MatchZINE – The MarTech Magazine
he Supply Chain Act (LkSG), which came into force on January 31, 2023, aims to oversee EU-wide compliance with human rights and environmental factors along the entire supply chain of companies. First and foremost, we should clarify that in Germany, only companies with a size of 3,000 employees or more need to observe the new Supply Chain Act. From 2024, it will also apply to companies with 1,000 employees or more. The new law comes with numerous obligations, including preventive measures and risk assessments. Would you like to know exactly what to expect and how supply chain software features can support you in the lawful implementation of these duties? Here are the most important practical insights.
Or: Are you already familiar with the basics and want to start directly with the vendor search for supply chain software? 👉 Directly to the LkSG Tool Matching
With or without software, the requirements of the Supply Chain Act must be implemented if a company meets the criteria. The extensive obligations under the Supply Chain Act include:
Identification of the sources of danger
What are the potential negative impacts on people and the environment in the company? The identified factors must either be eliminated or at least avoided or mitigated with suitable measures.
Due diligence
Companies must implement due diligence in their corporate policies and management systems.
Complaints procedure
Companies must establish grievance procedures and ensure that all stakeholders along the supply chain have the opportunity to use them when necessary.
Control
Companies have a duty to review the measures regularly and adjust them if necessary.
Compliance obligation
In particular, supervisory and administrative boards must monitor compliance with due diligence and request required information from management.
Transparency
Companies must disclose an annual report regarding their due diligence and provide transparent information about it.
Transformation Plan
Companies with annual sales of 150 million euros or more must submit a transformation plan showing how they will contribute to the emission reduction targets of the Paris Climate Agreement.
Of course, the above criteria mean that smaller companies are not (yet) affected by the LkSG. Interestingly, however, more and more SMEs are approaching us who would like to voluntarily present a transparent supply chain. The pressure from their own customers and the self-imposed goal of acting more sustainably show that the companies should and/or even want to fulfill this component even without specifications.
First of all, a clarification: The duty of care in the sense of the Supply Chain Act is not aimed at the results of supplier management. There is no obligation to succeed, but rather the obligation to make an effort: If it can be proven that the company has approached the implementation to the best of its knowledge and belief, it does not necessarily have to be liable for it. However, if there is a clear violation of the law, there are various penalties:
Penalty payments
Up to 50,000 euros in penalty payments as a legal means to force an omission or action.
Fine
Up to 800,000 euros. Above an annual turnover of 400 million euros in sales, the fine is 2% of the annual turnover. The fine, unlike the penalty payment, is intended to motivate the company to fulfill its obligations in the future.
Exclusion from public tenders
Companies can be excluded from public tenders for up to three years if they violate the Supply Chain Act.
We think that there will be a certain amount of sparing. However, the mere fact that such lavish penalties are being imposed right at the start should sharpen the sense of the importance (priority) of the LkSG in your company.
To save financial and time resources and accurately document that penalties are never an issue for you, LkSG software is a useful solution. But how exactly do the tools help you legally enforce the law? We’ve collected typical features from popular providers from our research:
Risk Analysis
A practical feature of LkSG tools is risk analysis. It helps companies identify existing risks and suggests solutions to integrate regulatory guidelines in the relevant areas.
Supplier and Risk Management
The function ensures compliance with environmental and human rights standards. In addition, financial risks are also covered by risk management.
Supply Chain Monitoring
To monitor the flow of products and raw materials, tools track the company’s supply chains. In parallel, audits and assessments ensure that the supply chain process meets regulatory requirements.
Preventive and corrective measures
Your supply chain partners are preventively checked by means of questionnaires and certificates. If you need to initiate measures at any point to meet legal requirements, tools support you in implementing and managing them.
Setting up a complaint management system
Many tools provide options for a consistent complaint process and help you set it up.
Documentation
Using the software, companies can create reports and dashboards to monitor and document progress as well as hurdles in implementing the Supply Chain Act.
Communication / CRM
Some young software providers in particular offer a module for communication with suppliers and internal stakeholders. In other words, a clear CRM for all dialogs and processes related to the supply chain.
To choose the right supply chain software for your business from the wide range of vendors, you should clarify a few points and specifications in advance, such as:
What are the industry-specific requirements for my company and can the software provider implement these with its solution?
