On January 1, 2023, the Supply Chain Due Diligence Act (LkSG) will come into force. For companies with more than 3,000 employees (or more than 1,000 employees from 2024), this means that they must follow clear and implementable due diligence requirements from the raw material to the finished product.
These aim to ensure the protection of human rights and respect for the environment in global supply chains and to create legal certainty for companies and those affected. So far so good. But are German companies prepared for this?
The London-based K3 Business Technology Group, which itself offers ERP solutions for the fashion industry, wanted to know more about this and commissioned the market research company Sapio Research to conduct an online survey of 100 decision-makers in the fashion, lifestyle and textile industries in March and April 2022 and retail in Germany.
The decision-makers surveyed work in the areas of IT, operations/logistics/supply chain and finance and are responsible for the supply chains in the fashion and lifestyle sectors, in the textile industry and in retail in Germany. They hold C-level and management positions or are department heads in companies with 1,000 to 4,999 employees (43 percent) and 5,000 to more than 10,000 employees (57 percent). Four out of five of the companies surveyed source products from countries with less stringent standards than the EU (82 percent) and therefore need systems and procedures to ensure compliance with the LkSG.
Results
The study uncovered five key findings:
- Not all companies are adequately prepared for the LkSG.
- There is currently a lack of transparency in the supply chains.
- Organizations use inefficient, non-automated methods of storing compliance information and certifications.
- New technologies are required.
- The fashion industry, the textile industry and retail are planning to use the implementation of the LkSG for their marketing.
Lack of preparation
While three out of five respondents said they were fully aware of the forthcoming LkSG legislation, around a third admitted not knowing the details. Of those who are aware of the need to comply with the LkSG, slightly more than half (53 percent) cannot yet act in compliance. 18 percent of them are also not sure whether they will be able to do this by the time the LkSG comes into force. “The survey indicates that this will be a challenge with the current systems and processes,” is the conclusion.
Lack of transparency in the supply chains
Seven out of ten of the companies surveyed (71 percent) obtain certifications from their direct suppliers to assess and prevent human rights violations and environmental risks in their supply chain.
“However, it is striking that less than half of those surveyed (47 percent) also demand this from the suppliers of their suppliers (indirect suppliers) – and this significantly increases the risks in the supply chain,” summarizes K3.
Inefficient methods
At 27 percent of those surveyed, just over a quarter said they keep paper certifications in a filing cabinet. Two-thirds of the majority of companies (94 percent) that conduct audits in their supply chain store the results in databases, but 37 percent of companies with 1,000 to 4,999 employees store the results in paper form, and 46 percent of companies with more than 5,000 employees.
Around a quarter of smaller companies store audit results in folders on shared drives or even on the personal drives of the responsible employees. 19 percent of respondents use a spreadsheet, increasing the risk of errors and making information more difficult to access, manage and locate.
Almost half of respondents (48 percent) do not believe that the technology they are using today to support supply chain due diligence can fully automatically integrate the relevant data and metrics into their financial reporting. For smaller companies, this is even two-thirds.
“If this information is not integrated into the financial reporting systems, compliance with the LkSG is a very time-consuming, manual task that is prone to errors and inaccuracies and puts companies at high risk,” explains Karsten Kurella, Enterprise Sales Director at K3.
New technologies are required
93 percent of those surveyed are convinced that they need new technological solutions in order to be able to fully implement and comply with the LkSG law in their company. Only 30 percent of respondents are very confident that the technology currently used to store and record certifications in the supply chain will be able to cope with the new requirements; in companies with 1,000 to 4,999 employees, this proportion drops to just 14 percent. While current systems automatically send alerts when certifications are about to expire, only 43 percent of organizations are able to automatically detect missing or inaccurate certifications.
Use implementation of the LkSG for marketing purposes
Almost all respondents (98 percent) intend to use the topics of sustainability, reduced environmental impact and protecting the well-being of workers in their supply chains for their marketing.
“It is important to note that companies that want to use these metrics for marketing purposes must also fully comply with all the requirements of the LkSG and ensure that their data is trustworthy,” concludes Kurella.