For the protection of people and the environment

Introduction of the Due Diligence Act – digital solutions support companies in ensuring the transparency of their supply chain

With the introduction of the Supply Chain Due Diligence Act (German abbreviation LkSG; also known as the Due Diligence Act), companies will in future be obligated to adapt their processes along the entire value chain to the legal requirements in order to protect the environment and human rights. In terms of transparency, the implementation of these requirements is also an important component of a company’s corporate social responsibility (CSR) strategy. More and more consumers expect companies to act carefully and sustainably.

Lufthansa Industry Solutions (LHIND) experts will assist you with the risk analysis, advise you on the selection of suitable software that supports your processes, for example in purchasing, production/manufacturing or along the entire supply chain, and on the integration of the software solution into existing systems.

The Due Diligence Act poses new challenges for companies and requires action

The German Supply Chain Due Diligence Act – also known as the Due Diligence Act – will come into force on January 1, 2023. The corresponding draft law was launched by Germany’s Federal Cabinet on March 3, 2021. It initially obliges companies based in Germany, and companies with a branch in Germany, (cf. sec. 13d of the German Commercial Code; HGB) that employ more than 3,000 people to improve and document their processes along the entire supply chain. Currently, the Supply Chain Due Diligence Act affects about 900 companies in Germany. The legal regulations will be extended to companies with more than 1,000 employees from 2024. This would mean that a total of 4,800 German companies would be obligated to comply with the Due Diligence Act. The long-term goal is a European directive for which the German Due Diligence Act shall serve as a blueprint.

Compared to the German Due Diligence Act, lower thresholds are to apply under EU law. For example, EU limited liability companies would be affected if they

  • employ at least 500 people and have a net global turnover of at least EUR 150 million
  • employ at least 250 people, have a net global turnover of at least EUR 40 million, and operate in a resource-intensive industry

A corresponding proposal was adopted by the European Commission in February 2022.
 

Environmental protection and human rights

The aim of the Supply Chain Due Diligence Act is to enforce compliance with basic human rights standards in global supply chains worldwide. These standards include, for example:

  • The sanctity of life and health
  • The prevention of slavery, forced labor and child labor
  • Fair working conditions
  • Environmental obligations to protect human health

To enforce the Act, companies will be held accountable to ensure transparency throughout their supply chains. In future, they will be responsible for ensuring that suppliers along their entire supply chain adhere to basic human rights standards. To avoid sanctions and damage to their reputations, however, they must not only ensure that their direct suppliers meet the requirements. With the Due Diligence Act, their duty of care concerning social and ecological risks also extends to upstream suppliers.

Clear requirements regarding corporate due diligence obligations

Responsibility for the entire supply chain

  • Duty of care – introduction of systematic risk management
  • Reporting obligation – documentation and publication of known violations and corresponding preventive measures

The clear requirements in the new Supply Chain Due Diligence Act are intended to generate legal security for both companies and the people affected. In this context, the companies’ due diligence obligation extends in graduated requirements to the entire global supply chain, starting with raw materials, through the manufacturing process to the finished product. In its implementation, the Due Diligence Act takes into account that companies cannot always directly influence the perpetrators of violations. However, it does obligate them to take action in the event that violations occur.

Fines for violations and omissions

The measures adopted include not only adjustments and improvements to purchasing and logistics processes, but also to their careful documentation. Compliance with the regulations is checked by the German Federal Office for Economic Affairs and Export Control (BAFA). In the event of omissions or breaches of their due diligence and documentation obligations, companies risk being fined or excluded from public tenders.

What measures must companies take to comply with the legal requirements in the future?

Due Diligence Act checklist for companies

  • Review legal requirements to prepare for implementation
  • Identify and analyze transparency and stakeholders in the supply chain
  • Identify and assess risks
  • Define and document measures to avoid and eliminate risks
  • Define KPIs for measuring success
  • Review, evaluate and re-implement IT systems to support the requirements

Companies that are affected by the introduction of the Supply Chain Due Diligence Act due to the number of their employees face the challenge of taking measures to comply with their due diligence and reporting obligations. When creating sustainable conditions throughout the supply chain, it is important that the company’s partners are aware of the different tier levels and that information can be shared with them via a platform.

The first priority of the implementation of the Supply Chain Due Diligence Act is for companies to adopt a policy statement on respect for human rights by January 1, 2023. At the same time, they must define who within the company is responsible for implementation and compliance. In the next step, supply chain risk management must be introduced to identify the risks in the company’s own business unit as well as those of direct suppliers. From this, effective measures can be derived to avoid, minimize and remedy human rights violations. Moreover, suitable risk analysis procedures such as supplier audits, the identification of risk raw materials or a comparison with external databases must be firmly embedded in the company.

