Key success Factors for Processes and Reporting

Written by William Newman

As companies spent the recent year-end holidays closing their fiscal books and creating program budgets for new products and services into 2013, a small and seemingly obscure clause in one of the widest-reaching financial reform acts in modern history has added concern and challenge to product manufacturers across industry segments.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 contains a small but very important section addressing so-called “conflict minerals” – referred to as 3TGs (tin, tantalum, tungsten, and gold) – harvested from the Democratic Republic of Congo and surrounding countries. The people in these areas are experiencing war atrocities, human slavery, and other human rights violations cited by the United Nations.  As such, Section 1502 of the Dodd-Frank Act suggested that this issue requires an aggressive supply chain reporting mandate.  The U.S. Securities and Exchange Commission (SEC) made final rulings on this provision in late August 2012 ascribing any publicly traded company and their suppliers to “include a description of the measures it took to exercise due diligence on the conflict minerals’ source and chain of custody” and file a new SEC form SD beginning in 2014 for the 2013 calendar year.

[1] The initial reporting period for tracking compliance efforts begins in January, 2013.

Far-reaching Impacts

According to leading industry experts in the field, the effects of the conflict minerals provisions are extensive.  “It’s not just whether you are a public company, in which case you for sure must report and show due diligence through your supply chain. Also, private companies and companies that are part of the US company’s supply chains will be affected, as the requirements are cascaded down the value chain. It has been suggested by the SEC that the number of companies that may contain trace elements of conflict minerals could be in excess of 280,000,” notes Thomas Bley, senior project manager for software maker iPoint-systems and participant in a number of industry work groups.

One of the challenges that make conflict mineral compliance to Dodd-Frank so encompassing is the level of trace elements of 3TGs found in most electronics components, used in everything from computers to automobiles to household appliances.  It is difficult for one company on its own to trace the flow of materials in raw form back to the component suppliers, however Dodd-Frank requires even deeper due diligence to determine the actual location of the mineral smelter.  Some organizations have stated publicly that obtaining declarations of conflict minerals to a level of only 40-60% is sufficient.  “That’s a risky proposition,” suggests Bley. “While there are no penalties for using conflict minerals in company products, the regulations require that a ‘reasonable country of origin inquiry’ is performed. Those companies that lag in this area risk ‘named and shamed’ by the consumer public and non-governmental organizations (NGOs),” creating a possible impact on brand reputation and sales.

A Reporting Process across the Supply Chain

 In order to facilitate some level of consistency of reporting, the Electronic Industry Citizenship Coalition (EICC) and Global e-Sustainability Initiative (GeSI) have partnered to create a consistent reporting template which has emerged as a de facto cross-industry reporting standard.  The template contains a questionnaire that allows companies to document their conflict minerals status to their customers.  This implies a massive workflow effort as customers notify their suppliers, and their suppliers notify their down-stream suppliers, and so on.  “We are more concerned with the process implications of handling large volumes of requests and in turn sending those requests to our suppliers,” observed a global compliance manager at an electronics component manufacturer. “With dozens of locations, many suppliers, and hundreds of thousands of products sold, it is necessary to utilize a solution to collect, review, and address the significant amount of data provided by our suppliers.”

Regarding her company activity in conflict mineral compliance, Amanda Davidson of Freescale Semiconductor says that new requests from customers and trading partners are the rule rather than the exception. “We receive requests daily,” observes Davidson. “In addition to these … demanding requirements, we also have our brand image to consider as well as new and continued business.” For most companies new to the issue of conflict minerals, the path forward can look extremely daunting.

 Industry Takes Action

 One of the early responders across industries in 2011 was the Automotive Industry Action Group (AIAG).  AIAG, no stranger to large and complex supply chain compliance initiatives, established the need to harmonize the processes around corporate conflict minerals compliance shortly after the Dodd-Frank Act was signed into law.  In late 2011, AIAG published a “position statement” that was a clear call to action for all participating members of the North American automotive industry supply chain and their global trading partners.[2]

After an extensive collaboration, AIAG announced in 2012 that it was partnering with iPoint-systems to develop a consistent, process-driven solution in line with the EICC-GeSI reporting standard.  In addition to significant workflow features, the iPoint Conflict Mineral Platform (iPCMP) also contains updates to the “certified smelter” database and also allows users to add their own proprietary notations to smelter lists and vendor records of suppliers, significantly enhancing the efficiency of using the EICC-GeSI standard (A free trial of the iPCMP solution is available upon registration at www.conflict-minerals.com, see sidebar).

Other industries are following suit in a less concerted manner relying on the actions of large OEMs rather than a broad industry initiative. Large companies such as Dell, General Electric and others have identified the need to have a comprehensive solution and advise that they are “committed to act on this issue” (in the case of GE) and have described a number of social compliance efforts in their annual sustainability and corporate citizenship reports.[3]  In some of these cases, the OEMs have initiated their own course of action inside their own supply chain and have considered automating the reporting process for their own purposes through the use of a common reporting platform.

Developing an Action Plan

 Depending upon the size and scope of the company, some organizations have considered offshoring the development of compliance records, essentially creating large customer collection centers to address inquiries down their value chains.  While this might be a cost-efficient approach to complete the basic EICC-GeSI template, firms concerned with exposing their bill of material (BOM) due to intellectual property or classified information find that outsourcing the issue – and their BOM descriptions – is not practical.  A simple form of declaration allows companies to state their compliance at the company, division, product category, and product levels.  This also allows for companies to certify without disclosing complete BOM information.

