriate level. After implementation, the LkSG should become an integral part of your supplier management .

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Are you looking for support in implementing the Supply Chain Act?

Contact Me. I would be happy to discuss your specific situation with me as part of a strategy meeting.

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Risk Management

As part of your risk management, the primary risk factors (i.e. business practices, employee rights and safety and environmental risks) must be analyzed using the relevant parameters (i.e. purchasing volumes, production sites and supplier company profiles). On this basis, your assessment of the probability of the risk occurring and the severity of possible damage must be assessed. This creates a complex database, the content of which must be updated regularly in order to draw the right conclusions. It should be noted, however, that the size of the affected purchasing volume alone provides indications, but is not entirely sufficient to assess the risk in regard to human rights and environmental damange or the risk for your own company. In the case of chemicals, for example, even small amounts can cause major damage.

Key Success Factors

The sub-topics of the supply chain law listed above show how highly complex the implementation is. It is therefore important to pay attention to efficiency in the corresponding processes and sub-projects and to benefit from experience.

We know typical mistakes from our consulting practice.

Our Tips

  • Agree the boundary conditions and approch with all stakeholders in advance.
  • Right from the start, make sure that you draw on the knowledge of your employees, especially on site at your foreign locations.
  • Employee training can be particularly efficient with e-learning.
  • Use your existing IT for the LkSG project. Existing and new suppliers can, for example, contractually agree to the new regulations using appropriate workflows.
  • Check to what extent existing standards (e.g. publicly available standards) can be used.
  • Check to what extent you should expand your database with special software. For example, AI-based web crawlers can help you identify and avoid particularly risky suppliers.

The implementation of the LkSG is a complex project

Our checklist helps to think of everything.

  • Check to what extent your company processes regarding supplier management can be optimized beyond the pure LkSG project in order to remain efficient in supply chain risk management in the long term.
  • Create "creative points" in your processes in order to check established patterns of action and, if necessary, to find new solutions.
  • Make it clear to your customers how carefully you deal with the topic. This is often an advantage, especially when it becomes clear that you are not greenwashing. In this way, you can use the legal requirements and your diligence for your company as an opportunity.
  • Especially if you are not directly affected: think about how and through which steps you can support your business partners or B2B customers with supply chain management in regard to the LkSG. Thereby you create a special customer loyalty.
  • In the project, it is better to aim for quick results in several small steps than one big step with a huge impact that takes too long to happen.
  • Use external experience for the implementation.

Make Emarticon's competencies your own

Make the competencies of Emarticon to their own!

Clemens Rinnebach and his team of experts will also advise your company and successfully support you in the following tasks.

  • Analyzing the legal and economic risks in your supply chain and supplier portfolio
  • Identifying ways to support your customers and business partners
  • Working out your options for action to assess risks and comply with legal standards
  • Identify and coordinate appropriate measures such as changes in processes, responsibilities or your company's products
  • Support in the implementation as a consultant or interim manager
  • Checking and making periodic adjustments
  • Preparing, accompanying and conducting contract negotiations

We accompany your changes through active change management, project management and interim management.

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