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Saturday, August 2, 2014

Crisis of Compliance Looms for CPOs Over Conflict Minerals

Conflict_minerals_961wThe potential for supply disruption is a constant in operational planning. Most disruptions stem from crises, but new laws and regulations are also a factor, as with the looming deadline of conflict minerals reporting, which could soon affect unprepared companies and manufacturers in North America and overseas.

Companies have yet to be affected by a recent U.S. law enacted to provide transparency in the use of conflict minerals — tantalum, tin, tungsten, and gold (referred to as 3TG). This will change, say Greg Anderson, president, and Michael Cross, senior manager of solutions marketing, Directworks, which develops software for materials sourcing and other supply chain operations.

The initial reporting periods are already underway, and while the federal government is giving companies some leeway when dealing with suppliers that are uncertain of their status or uncooperative, it won’t last much longer. Companies will soon be required to demonstrate compliance with the law and implement credible verification processes.

The cost of noncompliance could be significant, especially if the government moves to ban conflict minerals altogether. The paradox is that, so far, companies must only report if their products or manufacturing processes use conflict minerals. They are not required to cease using them, though for a number of reasons —not least of which are further federal or state actions, loss of contracts, activist boycotts, and negative effects on brand image — that will probably be the next step.

“This is a clear CPO (chief procurement officer) issue,” says Anderson. It is also a big concern for executive management if conflict minerals affect product sales, corporate image, and valuation.

The law could affect 15 to 20 percent of the global tantalum supply, a staple of electronics manufacturing. “Imagine if companies lost access to 15 to 20 percent of a key material, how it would impact pricing and supply,” remarks Cross.

As presented before on Procurement Journal, the conflict minerals moniker comes from the fact that proceeds from their sale are used to fund armed groups that commit human rights crimes and other atrocities in regional African conflicts. U.S. companies that use these materials, which are primarily extracted from the Democratic Republic of Congo (DRC) and distributed through nine neighboring countries, under the 2010 Dodd-Frank financial reform act (Section 1502), must disclose their 3TG sourcing information to the Securities and Exchange Commission (SEC) and on their websites (hence the potential for activist and public pressure).

The law was upheld in July by a district court in Washington, D.C., and analysts believe it will affect at least one-half of SEC issuers (i.e., public companies, including foreign firms that sell stocks or bonds in the U.S.) that manufacture, or contract to manufacture, products using 3TG, along with their suppliers.

This amounts to at least 6,000 companies, according to PricewaterhouseCoopers. PTC Inc., which supplies technologies for product development and services, puts the number at 5,500-plus U.S. companies, 430 foreign-based companies, and more than 280,000 suppliers. The SEC estimates initial compliance costs to be $3 billion to $4 billion, with annual costs thereafter of $207 million to $609 million.

Affected industries include electronics, communications, aerospace, automotive, and industrial products. Minerals that were outside supply chains as of Jan. 31, 2013, are exempt, notes Ernst & Young, as are those that have been smelted or, in the case of gold, fully refined. Minerals mined beyond the sanctioned areas are, or course, exempt, along with recycled materials, unless there is a clear connection to the sanctioned countries.

The reporting process begins with a company determining whether 3TGs are necessary to its manufactured products or production processes. If not, further reporting is unnecessary. If 3TGs are in use, companies are required to conduct third-party audits to determine whether the materials originated in the DRC or neighboring countries.

And that is where the challenge begins.

The next Procurement Journal article will look at key requirements of data collection and some of the recommendations that Directworks’ Anderson and Cross make to develop credible reporting procedures.

 

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