What software features do I need to meet my company’s unique requirements?
Do I need specific prevention measures that the software can help me with?
Is the software largely automated so that the investment is compensated by saving time resources?
Does the software comply with current legal standards?
How well can existing systems be integrated via interfaces?
How is the handling of the software? Can all team members work well with it?
Just a few months ago, the Supply Chain Act was hardly an issue, but today many companies can’t avoid dealing with it. You can imagine that the market was and is flooded with tools after the first legal requirements were announced and the threat of fines.
Established enterprise software suites from the compliance sector are preparing for the future in terms of product technology. Agile start-ups have received substantial funding in recent months to disrupt the market and offer added value with new software offerings. According to our research, about 30 solution providers are relevant on the German-speaking market.
An insanely exciting and at the same time non-transparent market when you start with vendor research. For better orientation, we have divided the vendors of supply chain tools into the following three clusters:
Classic supply chain solutions (originating from procurement, finance or risk management) – i.e. existing enterprise solutions with (new) LkSG modules
CSR and ESG suites (covering all areas of sustainability such as CSRD, decarbonization, etc.) with an all-in-one platform specialized in ESG
Specialized supply chain law software solutions (focused on LkSG challenges with interfaces to the two clusters above).
The enterprise software providers you have been using will certainly play a role in the decision-making process. If they already offer modules, the easiest way may be to simply license them additionally and (perhaps) be on the safe side.
However, in our recent supply chain software selection projects with apparently conservative midmarket customers, we have seen a very clear trend toward working with specialized vendors (i.e., all-in-one platforms or supply chain solutions). In any case, you should have discussions with specialized tool providers in your selection process in order to build them up as an option.
The two factors that have the most impact on the cost of an LkSG tool are: the number of suppliers (both active and passive) and the functionality of the software.
If you as a company only want to meet the minimum requirements, specialized supply chain solutions start at €400 per month. Here, for example, 400 suppliers are included. The system is based on a completely independent operation of the tool.
On average, the monthly prices for SMEs and corporate groups that will fall under the LkSG from 2024 are more like €800 to €1,300 per month. This is an empirical value from 80% of the matches on our platform. It is also recommended that you take advantage of a consulting package from the provider, especially at the start (plan for a one-time fee of around €3,000 to €5,000), in order to build up the expertise internally.
Tip: To get a non-binding budget estimate based on your initial situation and your parameters, use the LkSG Software Matching on this page (see below in the section after next).
There are some companies, and yours may be one of them, that are only “barely” affected by the requirements of the LkSG. So if you only have a few supplier relationships and still have to fulfill your due diligence obligations – how do you go about it in a budget-saving and resource-saving way?
There is no watertight answer to this question, as each supplier structure is too individual. Nevertheless, we have two tips for you:
Use a suitable technical solution
Ok, this tip is a bit obvious in an article about LkSG tools! But as you read in the previous section, these tools come with some cost, which doesn’t fit the “budget-saving” aspect. However, there are a few vendors that specialize in the minimum requirements and thus are priced much lower. These softwares will help you get started and efficiently implement the most important key points.
Search conversion guides
The German government wants to support companies in implementing their due diligence obligations under the Supply Chain Act. To this end, it has compiled various implementation aids, such as guides or the Multi-Stakeholder Initiatives (MSI). You can learn more about implementation guides here.
Ideally, you may even receive a grant for your supply chain compliance activities.
Especially due to the adjustments from 2024, the LkSG will (have to) occupy more companies than ever. Those who already implement the appropriate software for compliance with the due diligence obligation will therefore be well prepared for the future. In addition, there are numerous advantages to ensuring risk management, monitoring, audits and the like with the help of a single software. The new technology not only makes implementation simple and secure, but also saves time and financial resources in the long term!
Do you want to know which Supply Chain Software fits your requirements? Simply fill out the following match assistant. 👇
Benefit from our intensive research work on LkSG tools over the last few months. We show you which three providers of the total of about 30 technical solutions on the German-speaking market fit exactly to your individual requirements.
The matching is free of charge, anonymous and without obligation.
Ulrich Theves is Head of ESG and CSR Matching at Matchilla and works intensively around technical solutions (i.e. software and tools) in the field of sustainability. He has one of the best overviews of the market and shares his expertise in MatchZINE.
Match me if you can!