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Sustainability in the Supply Chain
In line with the Paris Agreement adopted in 2015 and the 1.5°C target contained within it, business activities throughout the entire automotive industry are undergoing a process of major transformation. Expectations around achieving climate neutrality are augmented by wide-ranging sustainability laws. The German Act on Corporate Due Diligence Obligations in Supply Chains (LkSG), the EU Regulation on Deforestation-free Products (EUDR), and the EU’s Carbon Border Adjustment Mechanism (CBAM) bring the entire upstream and downstream value chain into particularly sharp focus. But why? Because, for many companies, most of the effects on the environment, society, and governance occur in the upstream and downstream supply chain, in what is referred to as Scope 3. Breaches of official requirements incur severe sanctions and carbon inventories, which now increasingly include Scope 3 emissions, have a growing impact on different sustainability ratings and those, in turn, on financing and stakeholder decisions. More than ever before, sustainable products will therefore be the route to sustainable business success in future. These, in turn, are changing the requirements on supply chains. You can find out about how ElringKlinger is tackling these issues and the challenges the Group faces in the interview with Bernd Weckenmann, who is responsible for supply management in the Group.
» It is imperative to keep sight of the robustness of supply chains, as external factors have an adverse effect on security of supply. «
Mr. Weckenmann, to what extent are procurement activities at ElringKlinger affected by current developments around sustainability?
ElringKlinger is a global player with more than 1,000 suppliers for a diverse range of commodity groups in production alone. This shows just how multifaceted the structure of the upstream supply chain is at ElringKlinger. The complexity will tend to increase as the product portfolio changes. At the same time, it is imperative to keep sight of the robustness of supply chains, as external factors such as strikes, closed ports, shipping accidents, geopolitical conflict, or trade wars and economic sanctions have an adverse effect on security of supply, with the consequences that entails. In addition, it is increasingly the case that extensive European statutory requirements are prompting a look at the complexity of procurement transactions from other countries in Europe.
How is ElringKlinger responding to this development?
Increasingly, these circumstances are causing us to regionalize procurement activities. By doing so, we also shorten journeys. The introduction, and in particular the implementation, of the sustainability requirements is currently creating a substantial amount of work for us and the entire supply chain, as more and more additional documentation and data collections are required each year.
What do you see as the biggest challenges in implementing the numerous requirements?
With regard to the statutory regulations, acquiring sustainability-related data from our suppliers plays a significant role. This currently costs us a lot of time, as the entire value chain is undergoing a period of development as regards data capture on sustainability topics. Validating the data that are passed on and tracking weaknesses are crucial yet time-consuming elements of the information acquisition process.
Do you see any differences among suppliers in this respect?
Particularly for supply arrangements into other countries outside Europe, tracing the supply chain back to a commodity’s point of origin is becoming especially time-consuming, as the first party to market affected products within the EU is the one responsible for due diligence obligations. This, in turn, may cause companies to consider sourcing more within EU borders again. It is crucial to carry out an in-depth supplier and product risk analysis here. For implementation purposes, ElringKlinger has already put several new processes and IT systems into operation, as the risk classification criteria are tremendously complex.
What other developments will keep companies busy in future?
Calculating CO2 at product level. Because, in future, vehicle owners will not just be interested in how much carbon dioxide comes out of the exhaust; instead, it will be the product carbon footprint (PCF) that counts – that is, the total greenhouse gas emissions generated during a vehicle’s overall lifecycle. As a result, our customers, the automotive manufacturers, are increasingly integrating sustainability criteria into decisions on order placement. The upshot for us is that we increasingly need CO2 data at component level, which we record in databases and use for PCF calculations. We will also leverage this data transparency to work out the potential for reductions.
Will that not impact on all your procurement processes?
Yes, it will be a challenging task for our purchasing function to assess the sustainability criteria and ensure the comparability of different items so that, ultimately, we can best map official and customer requirements in the supply chain. In particular, the requirements for data transparency mandated by the new laws present major challenges for us and especially for our market participants in the upstream supply chain. At the same time, it is our job as a business to remain competitive and generate profitable growth.
How is ElringKlinger tackling these numerous challenges?
We were quick to start grappling with the new requirements. This has already resulted in a wide variety of enhancements. In 2023, for example, we published our first code of conduct for suppliers, which is now a binding part of the contract for our suppliers. This includes topics related to social and environmental sustainability, derived from the requirements of the German Supply Chain Due Diligence Act.
To assess supplier risk in relation to sustainability topics, we have introduced a software-supported risk management system. Suppliers receive electronic requests and reminders, and have to complete a questionnaire, which, in turn, results in a risk classification. Measures can be assigned to non-conformities – with the aim of reducing the risk to a negligible level.
So, what role does the code play in day-to-day dealings with suppliers?
Well, the content of the Supplier Code of Conduct also affects the range of topics in the questionnaire for supplier audits, as ElringKlinger has extended the standardized scope of questions established by the German Association of the Automotive Industry (VDA) to include a section for sustainability topics. This section contains a separate evaluation, gives us a comparable picture of the level of sustainability maintained by our suppliers, and raises supplier awareness of sustainability topics. And in parallel with the VDA system, measures are assigned to weaknesses, which results in continuous improvement. In addition, the risk classification, the supplier audit evaluation, and the product carbon footprints can inform decisions on order placement along with the price and quality information. Although this makes the overall picture during procurement much more complex, it offers us lasting protection against having to make changes in the future.
What is your overall conclusion?
Ultimately, the requirements entail a substantial amount of additional work for companies of our size and our suppliers. But all the measures are likely to take us to a new level, with significantly more data transparency and, subsequently, more insight into upstream supply chains. And that is both important and fitting so that shortcomings are swiftly detected or prevented altogether. After all, sustainability is a joint endeavor in which we must all fulfil our responsibility to future generations.
Mr. Weckenmann, thank you very much for the interview!
