What is the German Supply Chain Due Diligence Act?
The German supply chain act (titled Act on Corporate Due Diligence Obligations in Supply Chains; in German, Lieferkettensorgfaltspflichtengesetz, or LkSG) is an effort on the part of the German federal government to protect and strengthen human rights and the environment through the supply chains of companies operating in Germany.
The act obliges all companies operating in Germany in 2023 with 3,000 or more employees to implement a supplier risk management system. In 2024, the act will apply to companies operating with 1,000 or more employees.
The risk management system must help assess, mitigate, and monitor human rights and environmental risks in the company’s supply chain. Reporting to the German government will be required no later than April of 2024.
Compliance with LkSG will require:
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Establishing a risk management system
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Defining where responsibility for compliance lies within the company
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Issuing a policy statement
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Performing regular risk analyses
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Establishing preventive measures within the company’s own field of business and in relation to any direct suppliers
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Taking remedial measures
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Establishing a complaints procedure
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Implementing due diligence obligations with respect to risks at indirect suppliers
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Documentation and reporting
It’s important to note that the cost of not complying could be significant: penalties and fines up to 2% of annual revenues and exclusion from public tenders for up to three years. Not to mention the risk of damage to your brand and resulting revenue loss.
How SAP Can Help
SAP is committed to helping companies comply with LkSG with SAP Ariba solutions and SAP Business Network. SAP Ariba Supplier Risk addresses the act’s specific requirements.
We also recommend that you explore the capabilities of SAP Ariba Lifecycle and Performance to help scale compliance across your supply base.
Frequently Asked Questions
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What is Lieferkettensorgfaltspflichtengesetz (LkSG)?
Lieferkettensorgfaltspflichtengesetz (LkSG) will become German law in 2023 with reporting requirements that go into effect in April 2024 for all companies with German operations that exceed 3,000 employees in 2023 or 1,000 employees in 2024. Direct violations of forced labor, unfair conditions, discrimination, or other human rights issues could result in penalties up to 2% of revenue, exclusion from public tenders for up to three years, and negative impact to brand damage.
The law requires companies to:
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Adopt a policy statement on human rights protection
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Assign responsibilities for due diligence
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Conduct a risk assessment to identify particularly high human rights and environmental risks
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Take preventative and mitigative measures to prevent violations
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Establish a complaints procedure to address possible violations
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Document their compliance with the due diligence obligations
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Submit an annual report on compliance with due diligence obligations
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What about other sustainability laws or the upcoming European Union (EU) regulations?
A number of sustainability regulations are planned or in place across the European Union. SAP intends to support the requirements for mandatory Human Rights Due Diligence (mHRDD) laws, which require, in common, data collection from suppliers, identification of risk, risk mitigation, and reporting requirements.
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Which SAP solution(s) do I need to help comply with LkSG?
SAP customers can achieve LkSG compliance with SAP Ariba Supplier Risk combined with the power of SAP Business Network. SAP Ariba Supplier Lifecycle and Performance is recommended but not required as a foundational solution to provide consistent supplier master data and management.
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How does the SAP Ariba solution help companies achieve compliance with LkSG?
There are six requirements to consider:
- Supplier intake: The SAP Ariba Supplier Risk engagement assessment process provides you the capability to request the required data from your suppliers. You can also evaluate new suppliers as part of onboarding and monitor existing suppliers for compliance.
- Supplier segmentation: The law requires companies to address higher-risk areas for compliance. SAP Ariba Supplier Risk helps you categorize and organize suppliers by risk profile.
- Supplier risk scoring: SAP Ariba Supplier Risk calculates a risk score that is influenced by the factors listed by the regulation.
- Risk prevention, mitigation, and complaints management: SAP Ariba Supplier Risk offers issue management tied to the risk engagement assessment and to the risk control framework.
- Reporting: The SAP Ariba solution has the capability to create analysis reports to meet the regulations.
- Supplier collaboration: SAP Ariba Supplier Risk is connected to SAP Business Network to support robust collaboration with suppliers. This includes self-assessments to make compliance easier for both you and your suppliers.