From January 1st 2023„ the “Act on Corporate Due Diligence Obligations for the Prevention of Human Rights Violations in Supply Chains“ – short: Act of Corporate Due Diligence in Supply Chains or German Supply Chain Act – holds companies with more than 3,000 employees in Germany liable to comply with extensive due diligence obligations towards people and the environment in their value chain. One year later, the law will also take effect for organizations with more than 1,000 employees. In the following interview, Judith Jung, specialist group officer at the German Association of Materials Management, Purchasing and Logistics (BME) and project manager at the Competence Center for Innovative Procurement, and Carsten Knauer, head of the BME Logistics Section, discuss why small and medium-sized companies are also affected and what they can do to prepare.
Judith Jung, specialist group officer at BME and project manager at KOINNO/ BME. e.V.
“As suppliers, SMEs have a significant role in the implementation of the Supply Chain Act.”
In a first step, the German Supply Chain Act addresses large companies. Are SMEs affected at all?Carsten Knauer: Indirect suppliers are affected, as well. The law expects directly affected companies to act immediately if they have substantiated knowledge of a violation.
This means that if there are indications that a violation of human rights or environmental obligation at an indirect supplier is even possible, the company must initiate a review and, if necessary, take remedial action.
Judith Jung: Small and medium-sized enterprises play a crucial role as immediate (direct) suppliers. The organizations concerned are not only obligated to act in their own business field, but must also assume responsibility for their supply chain. What is required, literally, is the “identification, assessment and prioritization of relevant human rights and environmental risks, also in direct and indirect supplier operations.”
Which measures and information the suppliers must contribute is ultimately decided by the client affected by the law. The EU Supply Chain Law, which has already been presented by the EU Commission and which is to apply to companies with 500 employees or more, should also be kept in mind.
“The German Supply Chain Act will have an impact on the future purchasing strategy of companies”
How will large companies hedge against risk and what does that mean for suppliers?
Carsten Knauer: Companies must examine their immediate suppliers as part of their risk analysis and management using appropriate and transparent criteria – either as part of a supplier evaluation or as a separate analysis. In any case, the insights gained should have an impact on the future purchasing strategy, for example by avoiding high-risk procurement markets. Another tool is strategic material group management, which weighs out the risks of individual procurement markets and material groups.
Judith Jung: In the future, companies will thoroughly analyze potential and existing suppliers, as the law may make it necessary to adapt procurement strategies and purchasing practices in order to comply with the legal requirements. As part of the preventive measures under Section 6(4), directly affected companies are also required to communicate their expectations regarding due diligence obligations to their immediate suppliers, to obtain contractual assurance that these expectations will be met and – a crucial point – that they are also addressed correctly along the supplier’s own value chain. Among other things, this also requires the agreement of appropriate contractual control mechanisms in order to verify compliance and also obliges the companies concerned to provide training and further education to their suppliers for this purpose.
What does the law mean for global markets such as China, India or Bangladesh?
Judith Jung: Under the law, it is not decisive where in the world a direct or indirect supplier is located. The law indirectly affects suppliers in all international procurement markets. If companies assess the risk potential for certain producers or product groups as increased, they will become the focus of the risk analysis.
“For the Supply Chain Act, the location of a direct supplier is not decisive.”
What tools do large companies have to embed and regularly monitor due diligence compliance?
Judith Jung: There are methods and instruments across the entire supplier management process to prevent risks in the purchasing processes and procurement strategy. This ranges from supplier selection and development to the termination of the business relationship in a worst-case-scenario. In addition to risk analysis, possible instruments include the consideration of German Supply Chain Act standards in the contracting criteria and the General Terms and Conditions of Purchase (GTCP), as well as the definition of extraordinary termination rights in the GTCP. A helpful instrument is also a code of conduct, which can be expanded accordingly. In addition, we recommend requiring a self-declaration from the supplier on compliance with due diligence obligations. Furthermore, companies can integrate a criterion for human rights into the supplier evaluation and carry out dedicated audits in production sites outside the headquarters.
