Tracking The Future Of Conflict Minerals
While publically-traded manufacturers are aware of new and impending regulation that requires them to report the purchase and use of so-called “conflict minerals,” being prepared for the May 31, 2014 deadline is another matter altogether. And it’s a deadline with implications that are spreading out well beyond the confines of those that must report to the SEC.
In order to discourage use of these materials in a variety of industries, although primarily in electronics manufacturing, the Dodd–Frank Wall Street Reform and Consumer Protection Act, which was signed into law in 2010, mandates that publically-traded companies report the use of specific minerals source from the Democratic Republic of the Congo (DRC) and neighboring countries — Angola, Burundi, Central African Republic, Congo Republic, Rwanda, Sudan, Tanzania, Uganda, and Zambia.
These conflict minerals — cassiterite, wolframite, coltan and gold — are mined in the DRC by various rebel groups and those who, generally speaking, do not bind themselves to any threshold of human rights. Because minerals mined in these countries go through a complex network of middlemen in the region and in East Asian processing plant, the exact source of a particular batch of gold can be difficult, if not impossible, to find.
With manufacturers using third parties to deliver up to 60 percent of revenues, according to Hiperos, a company that provides third-party management software for situations like reporting on conflict minerals, the need for tools to resolve the sourcing chain is absolutely critical.
And don’t think that your company is exempt from this because it’s not publically-traded. The SEC has estimated that roughly 1,200 companies will be required to submit full conflict mineral reports, but they will be pushing that effort down across their entire supply chain. So if your company provides a part to one of these impacted firms, they’ll most likely pass the buck to you.
Of the effort to meet that May 31, 2014 deadline, Greg Dickinson, the CEO of Hipeos, says, “While companies are aware of the reporting requirement, many are still trying to figure out their internal processes and, in particular, the extent of the supplier due diligence that they expect to complete in the first year.”
One might think that working toward compliance with the Dodd-Frank Act is simply pushing down accountability to third parties, but Dickinson says that even that step is proving difficult for many manufacturers. He says, “Based on what we’ve seen, the most difficult part of the process is visibility into your supply chain – which suppliers do you need to contact and knowing which individual in that company will be responsible for completing the due diligence and attesting to it.”
In his experience, Dickinson says that most companies have accurate contact details for between 5 and 10 percent of their supply base. This equates, clearly, to a great deal of work up-front to simply get in front of the right person. Once that happens, he says that many of these companies are having a great deal of trouble ensuring that suppliers respond to the questionnaire about sourcing completely, and within a reasonable amount of time.
It becomes pretty clear that complying with the conflict minerals reporting is very much a clerical issue, but it could be an opportunity for companies to establish a tighter rein on the diverse and vastness of supplier relationships. Dickinson says that technology can help in some of the largest-order issues, in particular, simply discovering which companies in their supply base could be “in-scope” for conflict minerals. This means they’re not spending time pursuing leads among the wrong suppliers, who would have no need to purchase or built atop of something containing wolframite.
With a portion of the supply base cut away, companies using Hiperos software can then identify which suppliers could be using which conflict minerals, and “automate the process to identify the correct individual at the supplier who can respond to the questionnaire,” as Dickinson says. He says that companies using the solution have seen dramatically higher response rates from suppliers, which could mean the difference between sending the SEC a report that is complete, and one that isn’t.
In the end, Dickinson sees this legislation with a mixed viewpoint for the industry. It will affect the way that manufacturers operate, he says: “There is undeniably cost and difficultly associated in completing due diligence across a supplier base — and that cost varies depending on the size and complexity of the supplier base.” That capital expenditure could prevent firms from buying new machinery, or hiring more employees. At the same time, the push toward better supply chain visibility is, inevitably, good for these companies, even if they’re compelled toward it.
Dickinson says that it’s hard to tell whether this legislation will be expanded in the future, or if similar restrictions will make their way into the SEC’s purview, but enabling a solution that effectively deals with Dodd-Frank will help armor these companies against future changes. Dickinson says he’s seen a push toward greater “social accountability” in the way manufacturers operate, which could mean that even without rules, companies could want this information in order to pass on to savvy consumers.
He adds: “Regulation or no regulation, [accountability] will become core to how companies do business.”