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Friday, August 22, 2014

Conflict Minerals Compliance Could Rejuvenate Supply Chains

In an article last week, I discussed a PricewaterhouseCoopers (PwC) report about current efforts by publicly traded U.S. companies to get ready to comply with a congressional rule and a Securities Exchange Commission (SEC) mandate on reporting their sourcing and use of the four “conflict minerals” — tantalum, tin, tungsten, and gold — in products. According to the PwC, many companies are moving slowly.

Conflict minerals are mined in the Democratic Republic of Congo and neighboring countries plagued by wars and human rights violations. The sales of conflict minerals help fund groups behind these actions, hence the federal efforts to discourage, if not outright ban, their use in products sold by U.S. companies.

Credit: smokedsalmon at FreeDigitalPhotos.net

Credit: smokedsalmon at FreeDigitalPhotos.net

The PwC report, Conflict Minerals: How Companies Are Preparing, states that 16 percent of businesses surveyed have yet to begin collecting compliance data, while 32 percent are determining if compliance applies to them. The deadline for compliance is May 31, 2014. The rule could affect as many as 6,000 U.S. companies and 275,000 suppliers.

This is a major issue for procurement officers. It is also an opportunity to re-evaluate supply chains with an eye toward consolidation and greater efficiency and economy. To get more information on these issues, I interviewed Greg Szczesny, managing director of PwC’s risk assurance practice.

Szczesny says companies have time to conduct conflict mineral audits and inform the SEC that they are in compliance with the congressional rule, which is part of the Dodd-Frank Act. The SEC has no known automatic consequences for failure to comply — at least not yet. Possible penalties could include barring non-compliant companies from the direct receipt of capital, which might be levied on a case-by-case basis.

“No company is not participating [in this review],” he adds. “Every company understands its obligations, and none wants to chance the unknown” when it comes to non-compliance.

Szczesny says even companies that haven’t started to review their sourcing of these minerals understand the potential impact on their operations as a result of delays. Companies are putting in place steering committees and starting relevant programs to meet compliance requirements.

Most affected companies are diversified industrial firms with long, global supply chains. Szczesny estimates it takes two to three months for a large company to develop a conflict minerals program. After that the time involved depends on the length of a supply chain and how many tiers it has.

Although companies tend to see the “negative aspect” of this compliance procedure — cost, time, manpower, etc — Szczesny says it is also a “hidden gem” in that it can optimize supply chains.

For example, in auditing suppliers a company can see if it has the right number in place for what it receives. “A company may have multiple suppliers for a low-risk commodity,” he remarks. Dropping extra suppliers and buying the product in bulk at a discount could be more practical and economical.

The compliance mandate may also redefine supply chain risks. Szczesny says that if minerals come from non-conflict areas, it is an opportunity to make certain the supply chain is secure. If the minerals are not conflict free, then a secure, compliant source can be found.

The audit would also be an opportunity to install new enterprise resource planning systems and other technologies to facilitate supply, logistics, inventories, and cost management.

Importantly, Szczesny says compliance programs will accelerate supply chain enhancements for many companies, which will take advantage of the reviews and available funding available to improve procurement. Management otherwise would regard many of these initiatives as second- and third-tier needs and would not allocate the money for supply chain optimization.

The compliance effort consequently could yield positive results that go beyond certifying the origins of the four minerals. It could revitalize supply chains, improve logistics, and help generate revenue.

 

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