Flowchart showing measures for implementing the Supply Chain Due Diligence Act
Supply Chain Due Diligence Act Regulations – what measures must companies take to ensure they comply with the law?

In the event that the standards set are violated, a complaints management system helps to point this out both to those directly affected and to those who have knowledge of potential or actual violations. Pre-defined performance indicators are used to monitor success. These performance indicators are included in the company’s sustainability report, as are all preventive and remedial measures to ensure compliance with the minimum required social and environmental standards. This CSR report serves both as a review by the authorities and as proof of careful and sustainable corporate action vis-à-vis consumers.

Current challenge – from the traditional supply chain to the digital supply network

The structures and processes in supply chain management are complex and somewhat unclear. In order to reliably maintain compliance at all levels of the supply chain in the future, IT solutions are needed that transform the traditional supply chain with information silos and lengthy communication channels into a digital supply network characterized by collaboration and networking. For optimal control, shortening of lead times and for the best possible transparency, all partners must work centrally on a common platform in future, so as to be able to exchange information in real time.

How does LHIND use digital solutions to support companies in implementing the new Due Diligence Act?

Digital solutions help to meet the requirements of the Supply Chain Due Diligence Act and to bring all the data and information required for this together in one central system. This allows transparency to be created, data to be analyzed and documented, and risks to be identified at an early stage.

With our many years of experience and suitable IT solutions, we can support you in preparing for the introduction of the Supply Chain Due Diligence Act, from risk analysis to selecting software that is optimally suited to your needs, as well as individual adaptation and integration into existing systems.

 

Modular platform for the Supply Chain Due Diligence Act for companies

A potential software solution, that is already being used successfully by various customers, can offer you:

In the Due Diligence Act modular platform, companies can store their customer-specific requirements along their supply chains. For example, special specifications can be created for auditing suppliers, automated processes can be defined and individual questionnaires can be stored, which are then completed by the supply chain partners and monitored continuously by the system. It is also possible to create an individual code of conduct and to demand previously clearly defined corrective actions from suppliers and to track them. Inspections, audits and their results, further information on suppliers and production sites are also centrally managed here. Fairtrade, BSCI, Fair Ware, Sedex or other standards – it does not matter which guidelines are used for auditing the company.

New suppliers and partners can be integrated quickly and easily via a special workflow. They receive all the necessary documents and information, then fill them out, and submit them all on the same platform and receive approval for cooperation after a check by the company.

Individual survey templates can be created easily and quickly in the system to request specific information required from partners and suppliers.

You can share policies and your company’s code of conduct with your partners on the platform and have them countersigned there easily and in a manner sufficient for audits.

You can map a diverse risk management across all stages of your supply chain with the platform using a comprehensive assessment and monitoring system.

This gives you a complete overview of audit documents and the audit status of your supply chain partners with an alert function. This allows you to receive timely, automatic notifications regarding expiring validity periods and you can initiate new audit cycles. Results, necessary corrective actions and follow-ups are also centrally retrievable and controllable.

To fulfill your due diligence obligation, you will find a dedicated workflow in the platform for tracking and managing deficiencies and corrective actions discovered and to be implemented at your partners.

These support success monitoring and facilitate reporting obligations for companies.

In this portal, you can also obtain a central overview of your CSR measures and use the information for regular reporting and evaluations through automated and individually created surveys.

A clear dashboard allows you to always have a well-structured, centralized, real-time overview of all critical and incomplete issues, risks and to-dos. In the event of deadlines or the expiry of certificates or audits, you will be notified here in good time.

Overview of suppliers and their preliminary stages including production sites and origin of raw materials for comprehensive management of all tier levels.

Advantages of the Supply Chain Due Diligence Act implementation software solution

The Due Diligence Act creates a binding framework that supports companies in fulfilling their responsibility to protect human rights and the environment along their supply chain. A corresponding software solution reduces the burden and helps you to fulfill your due diligence obligations effectively.

For whom are LHIND’s services and Due Diligence software relevant?

  • Companies in all sectors in Germany
  • Companies with national and international suppliers and partners along their supply chain
  • Companies with 3,000 or more employees (Supply Chain Due Diligence Act as of January 2023)
  • Companies with 1,000 or more employees (Supply Chain Due Diligence Act as of 2024)

These thresholds may change again when the EU Directive is introduced.