How should SMEs and suppliers prepare?
Carsten Knauer: Suppliers who invest in quality and risk management could have an advantage in future selection processes and contract negotiations. Social compliance certification, for example, sends positive signals to existing and potential clients. Further, an ISO 14001 certified environmental management system helps companies to manage risks effectively. The SA8000 standard regulates working conditions at suppliers’ sites, especially in countries where legal requirements are difficult to enforce. The establishment of a quality management system in accordance with ISO 9001 in conjunction with sustainability reporting also fulfills the requirements of the German Supply Chain Act to a large extent.
Judith Jung: What is required or necessary is specified by the customer directly affected by the law. However, if a small or medium-sized company acts as a direct supplier, it can voluntarily check in advance whether the minimum requirements of due diligence are met in its own business operations and whether there are any violations. It is also possible to audit one’s own suppliers, define responsibilities and document measures. In the course of this, relevant information and data can already be researched and prepared. In this way, indirect suppliers can precautiously prepare in accordance with the guidelines.
“Transparency is gaining importance on all levels of the supply network.”
How can risk analysis and risk management be implemented, especially in SMEs?
Carsten Knauer: For the introduction of a risk management system, a clean process of identification, assessment, derivation of measures and regular review must be defined. It is very important to involve as many departments as possible and to ensure that neither the process nor the subsequent active risk management takes place in isolation. A recent logistics study conducted by BME has shown that risk management has so far hardly taken place across departments – consequently, transparency and networking are often lacking within the company.
Judith Jung: Transparency with regard to potential risks is becoming increasingly important in one’s own business area and at all levels of the supply network. The type and weighting of risks can vary greatly depending on the commodity groups or procurement region. Thus, companies can examine their own business and the supply chain according to material, supplier, transport or market risks from different angles. Questions for the assessment may include: How likely is a risk to occur? What is its impact? Which issues are particularly critical? The approach to risk classification must be developed individually and systematically.
When it comes to connecting companies internally and externally – what roles do strategic SCM and the use of collaborative tools play?
Carsten Knauer: Companies that practice strategic supply chain management (INTERNER LINK https://www.hermes-supply-chain-blog.com/vorteile-eines-aktiven-supply-chain-managements/) and use collaborative tools work closely with their suppliers, are well networked and share relevant information. This already provides increased transparency in the supply chain, which is also necessary for compliance with the German Supply Chain Act. The additional effort that is needed in order to implement corresponding monitoring measures and the digital tools required for this purpose in the supply chain is significantly lower, can be implemented more efficiently, and is generally met with greater acceptance by the already well-integrated suppliers in the supply chain. Another major advantage is that data is already being collected, which makes risk assessment and risk management much easier.
Thank you very much for the interview!
Judith Jung heads six specialist groups at the German Association for Materials Management, Purchasing and Logistics (BME) on various strategic purchasing topics, including “Trends & Transformation in Purchasing” or “Processes & Tools in Purchasing”. She also supports public-sector clients in the strategic realignment and transformation of their procurement departments as part of the Competence Center for Innovative Procurement (KOINNO).
As head of the logistics section, Carsten Knauer is responsible for the logistics specialist groups at BME. The focus in this context is on SCM and the annually conducted BME logistics study. He is also the contact person for topics relating to the purchasing of services.
The Competence Center Innovative Procurement (KOINNO) is a funding project with the aim of sustainably strengthening the innovation orientation of public procurement in Germany. The Competence Center is run by the German Association of Materials Management, Purchasing and Logistics (BME) on behalf of the German Federal Ministry of Economics and Climate Protection (BMWK).
As a leading trade association and network partner throughout Germany and Europe, the Federal Association for Materials Management, Purchasing and Logistics e.V. (BME) supports executives from purchasing, supply chain management and logistics with know-how transfer, training and further education as well as the promotion of new findings, processes and techniques at the interface of science and practice.