“Freescale is a company that will not release our BOM, nor will we hire a third party to collect the data for us,” states Ms. Davidson.  Other organizations, particularly those in the defense electronics industry, are precluded from doing so based on their respective government requirements.[4] An automated and integrated approach, similar to that initiated by AIAG in the automotive industry, also allows each organization to protect the chemical and structural composition of its products and materials. These safeguards are similar to those European Union (EU) edicts for Registration, Evaluation, Authorisation and Restriction of Chemicals (REACh) and Restriction of Hazardous Substances (RoHS) provisions enacted in the late 2000s.

Selecting a Reporting Environment

While smaller, less sophisticated organizations consider outsourcing the IP and BOM of their product for third parties to manage record keeping and tracking of notifications and compliance, most companies I have spoken to in regards to conflict minerals compliance feel the need to manage the process in an automated and centralized manner.  Given the timeliness of requests received and the volume – in many cases thousands of notifications in large industry segments such as automotive, electronics and medical devices which will begin in early 2013 – manual solutions to the Conflict Minerals reporting requirements are counter-productive and too labor-intensive for some companies.

A number of solutions exist that consider reporting to the EICC-GeSI standard. Some solutions act as simple plug-ins to Microsoft Excel document environments and operate locally. While these solutions are simple and relatively inexpensive, they do little to remove the management cycles required to integrate vendor records, product geometries, and larger supply chain notifications. In addition, there is some concern that while Dodd-Frank requirements have been finalized, there is still a need to harmonize these requirements and approaches to compliance filing with other organizations, such as the Organization for Economic Co-operation and Development (OECD).  A cloud-based solution, that matures as more vendors and certified smelters are added to the platform, creates a more integrated approach such as what the automotive industry has adopted (see sidebar).

Standards and Documents to Evolve

While Dodd-Frank continues to be the primary compliance driver on the issue of conflict minerals, several organizations, including OECD and the Association Connecting Electronics Industries (IPC), continue discussions on how to mature reporting standards and guidelines.  According to Bley, these evolving standards and guidelines could tackle some remaining issues to compliance reporting, including disclosure of IP and BOMs.  “Manufacturing companies are very concerned about disclosing the identity of their suppliers,” observes Mr. Bley.  “When you address the critical issue of IP protection, a supplier can still show a clear pathway to what smelters have been used in their supply chain, providing an accurate trace of conflict minerals required under current mandates.” While the final ruling of the SEC has been issued, there is no consensus that the appropriate level of reporting is captured in the current EICC-GeSI reporting framework.  Additional industry group discussions in the coming months hope to provide additional clarity on this matter.  As such, companies need the flexibility to adapt to changing requirements through the use of a well-monitored and continually evolving solution to the issue of conflict mineral reporting.

The cross-industry solution already widely adopted by automotive manufacturers and many of their suppliers plans to address the topic of integrated vendor and smelter lists, as well as any forthcoming changes to reporting structure which may come down the pike.  For example, once a company registers to the iPCMP solution adopted by the automotive industry, each supplier receives a unique identification in the Conflict Minerals Platform. While traceability from customer to first-tier supplier is known and unique with iPCMP, the downstream supplier identity is not shared visible to other users. This resolves the issue of multiple entries of the same organization existing in the supplier database while preserving confidentiality. Similarly, this approach of uniquely identifying organizations in the system is also extended to smelters, reducing the potential duplication of non-certified smelters which may be added by an organization and used throughout conflict minerals declarations.

Summary

Regardless of the path ahead each company chooses, conflict mineral compliance will be on the lips of many executives, compliance officers, and supply chain managers in 2013.  “I would say that up until now, the industry did not know what was coming,” reflects Davidson.  This year we will find out through our own experiences across industries how best to address conflict minerals reporting.

William Newman is a recognized author, speaker, analyst and consultant on matters of management strategy and technology.  He serves as managing principal of Newport Consulting Group, an independent management and technology consulting firm. Contact him via email at wnewman@newportconsgroup.com or follow him on Twitter @william_newman.

 Conflict Minerals Platform Now Available for Cross-industry Trial, Use

In an effort to reduce duplicative reporting initiatives, iPoint-systems – software makers and architects of the iPoint Conflict Minerals Platform (iPCMP) adopted by the North American automotive industry – has made its solution available for a free trial to all interested parties across industries.

With crisp workflow and process orientation, iPCMP can manage literally thousands of customer inquiries and supplier notifications and can integrate to existing reporting, Enterprise Resource Planning (ERP), Customer Relationship Management (CRM), Supplier Relationship Management (SRM), and Product Lifecycle Management (PLM) enterprise systems.  In addition, iPCMP can work perfectly with existing enterprise supplier portals as a back engine for conflict minerals reporting, or as a stand-alone environment based on the needs of the organization.

There area basic and premium license programs available, as well as customized approaches to suit unique company and supply chain needs.  For more information and registration for a free trial of iPCMP, visit www.conflict-minerals.com.



[1] United States Security and Exchange Commission (SEC) Press Release, http://www.sec.gov/news/press/2012/2012-163.htm

[2] AIAG Position Statement 13 October 2011

[4] For more information on defense electronics industry see: Boland, Rita. “Origins of Technology Materials Gain Importance,” SIGNAL Magazine. AFCEA, May 2012. http://www.afcea.org/content/?q=node/2955