Supply Chain Due Diligence Acts: What You Should Know

Amid the most challenging supply chain disruptions in recent history, events of the past few years have prompted reform designed to fortify procurement processes with social responsibility in mind. Many laws and initiatives based on the United Nations (UN) Guiding Principles on Business and Human Rights have emerged, following the three pillars of the UN’s human rights framework: protect, respect, and remedy.

Lieferkettensorgfaltspflichtengesetz, or LkSG, is an act passed in Germany in June 2021, providing a blueprint for the rest of the EU. It comes with a series of requirements that will regulate companies’ social and environmental responsibility. This includes requiring companies to report on the ability of their risk management system to address violations in their supply chain to the German government no later than April 2024.

LkSG and other supply chain due diligence acts aim to bolster environmental protections, prevent human rights violations, and ultimately create more transparent supply chains. This type of legislation requires preparation to ensure compliance, demonstrating how digitalizing supply chains is no longer a feature of modern procurement — it is a requirement. With an agile, digital supply chain, companies can quickly adapt to new legal requirements or unexpected crises.

Supporting sustainability and human rights has become an integral part of many companies’ purpose. Enterprises of the 21st century are looking to contribute to the greater good of global society and the planet. This ethical foundation is quickly becoming a requirement for customers and consumers, while also playing a vital role in attracting talent. Companies without a clear sustainability and human rights agenda could face significant issues with attracting and retaining talent.

Beyond the positives of working toward sustainability and ethical partnerships, violations of LkSG and other similar acts could result in costly fines and penalties. For example, companies with revenues exceeding €400 million may be required to pay up to two percent of annual revenue if they fail to implement remedial measures to address any non-compliant practices. Additionally, non-compliance may result in exclusion from public procurement tenders for up to three years. There could also be costs to the reputation of a business. A violation could be devastating for their public image and, in the end, revenue and profit.

Investing in sustainability and human rights protections is not only crucial to avoid penalties, but also to set up companies for future growth and success. Ultimately, it is about doing the right thing for our society and for our planet.

Creating a Radically Transparent Supply Chain

In an era of near-instant global connectivity, it is important to recognize that consumers are more attuned than ever to corporate attitudes and actions toward social responsibility. They want to know that the companies they interact with are socially and environmentally responsible. With customers able to use social media to spread news on scandals in real time, the possibility and consequences of a boycott due to a supply chain misstep could be dire. Companies can protect themselves by following all due diligence laws, collecting required data, and creating a radically transparent supply chain.

With this in mind, businesses need to create an actionable social responsibility strategy. While there are many commodity- and region-specific sustainability supplier networks, a single point of truth across the entire supply base can support risk-aware core processes while allowing for targeted reporting and transparent audit trails. SAP solutions can help build digital bridges and facilitate compliance by:

• Providing up-to-date supplier risk scores within supplier selection activities in the spend management process, so companies can easily select suppliers with low-risk profiles.
• Incorporating internal and external data sources to provide comprehensive supplier risk profiles across all immediate suppliers.
• Helping to identify, document, and reduce risks in close collaboration with suppliers.

How SAP Can Help

SAP offers a modular toolkit with a foundation based on newly enhanced SAP Ariba Supplier Risk solution and SAP Business Network, along with additional extensions to address company-specific requirements.

A Strong Foundation

SAP Ariba Supplier Risk provides core functionalities for comprehensive LkSG-compliant risk management. This longstanding risk solution has the capabilities needed for compliance with supply chain due diligence legislation. The solution provides supplier risk scoring from a variety of internal and external data sources to help companies avoid sourcing from non-compliant partners. Looking forward, SAP Business Network will offer standardized and extendable self-assessment questionnaires (SAQs) that make it easy for suppliers to share information about their LkSG risk profile with customers. Additionally, automatic reporting can help ensure that required information is reported to BAFA, Germany’s Federal Office of Economics and Export Control, eliminating manual processes.

LkSG features are available at no additional cost for SAP Ariba Supplier Risk customers. This will include standardized LkSG supplier SAQs in SAP Business Network for Procurement, and suppliers will be able to maintain SAQs and share with any customer. SAP also works with partners on pre-packaged deployment content allowing for an efficient go-live and broad flexibility to configure custom requirements.

Modular Extensions for Flexibility

SAP offers extensions and add-ons for specific business needs. Third-party industry- and sustainability-focused supplier networks can help businesses achieve 360-degree transparency. Complementary solutions like SAP Ariba Supplier Lifecycle and Performance can facilitate supplier onboarding and certificates management while SAP Fieldglass software manages external workforce compliance from onboarding to payment. SAP Product and REACH Compliance and SAP Environment, Health, and Safety Management applications allow for the reuse of existing compliance information to build trust with customers.

LkSG and similar legislation aim to make concrete progress toward creating a world of less inequality. It is likely that we will see this type of legislation make its way across the EU in the future. By implementing SAP solutions now, companies can lay a strong foundation for supply chain risk management, net-zero carbon, and circular economy capabilities, evolving into a crucial player within a resilient and agile value network.

To learn how SAP can help you prepare your business for LkSG, visit www.ariba.com/lksg.

Salvatore Lombardo is senior vice president, chief product officer, and head of Engineering for SAP Procurement.