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Supply Chain Act: definition & important aspects for buyers
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What is the Supply Chain Act?
The Supply Chain Act (LkSG - Lieferkettensorgfaltspflichtengesetz) is a German federal law that obliges companies to comply with human rights and environmental due diligence obligations along their entire supply chain. It initially came into force on January 1, 2023 for companies with more than 3,000 employees and was extended to companies with 1,000 employees or more in 2024. Violations can result in severe sanctions with fines of up to 2% of annual global turnover and exclusion from public contracts.
Contents
The most common problems of the Supply Chain Act for purchasing
Transparency and documentation:
- Difficulties in the complete documentation of all due diligence obligations
- Inadequate systems for recording and managing the required evidence
Operational implementation:
- High personnel and time expenditure for implementation
- Cost increases due to additional audits and measures
- Integration of LkSG requirements into existing procurement processes
- Insufficient technical infrastructure for the necessary monitoring
Compliance and liability:
- Uncertainty about the legal interpretation of due diligence obligations
- Fear of fines and reputational damage in the event of violations
- Difficulties in providing evidence of "reasonable efforts"
These problems show the complexity of implementing the LkSG and highlight the need for systematic and digital solutions in purchasing.
How to become compliant with the Supply Chain Act in purchasing
1. prepare the system landscape
- Inventory of existing e-procurement and SRM systems
- Evaluation of LkSG modules from existing system providers
- Integration of systems for consistent data flow:
- ERP system as a database
- E-procurement for operational processing
- SRM system for supplier management
- LkSG module for compliance management
2. set up documentation structure
- Implementation of a digital document management system for:
- Automatic archiving of all relevant documents
- Versioning of supplier agreements
- Audit trails for verification obligations
- Introduction of standardized workflows for:
- Supplier approvals
- Risk assessments
- Action tracking
3. automation of operational processes
- Set up automatic test routines:
- Risk screening of new suppliers
- Periodic compliance checks
- Automatic escalations in the event of anomalies
- Integration of AI-supported analysis tools for:
- Early risk detection
- Anomaly detection
- Automatic document check
4. establish a compliance management system
- Implementation of a central compliance dashboard:
- Real-time monitoring of all key figures
- Automatic compliance reports
- Early warning system for critical developments
- Development of a digital knowledge database:
- Legal basis
- Best Practices
- Instructions for action
5. practical implementation in day-to-day business
- Digitization of supplier evaluation:
- Online self-assessment by suppliers
- Automatic valuation calculation
- Digital audit checklists
- Integration into the procurement process:
- LkSG examination as a mandatory step
- Automatic blocking in the event of violations
- Digital signature processes
6. cost optimization through system integration
- Utilization of synergies:
- Common database for all systems
- Avoidance of double entries
- Automated standard processes
- Implementation of self-service functions:
- Supplier portals
- Automatic document updates
- Online training modules
7. legal certainty through systematic verification
- Creation of a digital audit trail:
- Complete documentation of all measures
- Timestamp for all activities
- Audit-proof archiving
- Implementation of compliance workflows:
- Standardized escalation processes
- Documented approval processes
- Automatic compliance reports
The key to success lies in the integration of all systems and the automation of standard processes. Modern SRM systems with LkSG modules can significantly reduce manual effort and increase legal certainty at the same time. The initial investment in the system landscape pays off through reduced operating costs and minimized compliance risks.
Supply Chain Act: From reactive compliance to proactive risk management
The Supply Chain Act calls on companies to assume their responsibility along the entire supply chain and to take active measures to comply with human rights and environmental standards. Based on the legal requirements from the law on corporate due diligence in supply chains, there is a practical need to rethink traditional approaches and implement modern strategies. The transformation from reactive to proactive measures is essential to meet the new legal requirements and ensure sustainable business relationships.
Traditional approach: reactive compliance strategies
In the past, many companies regarded compliance as a compulsory exercise that was mainly aimed at meeting minimum legal requirements. The focus was often on the direct supply chain, without considering lower levels or sub-suppliers. Tools such as sporadic supplier auditss and simple contract clauses were used to ensure basic standards. However, these reactive approaches often led to insufficient transparency and increased risk managementwhich were only discovered after the fact. Challenges such as a lack of control over working conditions or environmental practices at sub-suppliers remained largely unaddressed, which could lead to reputational damage and legal consequences.
New: Proactive supply chain due diligence
With the modern approach of proactive risk management, companies rely on comprehensive strategies to comply with due diligence obligations. By implementing advanced technologies such as digital risk management platforms, supply chains are monitored transparently and consistently. Companies carry out detailed risk analysisthat include human rights and environmental factors and establish continuous monitoring processes. The supplier development is strengthened through training and capacity building to achieve common standards. The practical benefits of this approach include reducing compliance risks, improving supplier relationships and increasing competitiveness through sustainable business practices.
Conclusion on the Supply Chain Act
The Supply Chain Act marks a turning point in modern procurement, requiring the transformation from reactive compliance to proactive supply chain due diligence. The successful implementation of legal requirements can hardly be practicably managed without digital solutions such as integrated e-procurement and SRM systems. Companies that see this challenge as a strategic opportunity and invest in modern technologies and transparent processes not only create legal certainty, but also gain a decisive competitive advantage through sustainable and resilient supply chains. The digitalization of LkSG management is therefore becoming a key factor for the future viability of procurement and the design of responsible global value chains.
