Supply Chain Act: Digital does matter

From table decorations to denim jackets: consumer goods have usually not only made a long journey in containers before they are sold in stores or via an online platform, but have also gone through numerous production stages. Importers of such goods in Germany or the USA - unlike other industries - do not think about whether production in their home country might make sense because supply chain disruptions have increased in recent years. So-called nearshoring does not make sense from their point of view. Because labor costs in Asian countries, for example, are many times lower than in Western Europe or North America, they are not wasting time on a general change of course.

Although the needle in the company compass points in the same direction as years ago, many companies have had to overcome new challenges since the beginning of 2023. For more than twelve months, the Supply Chain Act has made companies in Germany responsible for ensuring that they do not cooperate with suppliers who practice child and forced labor, for example. After almost a year, the Federal Office of Economics and Export Control (Bafa), which is responsible for the issue, has published statistics. One key result: according to its own information, the office has not yet imposed any sanctions for violations.

486 checks carried out in the first year

In a statement, the authority announced that 486 inspections had been carried out at companies since the law came into force on January 1 last year - mostly in the automotive, chemical, pharmaceutical, mechanical engineering, energy, furniture, textile and food and beverage industries. According to the Bafa, 38 complaints were received. In six cases, the authority contacted the company in question.

Overall, the Bafa draws a positive interim balance. The obligated companies have scrutinized their supply chain more closely than before and for the most part successfully implemented the requirements of the law, the authority emphasizes. Companies have also approached suppliers who are in breach of the regulations so that they can rectify or mitigate any shortcomings.

In 2023, the German Supply Chain Act only applied to companies with more than 3,000 employees. According to the Federal Ministry for Economic Cooperation and Development (BMZ), around 900 companies were affected by the regulations. Since January 2024, the law has also applied to companies with more than 1,000 employees. However, the number of companies affected is deceptive: small companies that want to do business with large players are usually obliged by them to comply with the new rules - or they have to say goodbye to major customers.

European Directive

The topic of supply chain legislation is also being pushed at European level. In December 2023, the Council and the European Parliament reached a political agreement on the Directive on corporate due diligence with regard to sustainability proposed by the Commission in 2022. Specifically, the directive will cover EU companies with 500 or more employees and a global net turnover of more than 150 million euros and non-EU companies if they generate a net turnover of more than 300 million euros in the EU three years after the directive comes into force. The financial sector is temporarily excluded.

Fulfilling these obligations ties up resources. Among other things, companies must analyze how great the risk is that they benefit from human rights violations such as child labor, set up risk management and a complaints process and report publicly on these. In the event of violations in their own business operations or at direct suppliers, companies must take appropriate remedial action as quickly as possible to prevent breaches of the law or minimize the extent of violations. The Bafa monitors the regulations and also investigates complaints. If the authority registers violations, it can impose fines. According to the law, companies that have broken the rules can also be excluded from public tenders.

Criticism from the business world

More than a year after the law came into force, there is still headwind from the business community. And not because of the objectives, but because of its practicability. The German Chamber of Industry and Commerce (DIHK) criticizes not only the high effort that companies have to make, but also the sometimes difficult implementation. One example given is that it hardly works to check a three-digit number of upstream suppliers from the beginning of the supply chain to the end.

But the whole truth is that anyone who approaches the issue half-heartedly or without a strategy will struggle, spend a lot of time and make mistakes. After all, what applies to managing a modern supply chain also applies to compliance with the Supply Chain Act: phone calls, emails and spreadsheets will no longer get you far in a complex, global and often bureaucratic business world. Digital tools are essential. The best of the best use cloud-based software systems in which certificates, audit results, framework agreements and code of conduct agreements are managed.

The most important business partners and suppliers are connected to the Corporate Social Responsibility (CSR) department's tool. Supplier evaluations and complaint management are also carried out in this tool. Only suitable software can bring transparency to the supply chain and save users time-consuming inquiries by email or telephone. The future of the supply chain is digital - even when it comes to supply chain law.