The supply chain act explained simply.

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Manufacturing processes for products are usually globalized and complex. From raw material extraction to the end consumer, often numerous steps and companies in different countries are involved.

How can we ensure that social and ecological standards are adhered to? A crucial building block could be the so-called Supply Chain Act. 

But what is behind it? In this blog article, we clarify 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 (LkSG), or Supply Chain Act for short, obligates companies to “comply with due diligence obligations in their supply chains“. This includes human rights, working conditions and environmental standards.

This legal framework requires companies to ensure compliance with human rights and environmental protection standards in their supply chains. This does not only apply to direct business partners, but also to suppliers further down the supply chain. This means that companies must be proactive 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 prevent human rights abuses and exploitative working conditions.
  • Environmental protection: It helps to better control and contain damaging to the environment.
  • Transparency: Through legal regulation, the consumer gains more transparency about safety concerning the production of the products.
  • Legal clarity: Companies are given clear guidelines and can be held liable for violations.

Which companies are affected? 

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

It can therefore be said that most companies will be affected at least indirectly. 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.

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

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An overview: The Supply Chain Act explained simply 

To better understand the core elements of the supply chain act, let’s break it down into its main components:

  1. Responsibility across the supply chain: Companies must not only review their own business practices, but also those of their suppliers. If a supplier violates human rights or harms the environment, the company can be held responsible at home.
  2. Risk assessment: Companies must regularly assess the risks in their supply chain. This means they need to look at where human rights could potentially be violated or where environmental damage could occur.
  3. Preventive measures: When a company identifies risks, it must take action to mitigate those risks. This may mean, for example, that a company provides training to its suppliers or changes its business practices.
  4. Complaint mechanism: Companies must have a mechanism through which people can complain if they believe their rights have been violated.
  5. Reporting: companies must report regularly on how they are fulfilling their obligations with respect to the supply chain act. These reports are often public, so that everyone can see how a company is performing in terms of 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 providing greater transparency and accountability in the global economy. 

How can companies ensure compliance? 

To ensure compliance with the Supply Chain Act, there are several starting points for companies: 

  1. Risk assessment: Companies should analyze their supply chain to identify potential risks. 
  1. Control: Regular inspections and audits of suppliers.
  1. Documentation: All steps and measures must be documented.
  1. Transparency: Consumers should be informed about compliance with the standards.

In a nutshell: With these 4 approaches, companies are on the right track. 

How digital processes help in this:  

The transparency required by the Supply Chain Act is a challenge for many companies, but one that can be made much easier by using digital processes.  

  1. Supplier connection: By connecting suppliers digitally, the exchange of information can be automated and made seamless. This means that all relevant data from the supplier or partner is directly available – without manual work.
  1. Digital documentation: Digital documentation has the advantage that it enables companies to record important information along the value chain in a simple and structured manner and to retrieve it quickly when needed. 
  1. Simplifying audit processes: Digitized audit processes can help companies reduce the time spent on audits and make them more efficient. Automated checklists and reporting formats make it easier to demonstrate compliance with standards. Working digitally, auditing can even be evaluated in real time, significantly reducing response time to potential violations.
  1. Automated reporting: Automated creation of audits and test reports not only saves time, but also reduces the potential for errors. The information can then be easily shared with the relevant stakeholders.
  1. Transparency through structured data: The structured collection of data gives a clear picture of the processes within a company and enables the requirements for transparency and traceability to be met. 

Digitizing documentation and process flows enables companies to maintain the level of transparency they need to meet for the coming 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 discuss with you in a non-binding meeting how we can work together to create more transparency along your value chain.

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