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How the New SEC Ruling on Conflict Minerals will Impact the Supply Chain

Aug. 24, 2012
Mickey North Rizza, vice president of strategic services at BravoSolution

After a nearly two-year wait, the SEC finally confirmed the speculation this week: manufacturers are now required to disclose the use and sources of tin, gold, tantalum and tungsten -- otherwise known as conflict minerals.

These are crucial materials for the technology industry, powering our favorite gadgets such as smartphones, laptops and tablets. However, these mines are found in hotbeds for violence and corruption in the Democratic Republic of Congo.

While supply chain and compliance executives are still digesting the full ruling -- a 500+ page document -- manufacturers are busy trying to figure out what information they need from suppliers and how to revamp the sourcing process to comply with this reporting. It’s a tall task that encompasses risk management and requires much deeper visibility into the supply chain that most companies lack today. This is even more challenging for companies with vast product lines and multiple, multi-layered supply chains.

Three Impacts on Sourcing Strategy

When a global supply chain consists of hundreds of tier-1 suppliers, the new SEC regulations that require companies to understand where these raw materials are sourced from -- down to the country and mine of origin -- seem nearly impossible to tackle if you don’t already have this level of reporting from suppliers.

However, the cost of inaction tremendously outweighs the steps and time companies need to invest to comply. Here are three impacts that go beyond supply chain operations, affecting the top and bottom lines:

  1. Worst case-scenario: production halts. The supplier information you’ll need for this reporting could paint a not-so-pretty picture. What if your production depends on a high-volume supplier which source from these controversial regions? You’ll need to scramble to find new sources of supply, at the last minute, to meet upcoming spikes in demand. Alternative sources are available in other regions of the globe, including a few in the US, but securing supply with so much competition from other businesses may be tough or even at a higher price.
  2. Customers turn to your competitors. The SEC ruling is the first major spotlight shone on conflict minerals, and it’s likely that consumers will catch on quickly, much like other CSR initiatives. Companies need to act quickly to avoid a backlash which could send buyers to competitors that don’t support the conflict minerals. Manufacturers and suppliers will feel the trickle-down effect.
  3. What most companies face: a drain of supply chain resources. At best, let’s call this a reallocation of resources. Visibility beyond prime suppliers to the tier-2 and tier-3 levels of the supply chain is the bare minimum of this ruling. Companies must undertake tactical outreach to suppliers to compile this information. In addition, businesses will need to reevaluate current technology systems to ensure that they can aggregate, analyze and report the information easily pull the reports.

Taking Steps to Address the Ruling

Creating visibility is the first step companies need to take to address this ruling, starting with data collection to see which products and suppliers are connected to conflict zones. One round of this research isn’t enough to sustain the SEC reporting. Instead, companies will need to establish a process to consistently refresh and monitor the data; technology will play a very critical role. Here are the core questions to keep in mind when first beginning the data collection process with suppliers:

  • Do you provide our company with any products manufactured with tin, tantalum, tungsten, gold or any other conflict minerals?
  • If you provide these minerals, what geographic regions do they come from?
  • Can you provide traceability to the exact mine and region these minerals are extracted?
  • Are your minerals at risk of supporting the DRC conflict? How?
  • How quickly can you verify and certify the origin of the minerals?

All information collected should be stored in one, complete technology solution that allows for flexible analytics and reporting, based on many SEC scenarios. The technology provides an ongoing collection, analysis and reporting tool. Many companies are already using their sourcing technology -- like supplier management and spend analysis tools -- to understand which suppliers are sourcing from where, and what percentage of the total spend falls into the conflict zone.

The SEC ruling also serves as a catalyst for companies to take matters into their own hands, by building specific clauses into contracts that prevent suppliers from using raw materials sourced from the Congo. This streamlines the sourcing impact by starting with the bidding process, eliminating non-compliant sources immediately.

This new regulation on conflict minerals is just another government mandate that affects the supply chain. Companies should start to anticipate similar limitations and ensure that their business processes and supporting technology are flexible enough to support new and ever-changing reporting standards.

Mickey North Rizza, former Gartner analyst, is now VP of Strategic Services at BravoSolution, the supply management company where she is helping companies make the shift from tactical to strategic procurement and sourcing.

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