Navigating the German Supply Chain Act with IntegrityNext: Key Learnings on Effective Action Management (Part III)

Blog series: Supply chain due diligence in practice

At IntegrityNext, we have developed a comprehensive five-step process that allows companies to meet all the critical due diligence requirements of the German Supply Chain Act with minimal effort. This blog series sheds light on insights gained from customer projects throughout the process and concludes with an outlook on what can be learned for the upcoming EU Corporate Sustainability Due Diligence Directive (CSDDD).

You can find the first and second part of our blog series on impact identification and prioritization here.

The German Supply Chain Act at a glance

The German Supply Chain Act came into effect on January 1, 2023. It requires companies with at least 1,000 employees to carry out human rights and environmental due diligence on their upstream suppliers. Its overall goal is to prevent human rights violations and environmental harm along global supply chains. Companies must meet nine key requirements, including conducting regular risk analyses, implementing preventive and corrective measures, and reporting on their actions.

The IntegrityNext due diligence approach

The IntegrityNext five-step due diligence process (see Figure 1) provides an end-to-end solution for regulatory compliance and is based on internationally recognized frameworks such as the OECD Due Diligence Guidance for Responsible Business Conduct.

• Step 1 helps companies perform a baseline assessment to pinpoint relevant adverse impacts that may exist along the supply chain.
• Step 2 identifies high-risk areas and critical suppliers, enabling companies to prioritize resource allocation and required actions.  
• Step 3 focuses on action and improvements. When negative impacts are detected, companies should develop and implement targeted preventive or corrective measures to address these issues.
• Step 4 involves the monitoring of progress and documentation of results to determine whether the due diligence strategy needs refinement.  
• Step 5 ensures comprehensive reporting on the due diligence process, including actions taken, in accordance with legal requirements.

Figure 1: The IntegrityNext supply chain due diligence process

Step three: Taking action

Once companies have identified and prioritized negative impacts, they need to take concrete action. These actions should aim to prevent or mitigate potential and actual negative impacts. In addition, remedial measures should be implemented when specific problems occur. For instance, preventive actions, such as employee trainings on human rights for high-risk suppliers, can help avoid risks. Remedial measures, like implementing a health and safety management system, may be necessary in response to frequent workplace accidents at a supplier site.

It is important to emphasize that cutting ties with suppliers in the event of a violation should not be the primary goal. Instead, companies should critically evaluate their own business practices. Under the German Supply Chain Act, terminating a supplier relationship is only deemed appropriate if misconduct is particularly severe, other measures fail to resolve the issue, no alternatives are available, or the company can no longer influence the supplier.

Step four: Tracking progress

After implementing relevant measures, it is crucial for companies to track the progress they’ve made. The German Supply Chain Act defines two key criteria for this assessment: appropriateness and effectiveness. As discussed in the second part of our blog series, the concept of appropriateness considers factors such as the nature and scale of a company’s operations, its ability to exert influence, the severity, reversibility, and likelihood of a violation, as well as the company’s role in contributing to the issue.

Effectiveness, as defined by the German Supply Chain Act, means that measures should lead to tangible improvements in workers' well-being or environmental protection. Companies must regularly assess whether their actions have achieved the desired outcomes and adjust their approach where necessary.

The principles of appropriateness and effectiveness are deeply interconnected. Companies can only make appropriate choices based on measures that have proven to be effective. This ensures that any measure deemed appropriate is also effective in reducing or eliminating risks and violations.

Further information on the concepts of effectiveness and appropriateness can be found in a dedicated publication from the German Federal Office for Economic Affairs and Export Control.

Challenges and keys to success

As with other stages of the due diligence process, the German Federal Office for Economic Affairs and Export Control provides general guidance for steps three and four but omits many details. This leads to a considerable degree of uncertainty. For example, what does an optimal response to a human rights violation look like? And how can companies determine whether the chosen measure was truly sufficient to resolve the issue? Often, there are no straightforward answers.

Based on our experience from customer projects, we have identified several keys to success that can help companies ensure the effective implementation of measures and resolution of issues:

• Define the scope of action: Sustainability departments frequently seek a single key measure to minimize human rights risks or remedy violations in the supply chain. Unfortunately, there are no one-size-fits-all solutions. Companies should develop tailored action plans for each prioritized negative impact or violation. As a first step, we recommend conducting a detailed analysis of the negative impacts or violations in the supply chain. Next, companies should create a shortlist of effective measures, and finally, implement these measures in close collaboration with high-risk suppliers.
• Get started: Instead of striving for perfection from the outset - whether in managing actions or tracking individual measures - companies should focus on taking immediate steps and refining their approach over time. In doing so, they can integrate lessons learned into a customized management system that reflects both stakeholder needs and the specific circumstances of their supply chain.
• Develop meaningful KPIs: A common mistake when measuring effectiveness under the German Supply Chain Act is using the wrong metrics. Effectiveness should be evaluated based on whether a measure has genuinely contributed to improving the status quo. For example, instead of measuring the success of an occupational safety training program in terms of the number of participants, companies should assess its impact by tracking whether work-related accidents decrease after the training. Companies should keep this in mind when developing meaningful KPIs that align with the requirements of the German Supply Chain Act.
• Strengthen supplier engagement: Addressing concerns with suppliers can be challenging. It requires tact and is most effective when a strong foundation of trust exists. Suppliers need to understand that the primary goal is to rectify issues, not to immediately sever all business ties. Open, transparent discussions and clear, well-founded explanations of necessary corrective or preventive actions are essential for achieving positive outcomes and maintaining productive relationships.
• Engage in industry initiatives: Many companies face similar challenges when implementing the German Supply Chain Act and often feel overwhelmed. A useful strategy is to participate in industry initiatives where experiences and best practices can be shared. Collaborating with peers can also increase pressure on high-risk suppliers to take corrective or preventive action. This collective approach, explicitly recognized by the German Supply Chain Act, can be particularly effective when companies share similar supplier networks.

How IntegrityNext supports effective action management

IntegrityNext’s comprehensive due diligence solution empowers companies to implement the German Supply Chain Act with confidence and efficiency. Steps three and four of the IntegrityNext due diligence process support several of the legal requirements of the German Supply Chain Act, including:

• Documenting and communicating measures to internal business units, direct and indirect suppliers
• Communicating measures to suppliers via the platform, with automated language translations
• Selecting effective preventive, remedial, and control measures from a comprehensive action library, tailored to the German Supply Chain Act and many other regulatory requirements
• Efficiently managing implemented actions
• Documenting and implementing control actions to track progress

Figure 2: The IntegrityNext Action Tool

To learn more about how our solutions and action tool can drive meaningful supplier collaboration and compliance, schedule a demo with one of our experts.

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