New Supply Chain Due Diligence Laws Necessitate Full Visibility and Transparency

Germany’s new supply chain law is likely to be a precursor to even stronger regulations to come. In January, the country implemented one of the world’s most extensive supply chain laws, the German Supply Chain Due Diligence Act (LkSG), which requires large companies to monitor their supply chain for both human rights and environmental abuses. Given Germany’s influence as the world’s fourth-largest economy, the implications for global supply chain operations will be considerable.

Other European countries have passed their own recent supply chain due diligence laws, including France and the Netherlands. Where past supply chain legislation has focused on specific risks, such as forced labor, many of the latest regulations being proposed and enacted across Europe have taken much broader regulatory views of the supply chain, requiring companies to report on the social and environmental sustainability of their supply chain or risk significant penalties (on top of extremely damaging reputational consequences).

Most of Europe is poised to follow in Germany’s footsteps. A proposed European Union due diligence law would take on an even wider scope than the LkSG and its French and Dutch counterparts. The EU proposal, expected to head to the European Parliament this spring, would require companies to monitor suppliers for both environmental and labor standards and ensure they’re adhering to a decarbonization path outlined with the Paris Climate Accords. It would apply to companies with 500 employees and annual sales of €150m. In industries where labor abuses are more common, such as textiles and farming, it would apply to companies with 250 employees and €40m in annual sales.

North America, meanwhile, has similarly moved ahead with regulations to weed out egregious ethical and environmental abuses from the supply chain. Most prominently, the United States enacted its monumental Uyghur Forced Labor Prevention Act last year, which empowers U.S. Customs and Border Patrol to seize any imported merchandise goods suspected of coming about in whole or in part from forced labor services. Canada, which has been criticized for being slow to respond to forced labor in the supply chain, is racing toward the passage of its own due diligence law, which could be approved this spring. Supporters of the bill say it’s long overdue, arguing the country has become “a dumping ground” for goods tainted by slave labor that other countries have rejected.

While the specific requirements of recent global supply chain laws vary, the practical implications of many of them are the same: Brands and retailers must now have complete documentation of their suppliers, from raw materials to finished goods, and they need to be able to document the full chain of custody of materials, including where they were shipped from, where they were made, and where they were stored. Businesses now recognize the necessity to act, but too many lack the proper systems to centralize supplier information and document the full provenance of their products. The right supply chain management platform can provide the crucial transparency they need to stay ahead of tightening global regulations.

Intelligent Systems Ensure Responsible Sourcing

Any responsible sourcing strategy needs to start with visibility because you can’t fix what you can’t see and understand. To ferret out human rights and environmental violations, business must take responsibility for mapping their supply chain partners, from the top tier to the Nth tier. It’s no longer enough to simply rely on tier one suppliers to collect and self-report the origins of the materials they're using. Additional steps must be taken by businesses to vet and validate the information they’re provided.

Especially for brands and retailers with complicated supply chains and large supplier networks, comprehensive supplier mapping is almost impossible without advanced supply chain management software. Accurate and detailed mapping provides companies with a full understanding of their true environmental footprint. In addition to facilitating visibility, this software exposes gaps that a business can then act on. For an apparel business, for instance, advanced supply chain management software can chart where their yarns and fabrics come from, how much carbon they’re emitting, and whether they’re making progress toward reducing water usage and pollution. With that visibility in place, businesses can take the next step to understand where help is needed and where action must be taken.

With so many new global regulations for brands and retailers to adjust to and even more on the way, the coming years will reveal which brands and retailers have evolved their systems to meet these requirements and which ones have fallen behind in their obligations to build and maintain an ethical supply chain. Supply chain management platforms will allow forward-thinking brands to seize opportunities to differentiate themselves and gain an advantage against their competitors based on sustainability. Brands and retailers that have put off their digital transformation, however, will become less competitive with time as they’re bogged down by outdated manual processes and saddled by heavy fines.

There's an old proverb that says the best time to plant a tree was a year ago; the second best time is now. For businesses that have delayed digitalizing processes to ensure a responsible supply chain, now is the time to plant that tree.

Eric Linxwiler is senior vice president of TradeBeyond, a company that connects retail supply chain operations from product development to delivery.