What the Potential Supply Chain Act Is and How You Can Prepare For It

Is the supply chain act coming or not? It seems as if the question of “if” is no longer a question, but only of the concrete “when”. The accusation that German companies generate their profits at the expense of third parties along the global value chain weighs heavily. Initiatives demand, politicians discuss and entrepreneurial views could not be more different. Read here what the Supply Chain Act is all about, what it would mean for German companies in concrete terms and what you can already do today as a precautionary measure to be prepared.

ISO 9001 states that interested parties should be taken into account when positioning a company. This probably also includes a capable production, in which economically promising products are not manufactured at the expense of fair working conditions and environmental protection. Ultimately, we all want to manufacture a product that impresses with its high quality. But we should not forget that quality arises along the supply chain and is not only reflected in the end product alone. Whether it’s the cultivation of palm oil and the rainforest cleared for it in Guatemala or the lack of fire protection in Pakistani textile factories – in the end, this is probably not quality you can be proud of. The question of how a German company wants to trace the origin of its goods back to their source is nevertheless a question many people are asking themselves at the moment.

The leitmotif for imposing a supply chain act is the reaction to the company survey conducted in 2016 as part of the National Action Plan on Business and Human Rights (NAP). The aim of this was to examine whether German companies are also taking their human rights due diligence beyond the German borders. The coalition agreement between the CDU, CSU and SPD stipulated that a legal regulation should be introduced if the voluntary commitment of companies is not sufficient. This case occurred in mid-July – the evaluation carried out this year shows that significantly less than 50 percent of German companies comply with their duty of care, according to a press release issued by the Federal Ministry for Economic Cooperation and Development. Federal Minister of Labor Hubertus Heil and Federal Minister of Development Dr. Gerd Müller are therefore now campaigning for fair trade in global supply chains and legal and operational security for companies within the framework of a Supply Chain Act.

If a Supply Chain Act is passed in the German Bundestag, then according to current planning, larger German companies with more than 500 employees will be affected initially if goods are sourced from abroad. However, it is not enough to think only one step backwards in the supply chain. Tracing the goods starts at their origin, i.e. with the raw material. As a result, every company must ensure that nothing is lost along the entire upstream supply chain. This means not just taking out insurance for this once, but continuous risk assessment. If damage occurs and it turns out that a German company has not taken appropriate measures to identify and eliminate possible risks, the company can be held liable and must pay compensation. Even if the possible Supply Chain Act cannot, according to the current status, hold all German companies responsible from the outset, what counts is the good intention behind the law – and no responsible entrepreneur should evade it, regardless of the number of employees.

As much political fuss as there is about the Supply Chain Act – basically, its coming into force would be nothing more than another legally regulated requirement for the production process. Normative and legal requirements are the daily bread of a quality manager. We have already discussed this in our BloQ article on requirements, standards and laws. These normative requirements already include a risk assessment that detects potential risks at an early stage. So what does the Supply Chain Act change? Actually, only the number of risks that we need to look at more closely in our risk assessment. What sounds so simple now naturally poses a major challenge. After all, how exactly will it be possible to monitor the entire upstream value chain?

A management that is sensitized to the topic will approach those responsible in strategic purchasing and want to reassure themselves that the purchased goods were produced fairly. The quality manager will audit the suppliers selected by strategic purchasing and obtain assurance that the goods have been produced in accordance with the relevant requirements. He will also need to ensure that his own supplier’s suppliers also adhere to these requirements – starting with the first link in the supply chain. If this is done properly and transparently, the company is well equipped to meet the expectations of its own customers and the Supply Chain Act.

On the one hand, the onboarding process of a supplier changes along the supply chain. On the other hand, there is also the continuous review of the fair economic actions of all suppliers in the upstream production process. Because already at the point, at which the choice on a supplier falls, in the future the supplier has to assure that goods are produced and appropriate raw materials are bought in conformity with the legal standards. This promise is continuously reviewed. If abuses become apparent, companies must take measures in the case of a Supply Chain Act to avoid possible liability.

As it turns out, risk assessment is actually nothing new in the environment of commercial enterprises. Companies should now position themselves in terms of processes and organization in order to be prepared if the demand for fair, global production is to become law. Practical solutions for the operative implementation of this already exist on the market today. Various aspects of a comprehensive quality management system such as incoming and outgoing goods inspection, audit management, complaints management and supplier assessment are a good basis for demonstrably meeting the requirements. Further information on suitable solutions can be found here.

Take measures today to better control the origin of your supplier products. Responsible supplier evaluation and development has long been considered a normative requirement and is now also the be-all and end-all when it comes to responsible management in terms of human rights due diligence. It is impossible to be solely responsible for quality. This requires a network: position yourself both forwards and backwards in your supply network as a company that takes its duty of care seriously and already today achieves product quality of which one can be truly proud and which helps to actively shape the future.