The German Supply Chain Act: What procurement needs to know
Here are some tips on how procurement leaders can maintain SCDDA compliance.
The German Supply Chain Due Diligence Act (SCDDA)—or Lieferkettensorgfaltspflichtengesetz (LkSG)—is a landmark regulation designed to enforce sustainability and ethical business practices across supply chains.
But the impact of SCDDA extends far beyond Germany. The law is part of a growing global trend toward stricter supply chain regulations, emphasizing corporate responsibility in human rights and environmental protection.
This article breaks down what SCDDA covers, who it affects, and how procurement can ensure compliance.
What is The German Supply Chain Act (SCDDA)?
The German Supply Chain Act (SCDDA) focuses on protecting human rights and ensuring environmental sustainability within company supply chains.
It requires companies to conduct due diligence to prevent violations of human rights and environmental standards.
According to KPMG UK:
“It isn’t enough to ensure an organization’s own compliance with legal requirements. Companies must also make a reasonable effort to ensure that subsidiaries and relevant supply chain partners are compliant.”
Who is affected by SCDDA?
Initially, the SCDDA applied only to companies with a registered office or subsidiary in Germany and at least 3,000 employees.
As of 2024, the threshold has been lowered to 1,000 employees—including temporary employees assigned for over six months and those posted abroad.
SDDA applies to:
- Companies headquartered or with a branch in Germany, regardless of legal form or sector
- German subsidiaries of U.S. or other foreign parent companies (though parent companies themselves are not directly subject)
- Non-EU suppliers indirectly, if they work with businesses covered under SCDDA
An in-scope German subsidiary must apply the act to all its subsidiaries. However, any upstream ownership (e.g. a US parent) is not directly subject to the SCDDA.
Key Requirements of SCDDA
The German Supply Chain Act mandates that companies produce publicly available due diligence reports. It also requires companies to implement due diligence measures to prevent or mitigate human rights and environmental risks, as well as end violations of related obligations.
The scope is wide. A company’s supply chain, as defined by SCDDA, includes all steps in Germany and abroad necessary to produce products or provide services, from raw material extraction to end customer delivery.
The law defines "supply chain" broadly, covering all activities from raw material sourcing to end-customer delivery—domestically and abroad.
Impact for procurement teams
A transparent supply chain is essential for SCDDA, and procurement teams are at the heart of ensuring these requirements through thoroughly documented collaboration with direct and indirect suppliers.
Procurement teams are responsible for several key actions to comply with SCDDA:
- Implementing and maintaining a risk management system
- Ensuring policy statements defining human rights and environmental diligence expectations are followed
- Conducting regular risk analyses of the supply chain
- Taking remedial actions and establishing preventative measures
- Ensuring a complaints procedure (ie. a whistleblowing process) is in place to report human rights and environmental violations, including a secure portal for employees, direct suppliers, and indirect suppliers to report issues.
5 key steps procurement teams should take to comply with SCDDA
There are effectively five core pillars finance and procurement teams should focus on in order to maintain compliance with SCDDA. Here are the key areas of focus, and tactical actions you can take.
1. Risk assessment
- Undertake a thorough analysis of your supply chain to identify potential human rights and environmental risks.
- Utilize vendor management software to analyze third-party risks, including upfront risk assessments, detailed supplier audits, and automated risk assessments.
- Implement software that performs continuous screening and monitoring to identify new risks.
2. Supplier collaboration
- Engage actively with both direct and indirect suppliers to ensure compliance.
- Use software that facilitates collaboration across multiple internal departments and functions to organize suppliers and contractors.
- Implement systems that track supplier responses to company policies, and follow up with non-compliant suppliers.
3. Documentation
- Maintain comprehensive records of communications with supply chain partners and their attestations to company policies.
- Implement systems that automatically follow up with those that are not compliant and send an alert to managers when an escalation is required.
4. Corrective action
- When issues are identified, implement systems that automatically send the supplier a corrective action plan.
- Use platforms to track the schedule and milestones for corrective and preventative actions.
5. Reporting
- Ensure processes generate audit-ready ESG reports, which can be shared with business stakeholders.
- Establish a system to track which communications have been sent, which suppliers have responded, and which have not.
Penalties for non-compliance of SCCDA
Companies that fail to meet their due diligence requirements for the German Supply Chain Act can face fines of up to €8 million, depending on the type and severity of the violation.
Violators also face reputational damage, and could be excluded from being awarded public contracts for up to three years.
Utilize Zip’s capabilities for SCDDA compliance
As supply chain regulations continue to evolve, procurement teams must be proactive in adopting technology for transparency and compliance.
With Zip’s procurement orchestration platform, teams can:
- Automate supplier risk management
- Track compliance across all supplier tiers
- Generate audit-ready reports effortlessly
Germany’s push for sustainable business practices is just the beginning. By future-proofing procurement operations, companies can stay ahead of regulatory changes—and lead the way in responsible sourcing.
Final thoughts
While the German Supply Chain Act may appear as a mere regulatory hurdle, it’s also an opportunity for procurement to drive greater transparency, accountability, and sustainability.
By embracing technology and proactive compliance strategies, procurement teams can turn regulation into a competitive advantage in the evolving global supply chain landscape.
For more information about how Zip can help drive compliance across the EMEA region and beyond, schedule a demo with one of our regional experts today.
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