Supply chain due diligence has evolved from a voluntary best practice to a fundamental business requirement, driven by regulatory pressures, stakeholder expectations, and the imperative to manage complex operational risks.
Supply chain due diligence is a systematic process in which companies research and investigate potential and existing suppliers to identify risks associated with those businesses.
This comprehensive evaluation extends beyond simple vendor assessment to encompass a company's entire sphere of influence through its supply network.
A company's supply chain extends the footprint, scope and sphere of influence of an organization, exposing it to factors that are outside the control of internal policies. The process typically examines risks ranging from legislative and governance issues to ethical and environmental concerns, including practices such as money laundering, child labor, human trafficking, corruption, bribery, and environmental damage.
Modern supply chain due diligence has evolved to include ESG compliance, with companies increasingly using this process to ascertain whether proposed suppliers align with their sustainability goals and requirements.
Core principles of supply chain management
Due diligence means investigation, auditing, or research. It's a systematic risk management practice that companies, investors, and other organizations use to identify harmful business risks.
In supply chain management, due diligence encompasses several key areas:
- financial stability assessment: this includes reviewing financial statements, assessing creditworthiness, and examining the supplier's track record in terms of paying bills on time;
- ethics and compliance evaluation: companies evaluate supplier policies on labor practices, environmental responsibility, and compliance with laws and regulations, including human rights policies toward fair wages, discrimination, child labor, forced labor, harassment, abuse, and safe working conditions;
- corporate governance analysis: this covers matters related to ownership structure, controls, transparency, and ESG governance;
- supply chain efficiency and sustainability: this involves analyzing the flow of goods and materials, identifying bottlenecks, and evaluating environmental impact including energy consumption, greenhouse gas emissions, water usage, and waste generation;
- risk and vulnerability identification: this includes assessing risks associated with the supplier's business location (climate or political risks) and business practices (fraud or corruption risks).
Why is supply chain due diligence important?
Regulatory compliance and legal requirements
The Corporate Sustainability Due Diligence Directive (CSDDD) entered into force on July 25, 2024, requiring EU member states to transpose the directive into national law by July 26, 2026. This legislation mandates companies to conduct due diligence on their supply chains for human rights and environmental impacts.
According to a German government report on business and human rights published in October 2021, 80% of mid-size and large companies in Germany were not conducting adequate supply chain due diligence, which inspired the German Supply Chain Due Diligence Act (LkSG).
In the United States, the Uyghur Forced Labor Prevention Act, enforced since 2022, prohibits goods from the Xinjiang Uyghur Autonomous Region from being imported due to forced labor concerns.
Business risk management
Recent data shows that 44% of organizations experienced supply chain disruptions due to third-party failures, while 34% faced disruptions from cyber attacks on suppliers.
Supply chain due diligence is important because it can:
- spotlight and reduce harmful supply chain practices
- ensure compliance with international and local human rights and environmental laws
- protect a company's brand and reputation
- help minimize the risk of supply chain disruptions or other negative financial impacts
- help identify opportunities for improving efficiency and sustainability
ESG and sustainability requirements
With increasing focus on ESG compliance, companies are under pressure from investors, regulators, and consumers to demonstrate responsible supply chain practices. Supply chain due diligence has become essential for meeting these expectations and avoiding reputational damage.
What comes next?
Supply chain due diligence isn't just a European regulatory trend, it's gaining momentum globally. Countries worldwide are implementing similar legislation, making comprehensive due diligence a business imperative rather than just a compliance requirement.
Since 2023, supply chain due diligence has become a key compliance, risk management, and sustainable sourcing priority for companies worldwide, particularly due to new laws and sustainability reporting requirements.
How van Berings can help
At van Berings, we understand that supply chain due diligence represents both a compliance imperative and a strategic opportunity. Our international legal expertise enables us to guide companies through the complex regulatory landscape while developing business-focused solutions that protect against risk and create competitive advantage.
Our multidisciplinary approach combines deep regulatory knowledge with practical implementation experience, ensuring that our clients not only meet their compliance obligations but also build sustainable supply chain operations that support long-term business success.
