Does your sustainability start with the selection of your suppliers?

An interview with the experts Ulrich Heindl, Managing Director of GTS (Global Traceability Solutions) and Mathias Kaldenhoff, Partner Sustainability & Innovation Management, SAP.

Ulrich Heindl: Transparency in supply chains is not a new topic. In the past, however, implementation has been limited to lip service rather than concrete activities. Changing framework conditions such as the availability of raw materials, price trends, supply security and new legal requirements have massively increased the need for transparency in the last two to three years. At the beginning of 2023, the Supply Chain Due Diligence Act ( Supply Chain Due Diligence Act – LkSG ) comes into force, which initially obliges companies with more than 3,000 employees to record compliance with working conditions, human rights and environmental regulations in their value chains, assess risks and take remedial action where necessary. Many may think that this only affects large companies.

Another challenge is a new law to reduce deforestation. deforestation through deforestation, particularly through the conversion of forest into agricultural land. In the current version of the law, this affects timber and timber products as well as agricultural commodities such as soy, beef, coffee, palm oil and cocoa. Companies, regardless of their size, are obliged to trace the origin of the raw materials back to the source, depending on various risk factors, and to prove that no deforestation has taken place on the cultivation areas. In some cases, the evidence must contain detailed information on the geolocation of these cultivated areas.

These two examples show how the requirements for companies in terms of supply chain transparency are set to become drastically more stringent. This is new territory for many and often requires additional resources and expertise that is not always available on an ad hoc basis.

Ulrich Heindl: Eight years ago, we at GTS decided to focus on providing our customers with professional support in addition to the RADIX Tree digital platform. Among other things, we also offer help and training on these issues:

  • What information and documents are relevant and must be available for a risk assessment?
  • What criteria play a role in risk assessment?
  • Which evaluation algorithms can be used?
  • How can I reduce or eliminate risks?

In view of the very complex requirements, we recommend that companies fall back on proven processes and existing knowledge. In addition to the technical issues – caused, for example, by industry-specific supply chains and raw materials – the amount of data, its procurement, processing and storage naturally also plays a huge role. Even for smaller companies, data management can quickly become a challenge. Exchange mechanisms such as e-mail, Excel files, PDFs, etc. are no longer sufficient to complete the necessary tasks in a time and cost-efficient manner. We therefore recommend that companies – regardless of their size – make use of digital solutions. The use of predefined, proven and established solutions is efficient, reduces time and costs, offers a high degree of application security and withstands inspections by the authorities.

Mr. Kaldenhoff, what brings GTS and SAP together as partners?

Mathias Kaldenhoff: Just like SAP through its business networks, when rolling out the Industry Cloud and not least with SAP RISE*, GTS also recognized early on that cross-organizational collaboration with different perspectives can only be implemented really well with a cloud approach. This is almost a must, especially when it comes to regulatory mapping.

Accordingly, I have already gotten to know GTS as a cloud partner. After a very interesting exchange about the solution and potential, we jointly defined goals for integration in SAP environments without questioning the authority and intellectual property of GTS. The step to use our versatile SAP® Business Technology Platform with all its integration possibilities and to accompany customers in supplier management with combined forces was then only a short and logical one.

New legislative proposals usually bring movement to a market. How do you rate the LkSG? Are delivery conditions now taking center stage alongside the hotly debated ability to deliver?

Ulrich Heindl: Legal requirements are often only as effective as the authorities’ strictness in monitoring them. Both the LkSG and the proposal on deforestation-free supply chains provide for drastic penalties for non-compliance. Furthermore, the review by the authorities is regulated much more stringently than in the past. This also increases the risk for companies if they do not implement the legal requirements consistently.

This trend will continue and companies will increasingly take responsibility for their supply chains. However, we see this trend not only for legal requirements, but also increasingly for internal company criteria such as a CO2/GHG footprint for raw materials. The importance of the raw material price will not fade into the background as a result, but other parameters will gain in importance and play an increasing role in an overall view of value creation.

Mathias Kaldenhoff: In addition to all the possibilities for complying with and monitoring regulatory obligations and the associated increasing transparency of the supply chain, the LkSG and the upcoming European Supply Chain Act offer opportunities for the digitalization of processes that users can use in a variety of ways for sustainable economic activity. Terms such as “circular economy” with its biological cycle, but also terms such as “responsible design and production”, the EU taxonomy or ESG reporting come to mind.

The LkSG affects several areas of a company at the same time. Which departments should be involved?

Ulrich Heindl: Both the LkSG and the law on deforestation-free supply chains generally affect different areas of a company. From product development to purchasing, production, quality management, sustainability, internal IT and, last but not least, the legal department, many different disciplines are involved. The fact that different stakeholders need to be involved requires a coordinated definition of objectives and a process that efficiently supports the achievement of these objectives. This is another reason why it makes sense to fall back on tried-and-tested methods, procedures and know-how

Mr. Kaldenhoff, a large number of companies already rely on SAP products to handle their purchasing, procurement and accounting processes. So where does a joint solution with GTS come in?

Mathias Kaldenhoff: This can affect several areas. Existing GTS customers – and as far as I know there are quite a few of them and not just SMEs – benefit from extended and faster integration into the solutions mentioned. The participants in the supply chain have the option of mapping and passing on the proof of origin in their ERP system for each subsequent system; external checks are no longer necessary. I also believe that our joint approach will enable us to make quicker decisions on alternative suppliers. Especially when it comes to organic raw materials or food. We have just experienced and mastered this in a time of crisis with wood as a raw material.

In a first step, larger companies will be obliged to comply with the LkSG, and it is already foreseeable that this will be extended to medium-sized companies. To be competitive for the future of emerging green sourcing – what influencing factors, industry trends, new market designs still need to be considered?

Ulrich Heindl: Both the LkSG and the law on deforestation-free supply chains affect not only large companies, but also the upstream supply chains and therefore medium-sized companies right down to the smallest producers. In the medium term, companies that do not adapt to the requirements of legal compliance, sustainability or the protection of labor and human rights will hardly be able to operate in certain markets.

This will also lead to the establishment of new business models that go beyond the pure approach of value for money and minimal quality requirements.

Mathias Kaldenhoff: Our current actions in this context will also influence the resilience of global supply chains and help determine whether suppliers can survive in international competition. New market segments will emerge, global and/or local supply chains will be strengthened or weakened.

*SAP RISE: All-in-one solution to simplify the digital transformation journey for companies

**twin transformation: The digital transformation and the simultaneous focus on more sustainable business are referred to as the “twin transformation” due to the many overlaps.