How Complying With The Conflict Minerals Rule Can Improve Your Supply Chain PDF

CSCMP
Educating and Connecting the World’s Supply Chain Professionals.™
EXPLORES...
V o l u m e One 2 0 1 4 W I N T E R
How
Complying
with the
Conflict
Minerals
Rule Can
Improve Your
Supply
Chain
The conflict minerals rule
requires SEC issuers to
disclose information that
will be challenging for many
companies to obtain, if it’s
available at all.
By
Kevin Lewis and Kelvin Harris,
PwC
This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from the
Council of Supply Chain Management Professionals (CSCMP). You may not upload any of this site's material to any public server, online service, network, or bulletin board
without prior written permission from CSCMP.
To submit a topic or suggest an author
for CSCMP Explores…, please contact
the Research Strategies Committee via
e-mail at cscmpresearch@cscmp.org
Table of Contents
Introduction.................................................................................................... 3
CSCMP
The Ascent of Supply Chain Transparency.............................................. 4

Reaping the Rewards of Compliance........................................................ 5
Visibility into the External Supply Chain................................................. 6
EXPLORES...
Sidebar: Can I File as “Undeterminable” and Be Compliant?............. 7
Taking Steps to Create a Conflict Minerals Initiative........................ 8
Leveraging IT for Compliance..................................................................... 9
Next Steps........................................................................................................... 9
CSCMP Explores…
is published by the Endnotes............................................................................................................ 10
Council of Supply Chain
Management Professionals
333 East Butterfield Road, Suite 140 LIST OF FIGURES
Lombard, IL 60148-5617 USA Figure 1: Number of Direct Material Suppliers in
Phone: +1 630.574.0985
Fax: +1 630.574.0989 Respondents’ Supply Chains....................................................................... 3
Web Site: cscmp.org Figure 2: Perceived Repercussions from Non-Compliance................ 4
Editor: Jessica E. D’Amico Figure 3: Perceptions of Compliance........................................................ 5
Direct Line: +1 630.645.3460 Figure 4: Companies Extending Due Diligence Past Tier 1................... 7
E-Mail: jdamico@cscmp.org
Figure 5: Conflict Minerals Decision Tree............................................... 8
Explores... provides a good way to keep
up with the latest trends and informa-
tion that affect your profession, when
you are short on time. Each issue is
written by a renowned thought leader
and provides in-depth coverage of an
important supply chain topic in an easy
to read and convenient publication.
2013-2014 CSCMP Research Strategies

Committee
Eric Peltz, Co-Chair
RAND Corporation
Lee Beard
Coca-Cola Refreshments
Glen Goldbach
PwC
Susan Golicic
Colorado State University
David Kaduke
Limited Brands, MAST Global
Rahul Mittal
Bi-Lo Holdings (Bi-Lo and Winn-Dixie
Stores)
Diane A. Mollenkopf
The University of Tennessee
Gilbert Nyaga
Northeastern University
Steven Raetz
C.H. Robinson
Morgan L. Swink
Texas Christian University
Judith M. Whipple
Michigan State University
ISBN 978-0-9899706-5-5
© 2014 Council of Supply Chain

Management Professionals
2 This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from the
Introduction
Many US public companies are now in the middle of their efforts to comply with the United States Securities and Exchange Commission’s
(SEC) conflict minerals rule. The rule, created as a result of Section 1502 of the Dodd-Frank Act,i requires SEC issuers to determine if
their products contain conflict minerals that originated in the Democratic Republic of the Congo (DRC) or adjacent countries and, if so,
disclose certain information about the conflict minerals.
Congress included this provision in Dodd-Frank to address concerns about the ongoing humanitarian crisis in the DRC. Traffic in con-
flict minerals—tin, tantalum, tungsten, and gold—have in some cases been used as a means to finance the decades-long conflict. This
creates a complication for many public companies, since conflict minerals are present in thousands of consumer products—from zip-
pers and children’s shoes to circuit boards and light bulbs.
The conflict minerals rule requires SEC issuers (companies affected by the regulation) to disclose information that will be challenging for
many companies to obtain, if it’s available at all: whether their products contain any of the four minerals; whether those minerals origi-
nated in the covered countries; and, if so, whether the minerals benefited armed groups.
The SEC estimates that compliance with Section 1502 will impact approximately half of all US public companies—6,000 issuers—at
a first year total cost of up to $4 billion.ii A more sobering estimate comes from the National Association of Manufacturers, which
forecasts compliance costs to manufacturers as high as $9 to $16 billion.iii
Figure 1: Number of Direct Material Suppliers in Respondents’ Supply Chains
How many direct material suppliers are in your supply chain?

