Procurement Glossary
Supply Chain Act: definition, compliance and impact on procurement
November 19, 2025
The Supply Chain Act obliges German companies to comply with human rights and environmental standards in their global supply chains. This legal regulation has far-reaching effects on the procurement strategy and requires new compliance processes. Find out below what the Supply Chain Act means, what methods exist for implementation and how current developments affect procurement.
Key Facts
- Applies since 2023 for companies with over 3,000 employees, from 2024 for those with over 1,000
- Includes due diligence obligations for human rights and environmental protection throughout the supply chain
- Fines of up to 2% of annual turnover possible for violations
- Requires risk analyses, preventive measures and complaint mechanisms
- Significantly influences supplier selection and contract design
Contents
Definition: Supply Chain Act - meaning and key messages
The German Supply Chain Act regulates corporate responsibility for compliance with human rights and environmental standards along global value chains.
Legal basis and scope of application
The Supply Chain Due Diligence Act (LkSG) came into force on January 1, 2023 and initially affects companies with at least 3,000 employees. From 2024, it will also apply to companies with more than 1,000 employees. The regulation covers both the company's own business area as well as direct and indirect suppliers.
Core obligations for companies
Affected companies must fulfill due diligence obligations, which are divided into several areas:
- Establishment of risk management
- Carrying out regular risk analyses
- Implementation of preventive and remedial measures
- Establishment of complaints mechanisms
- Documentation and reporting
Importance of the Supply Chain Act in Procurement
For the procurement strategy, the law means a fundamental reorientation. The suitability assessment of suppliers must be expanded to include sustainability criteria, and stakeholder management is gaining in strategic importance.
Methods and procedures
The practical implementation of the Supply Chain Act requires structured methods and systematic procedures to ensure compliance.
Risk analysis and due diligence
Companies must carry out regular risk analyses to identify potential human rights and environmental violations. These include the assessment of country risks, industry specifics and supplier structures. The market analysis is expanded to include sustainability aspects.
Supplier evaluation and development
Implementation requires new evaluation criteria for suppliers:
- Certifications and proof of compliance
- On-site audits and document reviews
- Continuous monitoring and supervision
- Development programs for critical suppliers
Contractual protection
Contracts must contain corresponding clauses that oblige suppliers to comply with the standards. Complaint management is being expanded to include compliance violations, and claim management is becoming increasingly important.
Tacto Intelligence
Combines deep procurement knowledge with the most powerful AI agents for strong Procurement.
Key figures for controlling the supply chain law
Effective key figures enable the measurement and control of compliance performance within the framework of the Supply Chain Act.
Compliance key figures
Central KPIs for monitoring legal compliance include the number of risk analyses carried out, the proportion of certified suppliers and the response time to compliance violations. These metrics support benchmarking in Procurement and enable continuous improvements.
Supplier performance indicators
Important key figures for supplier evaluation include
- Compliance rate of suppliers (%)
- Number of identified risks per supplier
- Average response time to audit findings
- Proportion of suppliers with valid sustainability certificates
Financial and operational key figures
The economic impact is measured by key figures such as compliance costs per supplier, audit costs as a proportion of purchasing volume and cost avoidance through preventive measures. The return on investment of compliance investments is becoming increasingly important.
Risk factors and controls in supply chain law
Non-compliance with the Supply Chain Act entails considerable legal, financial and reputational risks for companies.
Legal and financial risks
Violations of the Supply Chain Act can lead to fines of up to 2% of annual turnover. There is also the threat of exclusion from public contracts and civil liability risks. Directive compliance in Procurement is becoming a critical success factor.
Operational challenges
Practical implementation entails various operational risks:
- Incomplete transparency in complex supply chains
- Lack of cooperation from suppliers
- Resource bottlenecks during implementation
- Difficulties in data collection and validation
Reputational risks and market impact
Compliance violations can cause considerable reputational damage and jeopardize customer relationships. Supply chain visibility is becoming a decisive competitive factor, while security of supply must be redefined.
.avif)
Practical example
A German car manufacturer implements the Supply Chain Act through systematic risk analyses of its 2,500 direct suppliers. The company conducts annual audits of critical suppliers and develops a digital dashboard to continuously monitor compliance KPIs. Labor law violations are identified at a supplier in Southeast Asia, whereupon a structured development program is initiated.
- Risk classification of all suppliers according to country and sector risks
- Implementation of a digital complaints mechanism
- Quarterly reporting to the management
Current developments and effects
Supply chain law is constantly evolving and is shaped by technological innovations and regulatory changes.
Digitalization of compliance processes
Modern technologies are revolutionizing the implementation of supply chain law. Artificial intelligence enables automated risk analyses and continuous monitoring. The digital supply chain offers new opportunities for transparency and traceability.
European harmonization
The EU directive on corporate sustainability due diligence will further tighten the requirements:
- Expansion to smaller companies
- Stricter liability regulations
- Harmonization of standards across Europe
- Integration into digital procurement
Effects on sourcing strategies
Companies are fundamentally rethinking their procurement strategies. Nearshoring and reshoring are gaining in importance, while supply chain resilience management is becoming a strategic priority.
Conclusion
The Supply Chain Act presents companies with considerable challenges, but also offers opportunities for more sustainable and resilient procurement strategies. Successful implementation requires systematic risk analyses, digital monitoring systems and close cooperation with suppliers. Companies that invest in compliance structures at an early stage can gain a competitive advantage and at the same time fulfill their social responsibility.
FAQ
What exactly does the German Supply Chain Act regulate?
The Supply Chain Due Diligence Act obliges companies to comply with human rights and environmental standards in their supply chains. It includes due diligence obligations such as risk analyses, preventive measures, complaints mechanisms and regular reporting. Violations can result in fines of up to 2% of annual turnover.
Which companies are affected by the Supply Chain Act?
Since 2023, the law has applied to companies with at least 3,000 employees, and from 2024 to those with more than 1,000 employees. The decisive factor is the number of employees in Germany, although foreign companies with a corresponding presence may also be affected.
How does the law affect supplier selection?
Sustainability criteria must be added to the supplier selection process. Companies must carry out due diligence checks, require certifications and implement continuous monitoring. Contracts require corresponding compliance clauses and sanction mechanisms in the event of breaches.
What are the costs of implementing the Supply Chain Act?
Implementation costs vary depending on the size of the company and the complexity of the supply chain. Typical cost factors include personnel for compliance management, IT systems for monitoring, audits and certifications as well as possible supplier changes. In the long term, however, risk minimization and efficiency gains can justify the investment.
.png)
.png)
.png)
