Navigating the German Supply Chain Act: What We Have Learned About Impact Identification (Part I)

Blog series: Supply chain due diligence in practice

At IntegrityNext, we have developed a comprehensive five-step process that allows companies to meet all the critical due diligence requirements of the German Supply Chain Act with minimal effort. This blog series sheds light on insights gained from customer projects throughout the process and concludes with an outlook on what can be learned for the upcoming EU Corporate Sustainability Due Diligence Directive (CSDDD).

The German Supply Chain Act at a glance

The German Supply Chain Act came into effect on January 1, 2023. It requires companies with at least 1,000 employees to carry out human rights and environmental due diligence on their upstream suppliers. Its overall goal is to prevent human rights violations and environmental harm along global supply chains. Companies must meet nine key requirements, including conducting regular risk analyses, implementing preventive and corrective measures, and reporting on their actions.

The IntegrityNext approach

The IntegrityNext five-step due diligence process (see Figure 1) provides an end-to-end solution for regulatory compliance and is based on internationally recognized frameworks such as the OECD Due Diligence Guidance for Responsible Business Conduct. Step one helps companies perform a baseline assessment and pinpoint relevant adverse impacts that may exist along the supply chain. Step two narrows down the scope of risk areas and critical suppliers that should be prioritized for subsequent measures and resource allocation.

The third step focuses on action and improvement. When negative impacts are identified, companies should develop and implement specific preventive or remedial measures to address the issues.

Next, the results should be tracked and documented to determine whether progress has been made and whether the company’s due diligence approach needs to be adjusted. Finally, companies should report on the entire due diligence process, including actions taken, in accordance with legal provisions.

Figure 1: The IntegrityNext supply chain due diligence process

Step one: Identifying impacts

At the beginning of the due diligence process, companies must identify potential adverse impacts in their supply chains related to environmental protection, human and labor rights, anti-bribery and corruption, health and safety, and supply chain responsibility. The IntegrityNext solution streamlines this process with the help of an automated country and industry risk analysis and by harnessing the power of artificial intelligence to monitor critical supplier news in real time.  

Potential complaints about suppliers are taken into account via a mechanism that companies can easily incorporate into their communication channels. It is available in 14 languages to ensure broad geographic coverage. Integrating grievances into the overarching risk management system ensures that companies can spot and address patterns and recurring issues.
Standardized questionnaires based on authoritative international frameworks and conventions are used to obtain a more complete picture of suppliers’ sustainability practices and performance. All this information is aggregated to assess a supplier’s overall sustainability risk and help prioritize next steps.

The first step of the IntegrityNext due diligence process supports several of the legal requirements of the German Supply Chain Act. These include:

• The implementation of a risk management system
• Regular risk analyses of direct suppliers
• Ad-hoc risk assessments of indirect suppliers in case of substantiated knowledge of potential violations
• The implementation and maintenance of a complaint mechanism

To learn more about the IntegrityNext due diligence solution, please visit our website or request a demo of our platform with one of our experts.

Challenges for companies in identifying impacts

Accurately identifying adverse impacts in widely dispersed and opaque supply chains can be very challenging. There are numerous obstacles that companies must overcome:

• Supply chain complexity: Companies often have limited visibility beyond their direct suppliers (tier 1). Understanding the full extent of supply chains and engaging with relevant suppliers can be an arduous task.
• Evolving business landscape: The environment in which most companies operate is highly dynamic. This can include geopolitical shifts or changing market conditions. Also, as companies’ business strategies and product ranges change over time, so does the composition of their supply chains. Staying on top of these developments and keeping risk assessments up to date is a challenge.
• Data management: Companies must manage complex data streams with numerous data points and put in place IT systems and processes that are both fit for purpose and capable of seamlessly integrating external data. At the same time, these systems should ensure internal accessibility across the entire organization.
• Continuous monitoring: The German Supply Chain Act requires continuous monitoring of supply chains, which can be resource-intensive and difficult to implement.

Key lessons from our customer projects

Over the course of more than two years, we have gained valuable insights from projects with customers across all industries and sizes. Some of the key take-aways and learnings include the following:

• Supplier master data: Supplier information needs to be meticulously documented, regularly updated, and easily accessible to all relevant departments. This includes accurate contact details and industry classifications. This data is critical for subsequent risk analysis and management. Third-party vendors may be able to help if the information is not readily available.  
• Integrated data management: The use of digital tools can significantly simplify the management of large and disparate data streams. It is essential to link all the systems, for example to consolidate the results of various strands of risk analysis.
• Assessments: Standardized, easy-to-use questionnaires make it possible to gather data on thousands or even tens of thousands of suppliers in a short period of time. Making the results available to as many relevant stakeholders as possible can greatly reduce the reporting burden and facilitate the data collection process.
• Forward-looking process management: Digital tools and automation can accelerate risk analysis and deliver results quickly. Companies should act with foresight and conduct data collection and assessments with a view to subsequent steps, such as prioritizing impacts or implementing actions.
• Working with suppliers: Companies must find a way to meaningfully integrate sustainability into their existing supplier relationships. Treating suppliers as strategic partners, open and transparent lines of communication, and incentives can help.
• Cross-departmental collaboration: Companies should take a holistic and cross-functional approach to meeting the requirements of the German Supply Chain Act. This requires procurement, compliance, legal affairs, sustainability, human resources, works councils, and other departments to pull in the same direction and work toward aligned or converging goals.

To learn more about our solutions, please schedule a demo of our platform with one of our experts.

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