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Wednesday, September 3, 2014

Conflict Minerals Reporting Must Be Full, Accurate, and Ongoing

In yesterday’s Procurement Journal article, public U.S. companies that use conflict minerals — tantalum, tin, tungsten, and gold, or 3TG — sourced from or distributed by 10 countries in central Africa, namely the Democratic Republic of Congo, could face a supply crisis and other problems if they don’t develop credible reporting programs for the Securities and Exchange Commission (SEC) as mandated by law.

Reporting the use of conflict minerals to the SEC began this year. While the process is relatively simple in terms of how companies extract this data from their supply chains, it will become more demanding. Eventually, the SEC will expect all public companies and foreign firms selling stocks or bonds in the U.S. to maintain detailed information about where their 3TGs originate.

Credit: Ford Motor Co.

In an interview with Procurement Journal, Greg Anderson, president, and Michael Cross, senior manager of solutions marketing, Directworks, which develops software for materials sourcing and other supply chain operations, discuss what companies will need to do to meet SEC reporting requirements.

Anderson says the legal departments in most companies are now deciding whether conflict minerals are in use based on simple inquiries to suppliers. Supply chains can, however, be quite long, where conflict minerals are involved, and local sources don’t always keep meticulous records — if at all. Therefore, notes Cross, the SEC is giving companies a pass this year and next, by accepting “don’t know” as an answer to the question of conflict minerals’ use. (The technical answer is “DRC conflict undeterminable.”)

“Undeterminable” will, in fact, be a reporting option for large companies until 2016, although, as PTC Inc., which supplies technologies for product development and services, reports, “it may affect a company’s preferred customer status in some cases and draw the unwanted attention of NGOs and consumer groups.”

In future data-reporting years, detailed audits and due diligence will be required. According to Ernst & Young, the SEC estimates that 75 percent of registrants subject to the law will need to develop conflict minerals reports based on third-party audits.

The only exceptions will be companies with $75 million or less of outstanding shares owned by the public. They are exempt from the first four reporting cycles through 2016. The reporting cycles, which started this year, run from Jan. 1 through Dec. 31, regardless of a company’s fiscal year.

Anderson and Cross say that now is the time when chief procurement officers must put programs in place to provide the SEC with the data it wants. Among the plans that are needed, Cross notes, is an effective way to contact all suppliers, get truthful answers from each, and rapidly replacing any supplier that does not respond.

“CPOs need to lead programs to replace suppliers,” he says. “They have to figure out how best to do it, and how soon it can be done.”

If a company is using recycled 3TGs in its products, chances are it will not have to look too deeply into its supply chain, Anderson remarks. “If it is using virgin materials, it will be necessary to go deep — a CPO will need to determine which country the minerals come from, the location where they are mined (some mines in sanctioned countries run lawful operations), and how they are processed.”

To achieve and maintain accurate reporting, CPOs will need sophisticated software. “Spreadsheets are no good for this,” says Cross, “nor is simple yes-/no-based software.”

Chief procurement executives will also need proactive programs, i.e., those that collect data from suppliers as well as third-party audits, upgrade them continually, and integrate them company-wide to make results available across departments and to executive management.

Such programs will be like the compliance software that has become mainstream for ROHS, or Restriction of Hazardous Substances. “No one gives ROHS a second thought,” says Cross. He expects this is how conflict minerals software will evolve.

Anderson notes that many companies are offering software for conflict minerals reporting, including Directworks. “We have software available but are not promoting it as a conflict minerals solution per se,” he says — at least not yet. Potential customers, according to him, are taking a wait-and-see approach.

“As the issue matures and the reporting requirements become more defined, we will provide a product,” he notes. “We have a reporting construct, and it may be industry specific.”


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