Does your sustainability start with the selection of your suppliers?

5 Jan 2023

We are experiencing a tough battle for raw materials in many industries. For years, GTS has been supporting renowned retailers, DIY stores, furniture manufacturers and food producers in mapping and evaluating their supplier environments in detail. What will your customers have to face from January 2023, Mr Heindl?

Ulrich Heindl: Transparency in supply chains is not a new topic. In the past, however, implementation was limited to lip service rather than concrete activities. Changing framework conditions such as the availability of raw materials, price developments, supply security and also changing legal framework conditions have massively increased the need for transparency in the last two or three years. At the beginning of 2023, the Supply Chain Due Diligence Act (Lieferketten-Sorgfaltspflichtengesetz – LkSG) will come 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, to assess risks and to take remedial action if necessary. Many may think that this only applies to large companies.

However, one has to keep in mind that a large part of the suppliers belong to the SMEs and these companies are part of the risk assessment.

Another challenge is a new law to reduce deforestation through logging, especially the conversion of forests 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 raw materials back to their source, depending on various risk factors, and to prove that no deforestation has taken place on the cultivated land. In some cases, the evidence must include detailed information on the geolocation of these cultivated areas.

These two examples show how the requirements for companies with regard to supply chain transparency are foreseeably becoming drastically more stringent. This is new territory for many and often requires additional resources and know-how that is not always available ad hoc.

What is GTS’ advice to manufacturers and traders in view of the market situation?

Ulrich Heindl: At GTS, we already decided eight years ago to focus on the technical support of our customers in addition to the digital platform RADIX Tree. 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?
• Which criteria play a role in risk assessment?
• Which assessment algorithms can be used?
• How can I mitgate or eliminate risks?

In view of the very complex requirements, we recommend that companies make use of tried and tested 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 very important 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 by far to efficiently complete the necessary tasks in terms of time and costs. Therefore, we recommend companies – regardless of their size – to resort to digital solutions. The use of predefined, proven and established solutions is efficient, reduces time and costs, provides a high degree of application security and endures in the event of audits by the authorities.

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

Mathias Kaldenhoff: Just like SAP with its business networks, when rolling out the Industry Cloud and not least with SAP RISE*, GTS also recognised early on that cross-organisational 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 already got to know GTS as a cloud partner. After a very interesting exchange about the solution and potential, we jointly defined the goals of integration in SAP environments without questioning the authority and intellectual property of GTS. The step to use our versatile SAP® Business Technology 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 projects usually bring movement into a market. How do you assess the LkSG? Is the focus now on delivery conditions in addition to the hotly debated delivery capability?

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

We are already seeing from companies in our client portfolio that, in addition to the traditional supply criteria, compliance obligations are becoming part of the contracts and that non-compliance with this agreement is subject to sanctions.

This trend will continue and companies will increasingly take their supply chains into account. 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, but other parameters will gain in importance and play an increasing role in an overall consideration of value creation.

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

In this respect, the LkSG is not a regulatory shackle, but an opportunity, starting point and nucleus of an expanded sustainable orientation of the companies. Completely in the sense of my favourite topic – the so-called Twin Transformation**.

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 usually affect different areas in a company. Starting with product development, purchasing, production, quality management, sustainability, internal IT and last but not least the legal department, very different disciplines are involved. The fact that different stakeholders have to be involved requires a coordinated definition of the goals and a process that efficiently supports the achievement of these goals. This is another reason why it makes sense to use 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. At what point does a joint solution with GTS come into play?

Mathias Kaldenhoff: This can affect several areas. Existing GTS customers – and as I understand it, there are quite a few of them and not only SMEs – benefit from an extended and faster integration into the solutions mentioned. Participants in the supply chain have the option of displaying and passing on the proof of origin in their merchandise management system for each subsequent system; external checks are no longer necessary. In addition, I believe that our common path enables faster decisions towards alternative suppliers. Especially in the case of organic raw materials or foodstuffs. We have just experienced and mastered this in a time of crisis with wood as a raw material.

In the first step, larger companies will be obliged to comply with the LkSG, the extension to medium-sized companies is already foreseeable. In order to be competitive for the future of emerging green sourcing – what influencing factors, industry trends, new market designs are there still to consider?

Ulrich Heindl: Both the LkSG and the law on deforestation-free supply chains affect not only the large companies, but always also the upstream supply chains and thus medium-sized companies 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 labour and human rights will hardly be able to operate in certain markets.

On the contrary, it is to be expected that the above-mentioned criteria will become an integral part of the trade in products and that, in the long term, raw materials that do not meet these requirements will hardly find a market in the developed markets.

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

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

Thank you very much for the interview!

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

**twin transformation: digital transformation and the simultaneous orientation towards more sustainable management is referred to as “twin transformation” due to many intersections.