News laws from governments across the world are forcing supply chain organisations to be more ethical. The implications are vast and companies around the globe have to adapt to the changes. We spoke to Rajat Jain, Consultant, GEP, a leading provider of procurement and supply chain solutions to Fortune 500 companies.
How do laws affect supply chain operations, and what can companies do to prepare and understand them better?
Laws and regulations in supply chain operations are like the suspension of a car — it may slow down the speed of the car but it’s sacrosanct for its smooth functioning and control.
Germany recently passed the new supply chain due diligence act, making global companies (1,000+ employees) responsible for identifying and addressing human rights and environmental risks across their entire multi-tier, multi-geography supply chains. This law, which takes effect in 2023, impacts all enterprises that are part of global supply chains of larger enterprises.
We anticipate more countries and regions will follow Germany’s lead with similar legislation. This expands the remit for supply chain and procurement leaders to track, report and be truly responsible for environmental and ethical practices across their extended network of suppliers.
The German legislation provides an impetus for chief supply chain and procurement leaders to operate more strategically and drive sustainable and resilient supply chains, by:
- Revisiting and verifying corporate social, ethical and environmental goals, policies and auditing requirements. Patagonia and, more recently, Marks & Spencer created their own standards in response to allegations of child labor and unsafe working conditions in their supply chains.
- Proactively communicating new law(s) and your organization’s own policies to all suppliers.
- Creating transparency across your entire supply chain by using the same cloud-based supply chain software that manages your supply chain to both track raw materials and components from the point of origin and validate suppliers’ practice declarations.
- Using technology to identify hot spots: We already know the regions of the world and the industries where there are potential issues. Start by requiring all suppliers, and their suppliers, to
provide independent third-party-issued certification that they adhere to your sustainability and ethical standards. Moreover, demand more from auditors and third-party certifiers. Require your independent auditors to reflect the diversity of workers on the ground and ensure they have their own corporate sustainability program. Then, go beyond table-stake certifications and use the latest web-crawling software to create a risk profile of your immediate Tier two and Tier three suppliers, especially in the supply chain hot spots.
What are the direct implications of the German law on supply chains, and can we expect more countries to follow?
This German law for protection of human rights and the environment in supply chains is basically along the lines of the EU Due Diligence law. The start of this year saw the European Parliament voting in
favor of an initial legislative report that would urge the European Commission to finalize and introduce a due diligence law for all its member states. Therefore, we can expect other countries to formulate business and human rights laws pertaining to supply chains, especially in Europe — but a standard European regulation would benefit all stakeholders across Europe.
Beyond Europe, we will soon see Australia establish stricter laws for supply chain operations. Its parliamentary inquiry committee — consisting of foreign affairs, defense and trade unions — noted that the government should strengthen the already existing Modern Slavery Act (after a public hearing where officials conceded that there has been almost no enforcement of the act until now).
Should organizations think about implementing their own ethics frameworks to be better prepared for future laws?
German companies, anecdotally, lead the rest of the world in working with suppliers to meet stated environmental and ethical practices.
For instance, Bayer (disclosure: GEP client) provides very clear policies and operations regarding sustainability and ethical practices, and really set the gold standard for all global companies. Another German company, Naturaline, put a traceability code on all its clothes to provide customers with details from sourcing and production to distribution and finally to sales.
Companies must now find suppliers who can solve environmental challenges as a core value proposition. It’s no longer
sufficient to just track KPIs around waste, water usage and CO2 emissions. Companies expressly need suppliers to be competitive in both sustainability and price. This approach will allow organizations to align, formalize and continuously review and deepen understanding and assessment of their suppliers. At the center of the approach is engagement with direct suppliers to encourage continuous improvement in their capacity to manage environmental, ethical and labor practices in their subcontractors and broader supply chain, including suppliers’ suppliers.
The German law also firmly establishes fiduciary responsibility for chief supply chain officers in the way that CFOs have fiduciary responsibility to investors. It provides an impetus to supply and procurement leaders to:
- Systematically identify and track the history, distribution, location and application of raw materials, components products and their parts using radio frequency identification, bar codes, blockchain technology and material certification. Nestlé in the food sector and H&M in clothing list the details of nearly all their suppliers in the public domain.
- Establish a SWAT team: Create specialized, lean internal teams within the company’s corporate sustainability group and actively work with local communities to understand the root causes practices in the farms, mines and factories. In the same way, company employees should conduct regular vendor quality checks on the ground and in the factories. Embed members of your SWAT team side-by-side with suppliers to identify issues and report back on activities and conditions.
- Ramp up auditing: Nearly all global businesses conduct periodic in-person supply chain audits with their immediate (Tier one) suppliers to verify that they do not, for instance, utilize child labor. But these “fly bys” are infrequent and involve traveling to a small number of top-tier suppliers who prepare in advance. To be able to conduct regular evaluations of working conditions on the ground and in vendors’ factories, farms, fulfilment centers and transportation companies, businesses need to increase their spend on auditing from about 0.1% today to 1% of their annual profit.
Do you believe countries should intervene in the way supply chains are run?
Yes. First, investors led by BlackRock — the world’s largest investment management firm — are beginning to compel companies to track and report their corporate social responsibility efforts and impact. Second, there is an increasing realization that the environment will cause massive economic and social damage to the world and growing political will to require commercial companies to become part of the solution. Third, in everything from rare earth materials to energy to chip manufacturing, the world is entering a new phase of global nationalist competition with commercial trade. The Biden administration identified several strategically vital supply chains that it is intent on gaining greater control of going forward. While China and Russia pursue geopolitical objectives through control of supply lines, the reality is that we’re already experiencing greater direct intervention, beyond traditional levers like tariffs and regulation, in an increasingly active government-led intervention. ✷