The Supply Chain Act simply explained.

Product manufacturing processes are usually globalized and complex. From the extraction of raw materials to the end consumer, numerous steps and companies in different countries are often involved.

How can we ensure that social and ecological standards are adhered to? The Supply Chain Act could be a crucial building block.

But what is behind it? In this blog article, we explain what the Supply Chain Act is all about.

The Supply Chain Act was created to ensure that companies comply with human rights and environmental obligations in their supply chains. It aims to prevent human rights violations and environmental damage in global supply chains.

What is the Supply Chain Act?

The Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz, LkSG), or Supply Chain Act for short, obliges companies to “comply with due diligence obligations in their supply chains“. This includes human rights, working conditions and environmental standards.

This legal framework obliges companies to ensure compliance with human rights and environmental protection standards in their supply chains. This is not just about direct business partners, but also about suppliers further down the supply chain. This means that companies must act proactively and take responsibility for the entire chain.

Why does the Supply Chain Act exist? And why is it important?

This law is important for several reasons:

• Human rights: It helps to prevent human rights violations and exploitative working conditions.
• Environmental protection: It helps to better control and contain environmentally harmful substances.
• Transparency: Through the legal regulation, the consumer gains more transparency about the safety of the production of the products.
• Legal clarity: Companies receive clear guidelines and can be held liable for violations.

Which companies are affected?

Although the Supply Chain Act currently only directly affects a small percentage of companies, it has an impact on almost all companies due to the interconnected value chain. Similar to falling dominoes.

Industriemagazin writes: “The EU Supply Chain Act will only affect very large companies in the direct sense – one percent of companies according to the draft law. However, the EU expects this one percent to extend the impact to its supply network, meaning that the new law will ultimately affect everyone “.

It can therefore be said that most companies will be at least indirectly affected. This means that many companies will demand more transparency from their suppliers and partners.

In addition, the law is likely to be rolled out further over the next few years, meaning that more and more companies will be affected.

Against this backdrop, it is wise for most companies to prepare proactively.

An overview: The Supply Chain Act simply explained.

To better understand the core elements of the Supply Chain Act, let’s break it down into its main components:

1. Responsibility across the entire supply chain: Companies must not only review their own business practices, but also those of their suppliers. If a supplier violates human rights or damages the environment, the company can be held responsible in its home country.

2. Risk assessment: Companies must regularly assess the risks in their supply chain. This means that they must look at where human rights could potentially be violated or where environmental damage could occur.

3. Preventive measures: If a company identifies risks, it must take measures to mitigate these risks. This can mean, for example, that a company offers its suppliers training or changes its business practices.

4. Grievance mechanism: Companies must have a mechanism through which people can complain if they believe their rights have been violated.

5. Reporting: Companies must regularly report on how they fulfill their obligations under the Supply Chain Act. These reports are often public so that everyone can see how a company is acting with regard to human rights and environmental protection.

These five key aspects form the foundation of the Supply Chain Act and serve as a guide for companies to improve their practices while ensuring greater transparency and responsibility in the global economy.

How can companies ensure compliance?

There are various starting points for companies to ensure compliance with the Supply Chain Act:

1. Risk assessment: Companies should analyze their supply chain to identify potential risks.

2. Control: Regular inspections and audits of suppliers.

3. Documentation: All steps and measures must be documented.

4. Transparency: Consumers should be informed about compliance with the standards.

In short: with these 4 approaches, companies are on the right track.

How digital processes help:

The transparency required by the Supply Chain Act poses a challenge for many companies, but this can be made considerably easier by using digital processes.

1. Connection of suppliers: By connecting suppliers digitally, the exchange of information can be automated and seamless. This means that all relevant data from the supplier or partner is directly available – without any manual effort.

2. Digital documentation: The advantage of digital documentation is that it enables companies to record important information along the value chain in a simple and structured way and to retrieve it quickly if required.

3. Simplifyaudit processes: Digitized audit processes can help companies reduce the audit effort and make it more efficient. Automated checklists and report formats make it easier to prove compliance with standards. Thanks to the digital way of working, auditing can even be evaluated in real time, which significantly shortens the response time in the event of potential breaches.

4. Automated reporting: Automatic generation of audits and audit reports not only saves time, but also reduces the potential for errors. This information can then be easily shared with the relevant stakeholders.

5. Transparency through structured data: The structured recording of data provides a clear picture of the processes within a company and enables the requirements for transparency and verifiability to be met.

The digitization of documentation and processes enables companies to maintain the level of transparency they need to meet the upcoming requirements of the Supply Chain Act.

Conclusion

The Supply Chain Act is an important and exciting topic that will occupy many companies intensively in the coming years.

At Testify, we firmly believe that digital processes are a fundamental building block for creating the required transparency along the value chain.

We would be happy to have a non-binding discussion with you about how we can work together to create more transparency along your value chain.