The Supply Chain Act and its impact on quality management

Long discussions preceded, but now the so-called "Supply Chain Act" has passed the Bundestag. What does this mean for quality management in local companies?

On Friday 11 June, the majority of members of the Bundestag adopted the Federal Government's "Draft Law on Corporate Due Diligence in Supply Chains" as amended by the Committee on Labour and Social Affairs. The aim of the legislation is to better protect human rights and the environment in global economy. According to the federal government, production and trade regularly violate fundamental human rights and destroy the environment. Therefore, the adopted bill should oblige German companies to better fulfil their global responsibility to respect human rights and environmental standards.

Requirements are to be concretised

According to the government's will, the responsibility of companies should in future extend to the entire supply chain, subdivided according to the respective sphere of influence. According to the federal government, the obligations are to be implemented by the companies in the in-house business areas and with the direct suppliers. The obligation should then be extended to indirect suppliers if the company receives "substantiated knowledge" of human rights violations. One of the objects of the law is to specify the ways in which companies must fulfil their due diligence obligations with regard to human rights. This includes, for example, the implementation of preventive processes and remedial measures, the establishment of complaints mechanisms and the obligation to document activities. Environmental protection is also addressed in the law, to the extent that environmental risks can lead to human rights violations.

What is in store for companies?

From 1 January 2023, the law will apply to companies with more than 3,000 employees. For companies with more than 1,000 employees, the regulation will come into force at the beginning of 2024. This law will entail considerable liability risks for the companies concerned and trigger a considerable need for action. That companies comply with the due diligence requirements of the law will be monitored by the Federal Office of Economics and Export Control (BAFA). Violations of this will be severely sanctioned. The due diligence obligations of the law basically apply to the entire supply chain, starting with the raw material and ending with the finished end product. The issues of forced labour and child labour are touched upon, as are inadequate workers' rights, inadequate health conditions. Discrimination, unlawful expropriation and environmental pollution through pesticide emissions or air and water pollution are also covered. This catalogue of requirements for companies has a clear impact on business operations.

Requirements for risk management increase significantly

Companies are required by the new law to implement a risk management system that meets the requirements. The companies must also prove that it has been implemented appropriately. Depending on how susceptible the company's business model is to human rights issues, very high monitoring obligations will apply in the future. Companies will then be held liable if violations of the regulations could have been foreseen and avoided with appropriate due diligence measures. A distinction is made here as to whether the risks were present at the company's own sites, at a direct supplier or several stages up the supply chain. Therefore, a so-called graduated responsibility is provided for.

Regular risk analyses are mandatory

The companies are obliged to prepare a risk analysis for their own sites and direct suppliers at regular intervals. Here it is essential to examine and weight the severity and nature of the risk. The results of the analysis should be presented to the company's buyers and management. If concrete problems arise, the company must take immediate remedial and preventive action. In the event that the company receives information that an indirect supplier (upstream or sub-supplier) is in breach of the regulations, it must also prepare a risk analysis here. The company is also obliged for this supplier level to initiate appropriate measures to avoid the violations. At least once a year, the company should check whether these measures have been realised.

Communication is essential

The requirements for companies to be able to meet these goals are demanding. Companies must have transparency in the entire supply chain and create a risk mapping for locations, business areas, countries of origin and products. In addition, corporate communication must address the issue intensively. Internally, the company must keep a permanent record of how it complies with the law. Externally, the company should publicly communicate these measures to stakeholders in order to strengthen trust in the company.