(materials used in products only)
16.5%
34.0%
Fewer than 100
100 – 1000
23.1% 1001 – 5000
Greater than 5000
Not sure/not applicable
12.6%
13.8%
Source: PwC conflict minerals survey (2013).
The disparity in these estimates is due, in part, to companies’ lack of visibility into their supply chain. Each issuing company may have
hundreds or even thousands of tier 1 suppliers but many, in fact, do not know the exact number. PwC surveyed almost 900 respondents
from 16 industries (Figure 1) and found that more than a quarter of respondents said their supply chain comprises more than 1,000 tier 1
suppliers alone, while 34% of respondents indicated they did not know how many tier 1 suppliers they use.iv Extend this estimate to tier 2
and further upstream, and the picture becomes very opaque, very quickly.
This uncertainty will only intensify the challenge to make a definitive conflict minerals statement by the coming May 31, 2014 deadline.
Our recent analysis indicates the majority of companies are in the middle of their Reasonable Country of Origin Inquiry (RCOI) or Due
Diligence processes. There are, however, still some companies in the product or supplier analysis stage who have yet to issue their RCOI;
and there are some outliers who are not aware of the need to perform an RCOI. For all these companies, the challenge to make any
substantive progress by the first reporting deadline is now looming large with a higher likelihood they will end up for 2013 reporting far
behind their industry
This document peers.
is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from the 3
The ascent of supply chain transparency
For SEC issuers, the conflict minerals rule can be easily The move toward transparency results, in part, from increased scrutiny
viewed as just another compliance effort, but some may and visibility into the supply chain by consumers, coupled with advocacy
view it more as a strategic business opportunity. Either groups that, in today’s omni-media world, can inexpensively gain a stron-
way, the rule corresponds with a new focus on supply ger, broader reach than in the past.
chain transparency and risk management.
These factors have combined to create an environment in which watch-
Today, public companies are increasingly providing dog groups and the media hold companies accountable for the labor
greater transparency into nonfinancial operations. Ac- conditions and sustainability practices of their suppliers. Using powerful
cording to an analysis by the Governance and Account- social media tools, advocacy groups may urge consumers to single out
ability Institute in 2012, 57% of Fortune 500 companies corporations and supply-chain partners that don’t adhere to high envi-
reported their performance on environmental, social, and ronmental, ethical, or labor standards.
governance issues, marking a dramatic increase from the
The potential for this type of pressure has resulted in an internal push
19% that did so in 2011.v For many, however, these dis-
for supply chain improvements at many companies. Corporate boards,
closures remain somewhat basic, often including only
for instance, are insisting on increased supply chain integrity and trans-
tier 1 suppliers.
parency as a means to lessen negative impact on their brands and prod-
A recent illustration of this limited visibility into the sup- ucts. This impact often results from social media campaigns by watch-
ply chain can be found in the Bangladesh apparel factory dog groups and concerned consumers.
tragedy in which over 1,000 people died. Many US com-
Organizations like the Enough Project and Global Witness have begun
panies, despite sometimes robust supplier-management
naming companies that have taken the most impressive action towards
processes, did not know whether their apparel was man-
responsible sourcing. Once the deadline for conflict minerals compliance
ufactured at the facility. This lack of visibility is attributed
arrives, the naming (and shaming) of companies that have been relative
to the broad use of agents and the standard practice of
laggards is likely. The impact could range from brand risk to loss of cus-
ad-hoc subcontracting to lower costs or reduce capacity
tomers to full-scale boycotts, particularly among consumer-facing busi-
constraints, despite agreements in place often prohibit-
nesses (Figure 2).
ing sub-contracting.
Figure 2: Perceived Repercussions from Non-Compliance
If your company’s ultimate conclusion is that its conflct minerals are not conflict-
free, what possible repercussions is your company most concerned about?
Not sure/not applicable 39.9%
We don’t expect our conlict status to

