Supply chain law is coming – Measures to put it into practice
For some time now, we have accompanied the developments and discussions surrounding the introduction of the Supply Chain Act for you in our publications. In this special issue of our „Insight“ series we would like to promote an offensive approach to this challenge. To this end, we outline and concretise a management approach for practice that meets the emerging requirements, the corresponding cornerstones and also the necessary instruments.
In 2016, the German government adopted a „National Action Plan“ (NAP) to implement the „UN Guiding Principles on Business and Human Rights“, which were established in 2011. The logical consequence of this is the law that is now also being sought at the European level to ensure consistent compliance with human rights at every stage of global supply chains. This is particularly logical because the shortcomings of the majority of German companies in dealing with the voluntary self-commitment to date are considerable and obvious1,2 – as are fear of contact and helplessness.
Shift of paradigm as an opportunity for differentiation
At the same time, most corporate leaders apparently overlook the opportunity for differentiation and the achievement of a significant competitive advantage in this field of design. As many as 42 companies signed a petition for the introduction of a supply chain law3 in December 2019 – with certainly solid business arguments.
The challenge of supply chain management in small and medium-sized enterprises
Apart from the political disputes and detailed design of the legal regulations, we assume that the measures demanded by the companies, as recently promised, will indeed be „reasonable and proportionate“.
In practice, however, the majority of companies today are probably not even aware of the grievances that exist in their supply chains, because these chains are branched and sometimes extend over a number of links that can reach into double figures. And so far, no one has forced companies to gear their production and organization to answering these questions.
Small and medium-sized companies in particular are thus faced with the challenge of developing a management approach that is both effective and efficient.
Sustainable supplier management as a management approach
However, the basic measures that are actually necessary are not witchcraft. As part of a pragmatic approach, we also advocate the gradual establishment and expansion of sustainable supply chain management.
In concrete terms, what is needed is a concept that ensures that the company recognizes risks, fulfills its own duty of care and prevents impairment of human rights and environmental standards along the supply chain. The central elements of such a concept are transparency and reporting on how the company fulfils its own duties of care. These concern the entire business activity of a company, i.e. the value chain from raw material extraction to disposal.
From this, the basic cornerstones of the concept can already be determined.
Building blocks for practice
Module 1: Design of a own, official guideline. Expecting commitment to principles from business partners
The UN Guiding Principles can provide guidance in defining own guidelines, just as human rights trainings can promote awareness of the issue in the workforce.
Companies that produce abroad or import from abroad can include environmental standards, labour standards and health and safety regulations in the terms of contract with their suppliers.
Module 2: Identifying and analysing risks in supply chains
A prerequisite for the establishment of effective supply chain management is the identification of the actually relevant sustainability issues. This applies to all direct suppliers (tier-1) and – for particularly relevant products or groups of products – the corresponding upstream suppliers (tier-n) as well as the entire supply chain, if applicable.
The following questions, among others, must be answered for this purpose:
- Which raw materials/material groups have the highest purchasing volumes?
- Which are of strategic importance?
- How transparent are the supply chains of the most important raw materials currently?
- Have there been incidents in the past regarding non-compliance with sustainability standards by suppliers/industries/regions?
- What criteria are applied in the supplier selection process?
- How have suppliers been committed to internal company standards so far (e.g. general terms and conditions, purchasing conditions)?
- How is monitoring carried out (e.g. through on-site visits)?
- Which requirements are set by the legislator, the own customers and possibly other stakeholders? Are concrete proofs or external assessments or audits required?
The risk assessment can then focus on the supply chains,
- where there are already indications of inconsistencies (e.g. outdated certificates, quality problems, stakeholder queries, known incidents – even among competitors)
- where there is little or no transparency or where a risk is suspected,
- have strategic relevance (e.g. high purchasing volumes, materials critical to production)
Module 3: Inform and prioritize suppliers
A transparent and open approach to the topic promotes understanding and thus acceptance in a cooperative partnership. A letter from the management and a separate area for the topic on the company’s website underline the importance. Supply partners – including new supply partners – should understand and accept
- how sustainability is defined,
- why (new) demands are made,
- what is expected of the supplier and how he can benefit (highlighting the business case: reward, e.g. preferred supplier status, long-term perspective, award, etc.)
- what happens if the expectations are not met
For some material groups it will inevitably become necessary to know and involve upstream suppliers (tier-2 to tier-n) along the supply chain. Knowing these and committing or checking them for compliance with sustainability standards is a challenge and requires intensive cooperation with the direct suppliers.
Module 4: Assessing and monitoring suppliers
Two evaluation approaches have proven to be effective for this purpose: the supplier self-disclosure and on-site inspections. The third option may be industry solutions which, where available, can offer considerable advantages.
Based on the code of conduct or defined industry (sustainability) standards, the supplier self-disclosure is used to determine the degree of compliance with the defined sustainability standards of all prioritized suppliers with high and medium risk. In regular intervals, descriptions of the management approaches for compliance with the required sustainability standards are requested, as well as concrete evidence such as ISO certificates, quality seals or sustainability reports.
In the case of selected suppliers with an increased risk potential, an additional on-site inspection may be useful or necessary. This can be carried out randomly during on-site visits, e.g. as part of product demonstrations or quality audits. The information provided in the supplier self-disclosure can be checked and impressions of the working relationships and management practice can be gained.
Even if – for reasons of time and qualification – not a complete sustainability audit is possible.
How a comprehensive sustainability audit can be carried out separately can be agreed with the supplier. Under certain circumstances, the supplier can also be requested or obliged to have an audit carried out by an independent auditor and then to provide the audit report or certification.
In addition to the independent performance of a supplier evaluation, this can also be carried out as part of an industry solution or with the help of a cross-sector supplier platform.
Module 5: Supporting corrective measures, developing suppliers
If deviations from the Code of Conduct become apparent, it is important to know how serious the deviations are, what measures must be implemented and how much time is allocated to the supplier to rectify the situation.
The tools for this are regularly included in the supplier management toolbox and consist of determining and accompanying corrective measures, defining incentives and escalation processes, and continuously monitoring and developing suppliers.
Key factors here are targets, key figures and personnel capacities.
Module 6: Measuring and reporting progress
In order to report on the status, progress and ultimately the effectiveness of the measures, the following questions, for example, should first be answered:
- Have all relevant direct suppliers received or signed the Code of Conduct?
- Is there sufficient transparency in the main supply chains?
- How many suppliers have improved their sustainability performance?
- Are buyers trained and able to make informed decisions based on self-reports, site visits and audit reports?
In order to make progress measurable and comparable now and in the future, it is necessary to establish a system of key figures. Meaningful key figures can be:
- Number/proportion of suppliers,
- who can demonstrate an environmental, occupational safety and/or quality management system,
- that produce in risk countries,
- who have been contractually bound by the Code of Conduct,
- who have submitted a supplier self-assessment,
- which were visited by our own employees and sensitized with regard to sustainability aspects,
- have completed the TfS audits or another sustainability audit (with major or minor deviations)
- Number of terminated business relationships due to deviations.
- Proportion of own buyers trained on sustainability in supply chains
Are you on your way to sustainable supplier management?
Whether you need guidance or support in setting up and expanding your management approach or in the selection and implementation of digital solutions in this area as well, we at ADCONIA will be happy to assist you with our expertise in the areas of supplier management, digitisation and data transparency. Please contact us!