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.
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 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.
...also and especially in industrialized countries.
From our practice we recommend the following steps:
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 .
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.
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
Our checklist helps to think of everything.
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