Supply Chain Due Diligence Act causes concern
The Supply Chain Due Diligence Act (LkSG) - or simply the Supply Chain Act - which came into force in January 2023, created a big stir from the start - and its precise form has been the subject of fierce political and economic debate. While some thought it was still too lax, others were outraged by the massive burdens on businesses.
Thus, the LkSG has undergone numerous adaptations, for example regarding its scope: The LkSG now applies from a company size of 3000 and not 500, as originally planned. But even if it has affected large companies so far, small and medium-sized enterprises are not spared from the LsKG: The required verification of all direct suppliers is a heavy burden for both the companies directly and indirectly affected by the Act. As a result, voices are growing louder that see a "bureaucracy monster" for small and medium-sized enterprises and a real threat to competitiveness, if not to Germany as a business location.
Are the concerns and, in some cases, the anger of many entrepreneurs justified? We have looked at some interesting opinions and voices. But let's have a look at politics first.
Failed voluntary commitment
The position of the pro-LsKG group in politics can be summed up in one clear point: Companies have a responsibility to respect human rights along their supply chains. However, the previous voluntary commitment does not work, it is considered to have failed. A study conducted on behalf of the German government had shown that less than 50 percent of the companies surveyed were able to verify and prove under what circumstances imported goods were produced - a sign that business was not meeting its ethical obligations. Enforcing the Supply Chain Act would therefore have nothing to do with passing the buck or delegating. Rather, it is intended to give the appropriate "jolt" so that companies fulfill their already given duty of personal responsibility.
"I don't see the German Supply Chain Act as a bureaucratic burden, but also as a help and support for companies to build more transparency, more clarity, in their own supply chains.”“ Anna Cavazzi, Green Party MEP; Source
It is therefore repeatedly emphasized that the LskG is merely a step in the right direction. The primary objective is the protection of human rights, which is likely to be in the interest of the companies. To achieve that goal, companies are offered a reliable basis for action. According to the political common sense of some parties, the LsKG is both a pioneering step and a milestone on the way to fair conditions along the entire supply chain and, at the end of the day, strengthens competitiveness.
Administrative Tsunami
This political view is not shared without reservation. On the contrary, more and more voices are accusing the initiators of the Supply Chain Act of a certain hypocrisy. Prof. Werner Kirchdörfer, for example, has clear words:
"This hypocritical law harms Germany as a business location“ Prof. Werner Kirchdörfer, Board of the Family Business Foundation, Source
Kirchdörfer sees the hypocrisy in particular in the fact that officials and authorities do not have to face the LkSG. And "in doing so, politicians and administrators don't even begin to realize the burden they are placing on companies." (Source) Companies fear excessive bureaucracy. The consequences of this are "no longer calculable" for companies, according to the German Engineering Federation (VDMA) (Source). And Kirchdörfer speaks of an "administrative tsunami" here. In this respect, it could unleash a wave in which companies withdraw from risky regions.
"Companies are already saying goodbye to the African market because of bureaucratic and legal hurdles." Wolfgang Niedermark, Member of the Executive Board of the Federation of German Industries (BDI) Source
One could not blame them for withdrawing. The Supply Chain Act requires that companies implement a risk management system that is not only aware of the environmental and occupational health and safety conditions of their direct suppliers and partners - but also those of their indirect suppliers! But the fact is that most companies are not even aware of these. In addition, there is the threat of
"… massive cascading effects from production cutbacks, relocation of production to company closures, which destroy not only jobs but also purchasing power“ Reinhold von Eben-Worlée, President of the Association of Family Entrepreneurs, Source.
Many entrepreneurs are annoyed by a certain double standard in the latest energy negotiations of the German government. Here, the own monitoring of human rights seems to move into at least a second row. Thus, the entrepreneur Dr. Gunter Kegel writes in a much-noticed post on LinkedIn:
"The Supply Chain Act is a political diversion! In 2021, I was present when the German government negotiated with a delegation from Saudi Arabia about exporting the German dual training system there. Why not? After all, we also supply industrial goods to the Gulf, we buy oil there, we maintain good relations. But wasn't there something? The human rights situation in Saudi Arabia, the death penalty? As you might have guessed, not a single word was uttered by the German delegation. This fits into a pattern: when it comes to denouncing human rights violations, German politicians dodge responsibility - this task is pushed to the industry. The Supply Chain Act reveals this more clearly than it has in a long time“ Dr.-Ing. Gunther Kegel, CEO Pepperl+Fuchs Gruppe
Family honor violated
The entrepreneurial affirmation of the fundamental objectives of the law is beyond question in this discussion. And family-run SMEs reveal to be a little "offended" by the political moves to address human rights:
„Family businesses take their responsibility seriously. For generations, many of them have paid attention to fair dealings with the manufacturers of upstream products. From a competitive point of view, it can also be an advantage if German companies can advertise that they and their products are committed to high standards." Prof. Rainer Kirchdörfer; Source
It is precisely this point that shows wonderfully that family-run SMEs and politicians are on the same track in terms of setting goals. Only the implementation of this path is doubted by some and increasing business voices. Or as Niedermark from the BDI aptly puts it:
"We all want clean supply chains, but we don't achieve them through bureaucratic overreach" Wolfgang Niedermark, BDI; Source
Already trimmed for transparency before LkSG
The medium-sized, family-owned company UVEX is considered a model of transparency: The Uvex Group has 48 branches and is represented in 22 countries. Uvex produces mainly in Germany: Two thirds of the approximately 2,700 employees work in Germany.
The Group has had a social standard for its suppliers since 2008. By following the National Action Plan for the Implementation of the United Nations Guiding Principles there are clear guidelines and processes. And the monitoring covers no less than 30,000 direct suppliers and service providers in 79 countries. Susann Schubert, responsible for sustainability at Uvex, explains that the total increases five to tenfold if indirect suppliers are included.
"We were already well positioned before the Supply Chain Act for what the Supply Chain Act requires us to do operationally" Claus-Jürgen Lurz; Safety Group Uvex; Source
Family-run SMEs: a model of successful digitalization
With these different opinions it will not be easy to find common ground. Of course, companies will be faced with a great deal of bureaucracy and new tasks in the areas of risk management, supply chain tracking and other areas that can only be guessed at on the horizon today. However, somewhat fatalistically formulated: The LsKG has come into force and will expand its radius. And it's not the only one: as part of the Green Deal, numerous laws, regulations and directives are being sent on their way that will strain transparency and thus the documentation capabilities of companies.
But problem admiration inhibits business and growth. To reconcile social, political and economic interests, we can ask ourselves the question: Which parameters could help, if not be the deciding factor in making the new framework less bureaucratic, less costly, more competitive and yet still effective the new framework conditions in a less bureaucratic, less cost-intensive, more competitive and yet still effective way?
"Digitialization" is quickly the word of the day here. But digitalization is also massively responsible for an immense cost pit or efficient implementation of entrepreneurial and political goals in the upcoming development. The price a company has to pay for "its" transparency depends on
how high the price is to collect this transparency;
how efficient the necessary documentation will be; and
how large the room for maneuver will be to initiate appropriate measures to be able to manage its supply chain more optimally.
In the simplest terms, digititalization should simplify processes and save resources. So whether laws such as the LkSG impose high prices on companies, such as the loss of competition, or on the contrary even open up new markets and margins for companies, will depend to a large extent on which technologies accompany the implementation process. This is where digititalization can and will be able to show what it can do. And then, with regard to some political actions, family businesses in particular will be able to contemplate one of their most impressive strengths: Leading by example!
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