Where Supply Chain Due Diligence meets Product Compliance

Note: This blog post is a summary of a presentation I gave on October 25, 2022, at the SAP EHS & Product Compliance Info Days. On average 350 attendees per day took the opportunity to inform themselves about SAP’s EHS and Product Compliance solutions, as well as about related topics in the sustainability area.

More and more supply chain due diligence frameworks and legislations are being established around the globe, resulting in new obligations for organizations regarding taking care of human rights and environmental aspects in their supply chains. Especially the German Lieferkettensorgfaltspflichtengesetz (LkSG) and the proposal for a European Directive on Corporate Sustainability Due Diligence (CSDD) have recently urged many SAP customers to look for a software solution helping them to deal with the legislations. You may check out some previous blog posts on this topic here: New challenges ahead – The Lieferkettensorgfaltspflichtengesetz and Lieferkettengesetz: Menschenrechte bei Lieferanten UND in der eigenen Organisation schützen (in German).

Besides the functionalities required for the pure fulfillment of the legal obligations – e.g. with regards to supplier management, supplier-centric risk analysis and reporting – organizations are facing various requirements for processes and tools providing the insight required to take informed decisions on both operational and strategic level. For all companies manufacturing and/or selling products, this is where product compliance enters the game. Because in the end, the essential output of what these companies do is their products. And the marketability of the products can be – both positively and negatively – impacted by how a company manages human rights and environmental risks in their supply chain. Let me explain this in more detail by means of the – in my opinion – three most relevant contact points between supply chain due diligence and product compliance:

1) The need to consider product specifics in the risk analysis

To explain this, let’s look into the official recommendation of the German Federal Office of Economics and Export Control regarding the required risk analysis for the LkSG (German original linked here). There, it is stated that companies are required to consider information on human rights risks and environmental risks during the development and launch of a new product, e.g. when new sourcing countries are evaluated or with regards to raw material specific risks.

Concrete example: The Stockholm Convention on Persistent Organic Pollutants is mentioned explicitly in the LkSG. And already today, many companies use SAP Product Compliance applications to fulfill the requirements of this convention, respectively the related EU POP regulation, by applying processes similar to the processes already in place for other regulations like REACH or ROHS.

2) The need to consider product marketability when identifying appropriate remedial measures

Already today, companies face a lot of trouble when incidents related to human rights or the environment in their supply chain become known to their business partners or the public. With more and more legislations becoming effective, the need to consider product marketability when identifying appropriate remedial measures when a company gets to know about such an incident in their supply chain in a structured and organized way becomes even more crucial. So, let’s look into this in more detail. What happens in a company if there is such an incident? A lot of employees will be busy dealing with the legal details and restoring their brand reputation. And other employees will be busy with evaluating the best remedial measures, so they need answers to the following questions:

  • What do we buy from this supplier?
  • In which of our products do we use what we buy from this supplier?
  • What is the impact on the marketability of these products in different markets?

Dealing with questions like these is something product compliance professionals already do today. In other words: If you get to know of such an incident in your supply chain, the supplier level is not enough. You need visibility of compliance issues along your product structure, and you need visibility of compliance issues across your product portfolio, so that you can quickly take the right remedial measures (e.g., exchanging the supplier if possible or starting further investigation or collaborate with the supplier to overcome the issues). This way, you ensure that the impact of such incidents on the marketability and the sale of your products – and hence the success of your business – is as low as possible.

3) The chance to leverage a sustainable supply chain as a catalyst for new business models

The research shows that the protection of human rights and compensation laws becomes a more and more important factor in purchasing decisions of individuals (see e.g. here). In light of this, some companies are already adapting their business models. In addition, new companies with new business models emerge. For example, start a quick web search with terms like “fair smartphone”.

Of course, this is most visible the closer a company is to the end consumer, but many expect that this kind of shift of end consumers’ priorities will flow upwards through the supply chain. In the end, creating new products that reach additional customers by establishing supply chain due diligence as part of the value proposition of their products will give a lot of companies the possibility to differentiate from their competitors.

Conclusion

Companies which produce and/or sell products are confronted – by regulators, customers, NGOs, the media, and further stakeholders – with two essential questions with regards to human rights and the protection of the environment:

  1. Do your products comply with compliance requirements relating to the protection of people and the environment?
  2. Do you as a company comply with compliance requirements relating to the protection of people and the environment?

Dealing with the first question has been the task of product compliance professionals for several decades, and the visibility into the supply chain has played a crucial role ever since then.

Dealing with the second one has been the core of what EHS professionals do day-in and day-out, and this will not change, considering the significant effort it takes for ensuring an organization’s own operations are compliant with such compliance requirements.

But as introduced above, new supply chain due diligence requirements are introduced which are not limited to what happens inside the walls of an organization’s own facilities but require them to expand the area of responsibility to their supply chain. So, besides ensuring their own operations comply with compliance requirements relating to the protection of people and the environment, they also need to ensure that their suppliers’ operations comply. I hope this blog post helped to understand that it is reasonable to involve product compliance experts in this. Because their knowledge, tools and processes go a long way towards an efficient and effective fulfillment of the needs – and for taking advantage of the chances – resulting from supply chain due diligence requirements.

At SAP, we raise the claim to provide the tools and best practice processes for especially such cross-functional topics like supply chain due diligence and product compliance. Furthermore, we listen to our customers, who do not want to manage risks on supplier level and risks on product level in two separate silos but in one integrated tool landscape. Make sure to follow the SAP Product Compliance Applications community in case you are interested in how this will evolve.