The German government passed the Supply Chain Due Diligence Act last summer and will come into effect in January 2023, requiring all companies of a certain size to proactively monitor and mitigate supply chain risks. Not only will this act likely inspire other governments to follow suit, but it will also have implications that reach far beyond Germany’s borders.
Early adopters, such as Germany, are paving the way for progressively ethical and sustainable global supply chains. To better understand the Supply Chain Due Diligence Act, we asked Everstream’s supply chain legislation experts Ulf Venne, Leader, Center of Excellence, and Jon Bovit, Head of Everstream Discover.
Q: What does Germany’s Supply Chain Due Diligence Act require of companies?
Ulf: Starting in January 2023, the act will require all companies registered in Germany with more than 3,000 employees to manage their third parties, ensuring that they are not participating in any morally or environmentally dubious practices. The scope of the legislation will broaden in January 2024, when the same requirements will be placed on all German-registered companies with more than 1,000 employees.
Germany’s act is expected to start a trend around the world, with the U.S. and EU already following suit. Germany is the world’s third-largest importer, which means that the Supply Chain Due Diligence Act will affect approximately 4,800 companies around the world. This number includes over 1,000 U.S.-based companies. Germany may be one of the first to implement higher due diligence, but it certainly won’t be the last.
Q: Is there any upside to a higher burden of due diligence?
Jon: Yes—though the heightened responsibilities of monitoring, pinpointing, and mitigating all kinds of supply chain risk may initially seem almost impossible. However, there are a few reasons that companies can really take these requirements and use them to their benefit.
Consumers are more and more concerned about the provenance of their goods, and brand reputation goes a long way in their decision-making. This trend applies to most industries, including Retail, Food and Beverage, and Automotive. Companies won’t want to hurt their brand through association with unethical practices, such as slave labor. So, though it might take time to set up systems to monitor their entire supply chain, it will also help companies identify these issues quickly and handle them effectively.
Visibility is key to this process and can also help businesses more directly by preventing supply chain delays or shortages. For example, the microchip shortage during the COVID-19 pandemic caught many automakers by surprise and could have been better managed if these companies had been prepared.
Ulf: Bollore, a French logistics company, is another example of how investing in supply-chain due diligence measures can be crucial to your business. In 2018, Bollore was accused of supporting specific presidential candidates in two African countries in return for port contracts. This is the kind of supplier that you would want to stop working with, especially when Germany’s Supply Chain Due Diligence Act comes into force. If your company continued to use Bollore, despite the negative press and corruption charges, you’d likely face a damaged reputation and a hefty fine.
It’s about being proactive, which necessitates a continuous understanding of your company’s entire supply chain. If there is a very obvious issue that your company hasn’t anticipated and mitigated, it is simply no longer good enough for the government or for consumers.
Passing the Supply Chain Due Diligence Act was popular in Germany; official polls found that 75% of Germans were in favor of it. Following its tenets and demonstrating sustainability credentials will certainly help businesses distinguish themselves in the eyes of consumers.
Q: How should German-registered companies prepare for the Supply Chain Due Diligence Act?
Jon: Start by defining your approach to supply-chain due diligence. How will you be monitoring and discovering supply chain risk? What framework are you defining risk against? And what process will you use to mitigate or manage those risks?
Take the time to articulate and understand your internal process, so you can measure and tweak it as necessary. Finding a digital partner, like Everstream, will be crucial as well, giving your company access to global risk data and analytics, from weather patterns to social and political events.
Companies should be investing in their supply-chain due diligence processes now. January 2023—and even 2024 for smaller companies—is not far away at all. And, even if your company isn’t registered in Germany, putting supply chain due diligence in place will be key to business success as consumers and the government place a higher emphasis on ethical and environmental sustainability. Start getting your compliance in place. Your supply chain will thank you for it.