  • Transparent and reliable compliance with the legal requirements of the Supply Chain Due Diligence Act
  • One central system for a complete overview and transparency of the sustainable supply chain
  • Centrally managed compliance with your due diligence obligations and documentation of efforts as well as the company’s own Code of Conduct for proactive action
  • Global, real-time, cloud-based access to all procurement-related documents, audit data and reports on all supply chain partners
  • Early warning of non-compliance or milestones using AI and data analytics
  • Simple and efficient control of your database without media breaks and manual work steps, significantly fewer e-mails, completely transparent audits and production conditions
  • Easy integration into the system landscape incl. connection to SAP
  • Protection against lasting reputation damage and monetary compliance penalties

Integration portal for connection to all common IT systems

All relevant data from your other systems, such as ERP, PDM, QM, TMS etc., are brought together clearly and uniformly within the portal. This enables a central overview of the supply chain and the aspects that are important for the Due Diligence Act. All common systems can be connected with interfaces manually or by means of existing APIs:

  • Integration of supplier master data in ERP systems
  • Integration into analysis tools, for example, if a risk management system or supplier scorecards are already available
  • Interfaces to compliance systems, such as Amfori or BSCI

Our extended service

LHIND is your first port of call, not only when it comes to the Due Diligence Act, but also when it comes to the digitalization of your entire supply chain. We can support you with:

  • Analysis and optimization of the entire supply chain by analyzing data concerning networks, planning, sales, purchasing, logistics and production
  • Identification of potential improvements and realization using suitable IT solutions
  • Linking information flows and technical processes
  • Creation of end-to-end data transparency by integrating appropriate software and analysis tools
  • Automation of data-based processes
  • Interfaces to ERP systems (e.g. for the integration of supplier master data)
  • Integration into analysis tools (e.g. existing reporting tools)
  • Further risk management beyond the Supply Chain Due Diligence Act

Good reasons to choose LHIND

As a service provider for IT consulting and system integration, we can support you with our expertise and digital solutions to meet the legal requirements of the Supply Chain Due Diligence Act, to prevent sanctions and damage to your reputation.

  • Our team of IT consultants, developers and IT security specialists has years of operational and strategic expertise in logistics along the entire supply chain.
  • We develop and implement suitable IT solutions to comply with the Supply Chain Due Diligence Act, and its challenges for your company.
  • We support our customers from strategy and conception to end-to-end system integration and are always consistently geared to their needs.
  • When realizing IT projects, we rely on classic or agile project management as well as hybrid variants – depending on what is best suited to the project at hand.
  • We work for medium-sized organizations and large corporations.

Do you need advice or support in implementing the Supply Chain Due Diligence Act in your company? Feel free to contact us!

We’d be delighted to learn more about your upcoming challenges and support you in facing them.

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German Supply Chain Due Diligence Act FAQs

The Supply Chain Due Diligence Act will come into force in Germany on January 1, 2023.

The German Supply Chain Due Diligence Act, also known as the Due Diligence Act, obliges companies to adapt their processes along the entire supply chain to the legal requirements in order to protect the environment and safeguard human rights. Initially, the law applies to companies with 3,000 employees or more. From 2024, it will also apply to companies with 1,000 or more employees.

The aim of the Supply Chain Due Diligence Act is to enforce compliance with basic human rights standards in global supply chains worldwide.

Companies are obliged to adopt a policy statement. As part of their due diligence, they must also introduce systematic risk management, conduct risk analyses and embed all risks and preventive measures, document them and make them publicly accessible (for example in the CSR report). In addition, companies must establish a complaints procedure.

In Germany, there are currently about 900 companies (with more than 3,000 employees) that will be affected by the Supply Chain Due Diligence Act, as of January 2023. From 2024, a total of 4,800 companies (with 1,000 employees or more) are expected to be affected.

If the law is violated, companies must expect sanctions and damage to their reputations. Depending on the severity of the offense, fines of EUR 100,000, EUR 500,000 or even EUR 800,000 are imposed (source: Federal Law Gazette, as of July 22, 2021). In certain cases, companies that generate a turnover of more than EUR 400 million in a year must expect a fine of up to 2% of their average annual turnover. In addition, exclusion from public procurement for a period of up to three years is also possible.

Companies are obligated to ensure transparency in their entire supply chain in the future. They must guarantee that their own business unit, as well as all suppliers and upstream suppliers, comply with social and ecological standards in order to avoid sanctions and damage to their reputations.