1 July 2014 | Adrian Chamberlain
It’s an uncomfortable truth that when we buy some types of jewellery, a smart phone or a replacement part for a computer, we might inadvertently be supporting armed conflicts and child labour thousands of miles away from our homes.
In response, the use of ‘conflict minerals’ – elements sourced in areas that fund terrorism, war or unethical labour practices – is being tackled seriously by governments and businesses around the world.
The US government has led the way, mandating thousands of manufacturers who use tin, tungsten, tantalum and gold in their products – or even production - must reveal what steps they are taking to ensure minerals are conflict free.
UK business should be prepared for this to cascade down. Similar EU regulations are in the pipeline and increasingly, large firms will look to their suppliers to reveal where products come from and how they plan to help clean up their part of the supply chain.
But it’s not easy. Few companies understand what is required, yet alone how to achieve compliance. Based on work with supply chains across the world, here are five top tips:
1. Explain the issue to suppliers, to encourage support. It is estimated that in the last 15 years, five million people have died in wars funded by conflict minerals production in the Democratic Republic of Congo (DRC).
That’s a record no company – however small - should want to be associated with. Under legislation, such as the US Dodd-Frank Act, manufacturers can now be fined between $75,000 and $725,000 (£44,000 - £423,000) if they do not put in place systems to eradicate conflict minerals. In addition the reputational damage for both buyer and supplier would be significant.
Manufacturers will be keen to proclaim their products are ‘conflict-free’, but they can only do so when they are confident about the involvement or credentials of all companies in the supply chain. By involving suppliers early with communications and training, you can engage them in the process so that they support you. Ultimately, they will then lead their own sub-suppliers in the same way. They can become your best allies.
2. Understand the challenges. The Securities and Exchange Commission (SEC) estimates there are some 6,000 manufacturers affected by the legislation. Most are in hi-tech industries but almost all sectors are affected since the rules apply to businesses that use metals in their processes as well as end products. This means sectors including oil and gas, mining and cement, automotive, aerospace, pharmaceuticals and even food may also be required to take action.
With increasingly complex and globalised supply chains, determining the primary source of these precious metals is extremely difficult. A complex network of people is involved in production – from labourers in the mine to exporters, traders, intermediaries and smelters – who extract the mineral from larger pieces of matter. By the end of this chain, it can be impossible to know how the material was sourced.
3. Know who your suppliers are and carry out checks. So far, large businesses are focusing on the first-level, or direct suppliers, with limited checks on data. At this stage, the SEC appears to be sympathetic to the difficulties companies have in tracking and monitoring these minerals. But it is surely only a matter of time before the SEC requires checks on information provided right the way through the supply chain with checks on all the data provided. This should be incorporated into the existing ‘pre-qualification’ checks on suppliers – deemed as essential as health and safety and company turnover.
That sounds easy. But in our experience, most large businesses have no idea who their suppliers are beyond the first tier. How can companies make checks if they don’t know who their suppliers even are? Visibility of the supply chain, down through the tiers, is vital – knowing who supplies who is key to mitigating risk. Mapping the supply chain will be a ‘must have’ tool for buying organisations seeking to ensure compliance.
4. Build a supply chain map. The most effective way to gain visibility of all suppliers is to build a ‘map’ of the supply chain. The first step is to implement a proper system to manage information about suppliers. With an accurate database, buyers can request information from everyone involved in their supply chain.
This works best when ‘cascading invitations’ are sent down the supply chain. First the buyer invites its tier one suppliers to join the mapping process. In turn, those suppliers invite tier twos, and so on right down through the tiers. One key to success is automation – ensuring that the person in the middle can link what they sell to whom; and that details of what they buy link to the next person in the chain. But software on its own does not work, and you need to support the process with trained resources that can help suppliers down the chain to understand the whys and hows.
Once a map is in place, buying organisations can check and validate responses and implement improvement plans. All this will require time, effort and cost – which may be an issue for a great number of businesses.
5. Work collaboratively. This is a daunting task to carry out alone. Complying with laws is not a competitive advantage, so it makes sense for companies to set aside competition for this task. It is much easier to work collaboratively with other businesses so that the administrative burden and cost is split between the group. In this structure, much of the work – including checks on certificates and data - can be carried out by an independent third party.
Through outsourcing the task to a central co-ordinating resource, information is up-to-date, verified and aligned to common standards – so improving processes, sharing costs and reducing risk. Creating a conflict-free supply chain can be straightforward and far less onerous if a collaborative approach is taken.
☛ Adrian Chamberlain is chief executive of Achilles – a supply chain risk management company