Are German fashion businesses prepared for the impending supply chain law?

On 1st January 2023, the German Supply Chain Due Diligence Act (GSCA) will come into force, requiring companies with more than 3,000 employees from next year and with more than 1,000 the year after to follow clear and enforceable due diligence requirements from raw material to 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 world looks on as Germany as one of the first countries to tackle supply chain protection legally gets into gear.

London-based K3 Business Technology Group, which offers ERP solutions for the fashion industry, wanted to find out more and commissioned market research company Sapio Research to conduct an online survey among 100 decision-makers in the German fashion, lifestyle, textile and retail industries in March and April 2022.

The decision-makers surveyed work in IT, operations/logistics/supply chain and finance and are responsible for supply chains in the aforementioned industries 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 in the EU (82 percent) and therefore require systems and procedures to ensure compliance with the GSCA.

Findings

The study revealed five central findings:

• Not all companies are adequately prepared for the GSCA.
• There is currently a lack of transparency in supply chains.
• Companies use inefficient, non-automated methods to store compliance information and certifications.
• New technologies are required.
• The fashion industry, the textile industry and retail are planning to use their GSCA implementation for their marketing.

Lack of preparation

While three out of five respondents said they were fully aware of the upcoming GSCA legislation, about one-third admitted they did not know the details. Of those who were aware of the need to comply with the GSCA, just over half (53 percent) were not yet able to act in a compliant manner. Eighteen percent of them were also unsure whether they would be able to do so by the time the GSCA goes into effect. “The survey suggests that this will be a challenge given the current systems and processes,” is the conclusion.

Lack of transparency along the supply chain

Seven out of ten of the companies surveyed (71 percent) obtained 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 the respondents (47 percent) also demand these from their suppliers' suppliers (indirect suppliers) - and this significantly increases the risks in the supply chain,” K3 summarises.

Inefficient methods

At 27 percent of respondents, just over a quarter said they kept paper copies of 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 them in paper form, and 46 percent of those with more than 5,000 employees.

About a quarter of smaller companies store audit results in folders on shared drives or even on the personal drives of the responsible employees. Nineteen percent of respondents use a spreadsheet, which increases the likelihood of errors and makes the information harder to access, manage and find.

Just under half of respondents (48 percent) do not believe that the technology they use today to support supply chain due diligence can fully automatically integrate the relevant data and metrics into their financial reporting. Among smaller companies, this figure is as high as two-thirds.

“If this information is not integrated into financial reporting systems, GSCA compliance is a very time-consuming, manual task that is prone to errors and inaccuracies and puts companies at high risk,” explained Karsten Kurella, enterprise sales director at K3, in a statement.

New technologies are required

Ninety-three percent of respondents are convinced that they need new technological solutions to fully implement and comply with the GSCA in their company. Only 30 percent of respondents said they were very confident that the technology currently used to store and record supply chain certifications would be able to meet the new requirements. For companies with 1,000 to 4,999 employees, that number dropped to just 14 percent. While current systems automatically send alerts when certifications expire, only 43 percent of companies can automatically detect missing or inaccurate certifications.

Using GSCA implementation for marketing purposes

Nearly all respondents (98 percent) intend to use the issues of sustainability, reduced environmental impact, and protecting the welfare of workers along their supply chains for their marketing.

“It is important to note that companies wishing to use these metrics for marketing purposes must also fully comply with all GSCA requirements and ensure that their data is trustworthy,” concluded Kurella.