SUPPLY CHAIN CARE MANDATORY BY LAW FROM 2023 ONWARDS
Against this backdrop, it is only logical that policymakers should legally oblige companies to operate sustainably and responsibly in the future. To this end, the German Bundestag passed the Supply Chain Sourcing Obligations Act (LkSG) on June 11, 2021. It obliges companies to monitor their entire supply chain from raw materials to the end product with regard to compliance with a legal and environmental catalog of requirements. These include the following aspects, among others:
Violations regarding forced and child labor
Violations of human rights
Discrimination and racism
Violations of freedom of association
Problematic employment and working conditions
Environmental damage
In relation to these risk areas, a company’s area of responsibility is extended beyond its own sector of industry to include its direct and indirect suppliers. Failure to comply with the new monitoring obligation can result in severe fines in the millions of euros and exclusion of companies from public procurement contracts.
The law will come into force for companies with a head office, administrative headquarters, registered office or branch office in Germany from January 01, 2023, provided they have at least 3,000 employees. From January 01, 2024, this will be followed by corresponding companies with at least 1,000 employees. A timely extension to smaller and medium-sized companies has not yet been decided, but is already being discussed.
The LkSG states that companies must introduce appropriate risk management along their entire supply chain, which comprehensively analyzes the risk areas outlined above. Furthermore, appropriate remedial and preventive measures must be taken to prevent potential violations. The controls to be implemented in this context initially relate only to the immediate suppliers. However, the LkSG also requires that indirect suppliers be monitored. However, the latter is only mandatory if there are corresponding public indications or reports of possible misconduct on the part of the direct suppliers. Compliance with the LkSG is monitored by the Federal Office of Economics and Export Control, which has wide-ranging powers. Further information on the LkSG can be found here.
While the law has already been passed in Germany, a corresponding draft is also currently being discussed at EU level. This is largely the same as the German LkSG, but may affect more companies. The current aim is to set an application limit for companies with 500 or more employees. Furthermore, the catalog of requirements envisaged at EU level could be even stricter than in the German LkSG, as there is an even stronger focus on environmental issues. A corresponding article can be found here. Since EU law takes precedence over German law in cases of doubt, it can be assumed that supply chain due diligence requirements will become even more comprehensive than has currently already been decided.
SUPPLY CHAIN CARE AS A MONITORING TASK
Against this background, the enormous effort that companies will have to face in the near future becomes clear. Larger companies often have a three- or even four-digit number of suppliers. The amount of information that must be continuously collected and processed for comprehensive supply chain control is enormous. However, it also leads to an important realization: the implementation of supply chain care is to a large extent a monitoring task.
The previously discussed transparency of economic activity through the Internet and social media makes it possible to quickly and efficiently implement legal supply chain governance with the help of AI and Big Data tools from the field of media monitoring. These perform real-time tracking of millions of websites and dozens of social networks worldwide in hundreds of languages. Included here are news portals, blogs, forums, podcasts, but also NGO websites. The latter are particularly relevant for supply chain visibility because many NGOs are dedicated to human rights and sustainable business. Modern tools also allow the connection of external APIs, for example to extend coverage to print, TV and radio or news agencies.
By using AI and appropriate queries, such a tool can be searched to identify and collect finds potentially relevant to the LkSG from the totality of its data sources. However, this alone is usually not sufficient, as the data collected in this way is often contaminated by non- or only semi-relevant information. Therefore, in a further step, the finds have to be exported and further processed by an AI specially developed for the LkSG.
The AI has special search and control functions that reduce the set of potentially relevant finds to actually relevant ones. Furthermore, the AI additionally searches for conspicuous data patterns in social media to guarantee comprehensive coverage. Based on the results of the AI, a score is then calculated that estimates the individual risk of an LkSG-relevant violation by a supplier. If a conspicuous result is found here, the findings are checked again by an analyst and plausibility checked.
REPORTING AND VALUABLE SYNERGIES
After the suppliers have been evaluated and the results have been checked for plausibility, the data is made available to the company (if necessary with context-related recommendations for action). Since the actual risk management instance qua the LkSG must be located in the respective company itself, there is a particular focus here on ensuring that the reporting can be established as simply and efficiently as possible in the existing work processes. This can be done, for example, through a dashboard or web application that the company accesses. Alternatively, regular reports or written reports can be prepared. This way, the company always has all data and documents available that are necessary for the implementation of the supply chain due diligence.
Another important advantage lies in the many synergies that arise for a company through supply chain monitoring. Since the Big Data tools described earlier are already programmed to monitor a company’s suppliers anyway, the information collected in the process can be used beyond the LkSG. For example, industry-specific product trends and market risks can be investigated directly and cost-effectively. This provides valuable insights that the company can reuse internally, for example for customer relations, marketing, sales or strategic analytics.
The introduction of the legal supply chain management obligation marks a comprehensive but timely paradigm shift in the European economic area. It confronts many companies with major challenges in the area of monitoring, which can, however, be mastered well and efficiently with modern tools and many years of data science expertise. The sensible implementation of supply chain intelligence as AI-supported monitoring not only serves the LkSG, but also offers many valuable and cost-effective synergies, from which a company can additionally benefit widely. If your company should be interested in such a modern interpreted supply chain monitoring, please contact us!
