People have long speculated, “If a tree falls in the forest, and no one is there to hear it, does it make a sound?” Applying this philosophical thought to Germany’s new supply chain law, which requires businesses to address human rights issues, out of sight is definitely not without sound. Starting January 1, 2023, companies are required to comply, or face legal consequences.
The Bigger They Are, the Harder They Fall
Germany’s Act on Corporate Due Diligence Obligations in Supply Chains mandates ethical standards of conduct throughout the value chain. The law requires large companies doing business in Germany to make an effort to detect human rights violations in their supply base. These include child labor, modern slavery or forced labor. Environmental risks that can violate human rights also come under scrutiny.
Multinationals with more than 3,000 employees in Germany have to comply, regardless of where the company is headquartered. Their responsibility includes subsidiaries and direct suppliers (Tier 1). It also extends to indirect suppliers (sub-tiers, Tier 2 and beyond) and other third-party providers.
Penalties for noncompliance begin at 50,000 euros. Businesses face fines of up to 2% of their annual revenue. And smaller companies are not out of the woods. Beginning in 2024, companies with more than 1,000 Germany-based employees will be held accountable for their supply chains.
What Are the Key Legal Requirements of the German Supply Chain Law?
In a nutshell, corporations are obliged to minimize the risk of noncompliance to human rights or work safety regulations in their supply base. Key requirements include:
- Establish a risk management system.
- Designate internal responsibility within the enterprise.
- Conduct regular risk analysis.
- Issue a policy statement.
- Anchor preventative measures in subsidiaries and vis-a-vis direct suppliers.
- Take remedial action.
- Establish a complaints procedure.
- Perform due diligence with regard to risks at indirect suppliers.
- Document and report activities.
All efforts should be recorded for the authorities. Companies must provide an annual report for the Ministry for Economics and Export Control. These reports also have to be published on the websites of the organizations.
Ways to Drive Due Diligence and Transparency
Germany’s law is not the first supply chain mandate. In the past decade, England, Netherlands, France and the U.S. have passed strict national laws. These include duty of vigilance against modern slavery, child labor and forced labor in the supply chain. Supply chain mandates by the European Union and Canada are forthcoming.
To comply with national or international supply chain laws, companies can start by introducing supply chain risk management. Five steps will drive due diligence efforts:
- Collect risk information and data.
- Gain visibility across the supply network.
- Start monitoring how your current risk exposure is changing.
- Analyze how risks, including reputation and compliance risk, impact the business.
- Introduce preventive mitigation actions, as well as responses.
And the push for transparency is not slowing down. Whether laws impact businesses now or further down the road, accountability will eventually reach all organizations.
How to Increase Accuracy, Reduce Effort
Effective risk management relies on real-time information-gathering and continuous updates. Filtering for relevant information is also critical for identifying violations.
However, modern supply networks could encompass tens of thousands of businesses. Complying with legal requirements creates an enormous burden, particularly for supply chain teams. Manual processes are far too unwieldy.
This is where digital technology comes in. As part of a holistic approach to managing risk, an automated system is fast and accurate. A central data repository reduces the effort of generating reports.
Finally, take a high-level view of supply chain laws. Yes, these are imposed by regulators. And yes, companies have to spend time and resources to identify, monitor, assess and mitigate risk in their supply chains. But the effort can pay off.
Why Supply Chain Laws Benefit Business
Businesses can turn legal obligations into an opportunity. When done right, managing supply chain risk protects business reputation. It helps make sure companies actively work toward a sustainable economy where human rights play an important role. Business benefits arising from having a good brand reputation include trust, credibility, and yes, profitability.
Managing supply chain risk helps avoid contract penalties and revenue shortfalls, which protects margins. Companies deliver the right quantity, the right quality, and on time, which keeps customers satisfied too. So, there are big rewards all around.
Law or no law: Breaches of child labor regulations, forced labor or poor health and safety conditions in your supplier base are not only bad press. These need to be identified, treated and prevented to contribute to a better world. Increasingly, consumers and corporate customers buy only ethically produced and sustainable products. Despite the legal and regulatory complexity, it’s important to see the forest for the trees – namely that such laws protect the people in supply chains.