German Supply Chain Act: What LkSG Means for Companies

The new Supply Chain Due Diligence Act in Germany mandates companies to uphold human rights and ethical practices within their supply chains.

The Lieferkettensorgfaltspflichtengesetz or LkSG that is in effect since January 2023 requires German and foreign companies with German branches and more than 3,000 employees to monitor human rights, environmental risks and introduce risk management practices across the supply chain globally.

Otherwise, they face stiff penalties such as fines of up to 2% of annual sales for large companies. Companies may even be barred from receiving public contracts.

In case companies spot any violation in their business or at direct suppliers, they are by law required to prevent or minimize the extent of the violation.

But do companies really have the capacity to comply with these new stringent rules?

Only about 4% of German companies are prepared to implement the LkSG and 70% are moderately to very poorly prepared, according to a survey by the Federal Association of Materials Management, Purchasing and Logistics (BME) and Integrity Next.

What should companies that come under the purview of the new supply chain law do to ensure proper compliance?

GEP has the following recommendations:

1. Strong Risk Management Framework

The companies need a governance system to meet the due diligence requirements with help from the procurement team to make sure risk management is well-integrated. They must also start implementing responsible sourcing and supplier code of conduct policies. 

They can build risk profiles by assessing the supply chain and supply base against factors like geography, industry, supplier’s company size, maturity and past record. 

2. Right Governance System to Prevent Violations

Businesses can prevent nonethical practices in sourcing events and the onboarding of contractors and suppliers by integrating risk management into the process. 

Organizations can put the right governance system in place by engaging with suppliers on an ongoing basis, getting updated information on performance against risk key performance indicators and identifying when corrective action is needed. 

Strategic sourcing can help category managers ensure supplier due diligence. They can do this by creating category-, business unit- and region-specific forms. They can generate risk ratings and recommend control forms for suppliers’ actions through built-in logic to meet a specific evaluation criteria. 

They can also adopt engagement programs to support suppliers likely to have high risk or compliance issues. These can include supplier training, providing access to resources and collaboration with peer companies.

3. Better Documentation and Reporting

To meet LkSG obligations, companies will need to create documentation to describe the governance, processes, policies and procedures that enable tracking and reporting LkSG-linked performances. 
They can also use annual reports to show how they are tracking supply chain human rights and environmental standards performance. 

To know more about LkSG, download GEP’s latest bulletin — How To Ensure Compliance With the New German Supply Chain Act.