The past decade has seen an increase, globally, in the scrutinization of corporate supply chains, specifically those involving material sourcing and labour practices. The passing of the German Supply Chain Act in June 2021 is one milestone step in response to public outcry for companies to better monitor and remediate human rights and environmental risks in their supply chains. At a practical level, however, providing such transparency, maintaining efficiency and operationalising new regulatory requirements will be challenging for many organisations. As new supply chain reporting practices and obligations scale up, blockchain technology offers a promising solution to facilitate and automate transparency, security and enhanced communication with regulatory bodies and partners.
In this blog, you will learn more about the German Supply Chain Act and how blockchain works for the supply chain.
How will companies be required to comply with the new law?
The German Supply Chain Act, also known as the Due Diligence Act, is designed to create transparency along the supply chain. The aim is to prevent human rights abuses and violations against the environment. The law takes effect on January 1, 2023. If due diligence measures are not implemented in time, companies could face legal and financial consequences as well as negative publicity.
Companies act in compliance with the law by:
- Documenting the suppliers involved in their supply chain and selecting them based on sustainability criteria.
- Establishing a complaints system that is accessible without hurdles.
- Issuing a human rights statement from senior management with details of risks, the risk management approach and human rights-related expectations.
- Assessing and documenting changes to the supply chain using risk analysis.
- Taking preventive and responsive measures to meet due diligence obligations under the Act.
The Act will initially apply to companies with more than 3,000 employees, and in 2024, the threshold will drop to 1,000 employees. According to the Explanatory Memorandum from the German Federal Ministry, approximately 2,800 companies will be ultimately affected in Germany.
How can blockchain technology ensure transparency around the sustainability and security of their supply chain?
Complex supply chain ecosystems rely on data at every step of the process. From sourcing materials to delivery at the end client, streamlining the process includes multiple tech stacks combined with, in some cases, manual data entry. Blockchain technology has the capability to help streamline these complex multi-tiered processes.
On a blockchain, data blocks are chained together in encrypted form using time stamps and hash values. The data blocks are continually updated with recorded transactions stored on a decentralized network of computers (nodes) that are all working within the network. A copy of the data exists on every node in the network, ensuring integrity of the recorded transactions through the inability to change the data (immutability). Each computer is connected to every other participant in the network. This concept is called peer-to-peer or P2P.
Cryptocurrency, the most well-known application of blockchain technology, is the initial way blockchain technology gained visibility. One of many forms of digital assets, cryptocurrency gained substantial popularity among early adopters of the technology, but its future remains uncertain. However, another application of blockchain technology emerged through smart contracts. Utilizing code to execute transactions automatically against digitally embedded terms in the “contract” enables transactions to execute automatically once conditions are met. Once a contract condition is fulfilled, the next step takes place immediately which streamlines routine processes and tasks, freeing personnel for more substantial contributions. Many business transactions and administrative matters in the corporate and private sectors could be streamlined using smart contracts.
Utilizing smart contracts, in conjunction with other layers in the blockchain ecosystem, can build foundational layers of support for streamlining the supply chain.
Blockchain for track and trace
Blockchain technology offers several opportunities to make the supply chain more transparent and secure, making it easier to implement and comply with supply chain laws.
One well-known example is in logistics and materials sourcing provenance. Track and trace refer broadly to the ability to digitally follow a product end-to-end through the supply chain. The benefits to the customer and the company are realized through transparency, which helps satisfy the need for proving sustainability and ethical labour practices, while also complying with the Supply Chain Act.
The blockchain also helps automate processes such as goods receipt and orders, and it can also communicate a products’ storage information to supply chain stakeholders. For example, in a blockchain-enabled supply chain, customer can scan a QR code located on a product. That will call up relevant information about the product’s origin, journey to the shelf and the practices and steps involved in producing it, depending on the extent of information the company has stored on the blockchain.
Supplier identity management via blockchain
Another example of blockchain technology being used to comply with supply chain law is in identity management. To comply with the law, organisations must verify and document the parties involved in their supply chains.
Onboarding new suppliers and tracking their lifecycle can all be managed on a blockchain — trusted suppliers are documented in the network, and suppliers only need to submit their information once, which enables faster onboarding.
Sharing via P2P platforms in the supply chain
Also critical to the supply chain is that blockchain technology enables communication with each other via a peer-to-peer network. Participants can view certificates, licensing rights and contracts, as well as exchange information, digital goods and services with each other instantly.
Benefits include transparency and security to comply with supply chain laws. Other advantages would be the exchange of spare parts, direct purchasing from suppliers and automatic calculation of free capacities for trucks or ships. An exchange between participants for foreign trade financing on a blockchain financial platform is also conceivable. Blockchain can be used to automate processes and simplify communication within the supply chain.
Blockchain technology holds enormous potential for successful application in the corporate world, economy, society and trade. In a supply chain use case, the distributed, secure database provided by a blockchain enables direct and partially automated communication between participants, helping to store important information, transactions and product movement immutably and transparently. Such functions may help organisations more efficiently and successfully comply with the Supply Chain Act over the long term.
The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.