For several years now I’ve been arguing that the scope of end-to-end supply chain visibility must go beyond the tracking of orders, shipments, inventory, and assets in motion. It must also include visibility to greenhouse-gas emissions and forced labor across the supply chain.
Why? Because it’s becoming mandatory due to a growing number of laws and regulations.
Last January, for example, the German Act on Corporate Due Diligence Obligations in Supply Chains went into effect. It requires companies based in Germany with 3,000 employees or more to screen suppliers for environmental violations and human-rights abuses (see “Screening Suppliers For Human Rights & Environmental Abuses”).
Here in the United States, the legislature in California passed Senate Bill 253 in September 2023, which was signed by Governor Newsom in October, that will require companies with over $1 billion in revenues that do business in the state to disclose all greenhouse-gas emissions associated with their operations, including Scope 3 emissions. Disclosure of Scope 1 and Scope 2 emissions will begin in 2026, and Scope 3 emissions will begin in 2027.
The U.S. also passed the Uyghur Forced Labor Prevention Act (effective since June 21, 2022) that prohibits the importation of “goods mined, produced, or manufactured wholly or in part in Xinjiang [China] or by an entity on the UFLPA Entity List” (see “Proving The Absence Of Forced Labor In Supply Chains”).
Another example is Canada’s “Fighting Against Forced Labour and Child Labour in Supply Chains Act,” which took effect on January 1, 2024. The law requires companies to file a report, on or before May 31 of each year, to the Minister of Public Safety and Emergency Preparedness detailing “the steps the entity has taken during its previous financial year to prevent and reduce the risk that forced labour or child labour is used at any step of the production of goods in Canada or elsewhere by the entity or of goods imported into Canada by the entity.”
The latest example comes from Europe, but it impacts companies in other regions too. On December 14, 2023, The Council and the European Parliament announced that they had reached “a provisional deal on the corporate sustainability due diligence directive (CSDDD), which aims to enhance the protection of the environment and human rights in the EU and globally. The due diligence directive will set obligations for large companies regarding actual and potential adverse impacts on human rights and the environment, with respect to their own operations, those of their subsidiaries, and those carried out by their business partners.”
Here are some additional details from the press release:
The due diligence directive lays down rules on obligations for large companies regarding actual and potential adverse impacts on the environment and human rights for their business chain of activities which covers the upstream business partners of the company and partially the downstream activities, such as distribution or recycling.
The agreement fixes the scope of the directive on large companies that have more than 500 employees and a net worldwide turnover over €150 million. For non-EU companies it will apply if they have over €150 million net turnover generated in the EU, three years from the entry into force of the directive. The Commission will have to publish a list of non-EU companies that fall under the scope of the directive.
A big challenge in complying with these laws is that most companies have poor visibility beyond their Tier 1 suppliers (see “Supply Chain Mapping (Insights from Indago”). This not only exposes companies to greater supply chain risks, but also hinders their ability to measure and manage their Scope 3 greenhouse gas emissions and contributes to ongoing issues related to forced labor in supply chains.
If you haven’t started preparing yet, where do you begin? Start by mapping your supply chain.
What is Supply Chain Mapping? It’s knowing and representing graphically where the manufacturing/production facilities of your suppliers (and their suppliers) are physically located, and which parts or materials are manufactured/produced at each location.
Supply Chain Mapping is a key component of supply chain risk management, and as the authors of Hidden Suppliers Can Make or Break Your Operations (Harvard Business Review, May 2015) state, “With the size and complexity of supply chains soaring, a daunting challenge is confronting companies: identifying the critical nodes hidden within the vast expanse of their supply networks.”
Supply chain mapping takes time, money, and resources to do it right. Unfortunately, many companies lack all three (as well as leadership support), which is why they haven’t done it yet.
But as I wrote last May in “Generative AI + Business Networks: A Smarter Way To Map Your Supply Chain,” what if you fed a generative AI engine with data from purchase orders, advance ship notices, invoices, bills of lading, status updates, proof of deliveries, and other transactions flowing between trading partners on a business network? Could it generate a graphical supply chain map for you? I believe so — maybe not today, but sometime in the not too distant future.
In the meantime, stay informed of what’s happening with greenhouse gas emissions and forced labor regulations, and if you’ve been standing on the sidelines until now, start formulating a plan on how to comply because sooner or later you will have to. This includes small and midsize companies too. Although these regulations generally target large companies, your large trading partners will expect you to provide them with the data and information they need to comply.
For additional insights on this topic, please read: