Supply chain transparency is no longer an option but a necessity for companies that aim to establish trust with their stakeholders. From customers to shareholders and suppliers, everyone has an interest in knowing how products are made, where they come from, and whether they are ethically and sustainably produced. Supply chain transparency is crucial for companies because it builds their reputation and credibility, reduces risks, and enables them to make informed decisions about their business operations.
One factor that underpins the importance of transparency is supply chain security. With the growing incidence of cyber threats, natural disasters, and pandemics, businesses need to know where their goods are at all times, which suppliers are impacted, and what alternative routes are available. Supply chain transparency can help companies to identify the weakest links in their supply chain and take measures to mitigate risks.
Why are audits so important for transparency?
Audits play a crucial role in promoting transparency by verifying suppliers’ compliance with sustainability, ethical, and legal standards. Audits can be conducted internally or by third-party auditors, depending on the scope and complexity of the supply chain. Internal audits involve evaluating a company’s own operations, while third-party audits involve evaluating suppliers’ operations. Audits can cover various aspects, including labor practices, environmental impact, social responsibility, and data security.
However, audits also pose some challenges. For example, auditors need to have the right expertise, tools, and access to data to conduct effective audits. They need to be able to identify potential risks and areas for improvement, communicate findings to stakeholders, and follow up on corrective actions. Moreover, audits need to be conducted regularly to ensure ongoing compliance and improvement.
The German Supply Chain Act and Upcoming EU Legislation
The German Supply Chain Act, which came into force in January, 2023, requires companies with more than 3,000 employees to conduct due diligence on their direct suppliers and assess human rights, environmental, and governance risks in their operations and supply chains. The law applies to various industries, including textile, footwear, and electronics, and covers risks such as child labor, forced labor, and environmental pollution.
The German Supply Chain Act is a significant step towards promoting transparency and ethical business practices, but it also poses some challenges for companies. For example, companies need to ensure that their suppliers comply with the requirements and provide them with relevant information. They also need to establish effective monitoring and reporting mechanisms to identify and address risks.
The EU is also planning to introduce mandatory due diligence legislation that will require companies to identify and address risks in their supply chains. The proposal is currently under review by the European Parliament and is expected to be adopted in 2025. The proposed law will apply to companies operating in the EU, irrespective of their size, and will cover a range of risks, including human rights, environmental, and governance risks.
Supply chain transparency is crucial for companies that aim to establish trust, reduce risks, and make informed decisions. Audits play a crucial role in promoting transparency by verifying suppliers’ compliance with sustainability, ethical, and legal standards. However, audits also pose some challenges, such as the need for expertise, access to data, and ongoing monitoring.
The German Supply Chain Act and upcoming EU legislation are significant steps towards promoting transparency and ethical business practices, but companies need to be prepared to comply with the requirements and ensure ongoing monitoring and reporting. By investing in transparency and audits, companies can build their reputation, reduce risks, and contribute to a sustainable and resilient supply chain ecosystem.