What does the German Supply Chain Act Mean for Procurement?

by Jan-Hendrik Sohn

The German Supply Chain Act, or Lieferkettengesetz, is a new piece of legislation that came into effect January 2023 with an extended remit from January 1, 2024. The act was established to address issues of sustainability and ethical conduct in global supply chains, and has significant implications for companies and procurement organizations operating in Germany.

The main purpose of the German Supply Chain Act is to ensure that companies are not contributing to human rights violations or creating environmental damage through their supply chains. Its scope is initially limited to companies (German or foreign-based in Germany) that employ at least 3,000 employees. However, the scope will be extended to companies that employ at least 1,000 employees from 1 January 2024. In Germany, this figure amounts to approximately 3,000 companies and requires them to conduct due diligence to identify and address potential risks in their supply chain. This includes assessing the environmental and social impacts of their operations, as well as the working conditions of those involved in their supply chain.

The Act is designed to protect against the following, holding organizations accountable all activity that exists within their supply chain operations:

• Child labor, forced labor, any form of slavery
• Discrimination
• Withholding an adequate wage
• Production and use of chemicals under the Persistent Organic Pollutants Convention (POP or Stockholm-Convention) 
• Production of mercury-added products, use of mercury and treatment of mercury waste
• Export and import of certain hazardous wastes

In compliance with the Act, companies are required to implement a supply chain management system that adequately identifies and mitigates risks, conducts reporting and creates remediation mechanisms. These organizations must also conduct regular supply chain audits to ensure sustainable and responsible operating measures. 

The Act demands that companies define, publish, and implement a complaints procedure that enables anyone affected or potentially affected by human rights violations, or aware of possible violations to report their concerns. Compliance with the German Supply Chain Act is enforced by the Federal Office for Economic Affairs and Export Control (BAFA). 

BAFA can impose penalties on businesses that don’t comply with regulations, including: 

• Fines of up to €8 million 
• Being banned from public tenders for up to three years 

For procurement organizations, the German Supply Chain Act presents both challenges and opportunities. The new set of regulations add an additional layer of compliance and risk management to the procurement process. Procurement teams will need to be prepared and equipped to conduct supplier due diligence to meet the requirements of the act. These extra steps  may require additional resources and expertise, and more sophisticated technologies and tools to better manage the process.

The Act also presents an opportunity for procurement organizations to demonstrate their commitment to sustainability and ethical conduct. By implementing effective supply chain management systems and partnering with suppliers who share their values, procurement teams can position their companies as leaders in responsible sourcing and supply chain management. The commitment to these changes not only improves their reputation and builds trust with stakeholders, but also drives innovation and improves their global competitive positioning.

One way procurement organizations can leverage technology to comply with the German Supply Chain Act is to leverage supplier management software. These tools are made to automate the processes that conduct due diligence and risk assessment, creating a more efficient way to manage the supply chain. Procurement teams can track and monitor their supply chain to ensure compliance with the act and other relevant regulations. Further, it is essential that supplier management and data is holistic (i.e., covers all elements of a relationship with a supplier not simply transactional but including information, performance, risk, diversity, sustainability, etc.) is entirely interconnected with all other procurement processes from Source-to-Pay. This presents an opportunity for relevant changes in supplier information and risk to inform sourcing or procurement decisions.

In closing, the German Supply Chain Act is a major development for procurement and supply chains in Germany. Although its implementation presents challenges for companies and procurement organizations, the Act offers opportunities to improve sustainability initiatives and ethical conduct in the supply chain. By leveraging technology and adopting new approaches to collaboration and communication, procurement teams can help their companies comply with the Act and become leaders in responsible sourcing and supply chain management.