28.4%
have much impact on our business
Brand risk 22.7%
Possible loss of customers 19.0%
Shareholder backlash 9.2%
Possible boycotts of products 6.4%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Reaping the Rewards of compliance
While Section 1502 is generally viewed through a lens of liability, it also holds opportunities for competitive advantages. Companies that
work proactively to address the provision could strengthen their supply chains, polish their brand reputation, and differentiate themselves
from competitors.
Some companies view compliance with the conflict minerals rule as a stepping stone to achieving higher quality supply chains and reduc-
ing costs (Figure 3). The information-gathering process, for instance, can identify ways to consolidate suppliers, pinpoint strategic sourc-
ing opportunities, and streamline supply chain operations⎯all of which can yield cost savings. What’s more, compliance often can help
raise awareness among senior leadership regarding product lifecycle management or supply chain management opportunities, issues
that have previously not gained traction.
Figure 3: Perceptions of Compliance
How does your company view its efforts related to the conflict minerals rule?
31.1%
30%
26.7%
25% 24.1%
20%
15%
11.0%
10%
5.9%
5%
1.3%
0%
As a Primarily as a We are using We believe We believe Not sure/
compliance compliance or compliance this is not this is a not applicable
exercise only exercise, but if initiatives to only a competitive
opportunities revisit all or compliance necessity
to enhance part of our initiative but
supply chain supply chain it is also the
processes processes, right thing
present and are willing to do
themselves for to invest
little or no additional
incremental funding to
cost, we will undertake
investigate supply chain
them changes
This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from the 5
Section 1502 also presents an opportunity to improve supplier responsibility and qual- This framework can be leveraged to man-
ity. In identifying sources of conflict minerals, companies must obtain a reasonably re- age other types of issues, including sustain-
liable representation from suppliers. This demands that companies, often for the first ability, supply chain visibility, product integ-
time, define a supplier risk framework to evaluate conflict minerals supplier responses. rity, and vendor resilience. It can also help
The process leads many companies to consider broadening the risk framework to en- companies to comply with other industry-
compass other supplier risk drivers; ultimately, companies can effectively eliminate specific mandates such as the Registration,
suppliers that do not deliver an acceptable level of trust and performance. Evaluation, Authorization, and Restriction of
Chemicals (REACH) regulation, the Restric-
The rule also opens the door for companies to use their conflict-free status to market
tion of Hazardous Substances (RoHS) direc-
themselves in new ways that appeal to today’s socially aware customers. Businesses
tive, the California Transparency in Supply
that sell to retail consumers have the most to gain, but corporations that sell to public
Chains Act, The Food Safety Modernization
company customers also may be able to expand their market share by being among
Act (FSMA), National Defense Authorization
the first strategic suppliers to be certified as conflict-free.
Act (NDAA), numerous chemical and materi-
Conflict minerals programs often help companies gain a deeper understanding of sup- als standards, import/export regulations,
pliers, as well as attain better and more enriched supplier and product master data and other supply chain risk and compliance
that can help enhance business intelligence and improvement initiatives. With all com- priorities. As a result, instituting a common
panies, and particularly those that have more than 1,000 suppliers and struggle to framework of processes and technologies
identify them, the conflict minerals rule also presents an opportunity to create a con- used across multiple initiatives can gener-
sistent, risk-based framework. ate cost and resource efficiencies.
Visibility into the external supply chain

The often-unknowable extent of multi-tier supply chain sources and networks presents a formidable challenge
for compliance with the conflict minerals rule. Truth is, most companies know their tier 1 suppliers but have very
little information about their suppliers’ procurement sources and typically have little visibility beyond tier 1. One
thing is certain: Businesses will need to rely on assistance from their tier 1 vendors, and beyond, to comply with
the conflict minerals rule.
Nearly 27% of companies will rely solely on tier 1 suppliers for information on their component sourcing (Figure 4).
Similarly, tier 1 suppliers will rely on their own suppliers to gather information. Obtaining timely and accurate responses
from these suppliers may prove difficult, and once gathered, companies will need to assess the reliability and thorough-
ness of the data to conclude whether any steps should be taken to assess suppliers which fall in tier 2 and beyond. Even
tier 1 suppliers could need significant assistance to understand the intent of the rule and guidance on how to complete
Reasonable Country of Origin Inquiry (RCOI) surveys, conduct due diligence, and other factors.
Figure 4: Companies Extending Due Diligence Past Tier 1
Do you intend to perform due diligence beyond your Tier 1 suppliers?
70%
65% 57.9%
50%
40%
30% 26.5%
20%
13.5%
10%
2.1%
0%
No, we will Yes, we expect to Yes, we will Not sure/
solely rely on receive initial obtain the not applicable
information we information about names of
get from Tier 1 Tier 2+ suppliers suppliers
suppliers from our Tier 1 beyond Tier 1
suppliers, and will and survey them
follow-up directly directly
with Tier 2+
suppliers for any
follow-on questions
Complicating the matter is the fact that the conflict minerals rule itself is not crystal clear. The SEC did not define a number of key terms,
and frequent use of words like “reasonable” was intended to allow flexibility in response to the scale and complexity of supply chains.
For instance, the SEC doesn’t require proof of a mineral supply chain audit; rather, it seeks reasonably reliable information on the origin
of components. This type of latitude leaves some decisions open to interpretation, with no clear guidance or precedent.
Can I File as “Undeterminable” and be Compliant?

Some issuers will not be able to readily determine the origin of their conflict minerals in the rule’s initial years.
Accordingly, for a temporary period of two years, or four years for smaller reporting companies, the rule permits issuers
to describe products containing conflict minerals as “DRC conflict undeterminable.”
This determination can only be made after the issuer exercises due diligence on the source and chain of custody of its
conflict materials, however. An issuer that concludes that its conflict minerals are “DRC conflict undeterminable” during
the temporary period must still include a Conflict Minerals Report as an exhibit to Form SD. These disclosure require-
ments seem to preclude an issuer from simply deciding to file as “undeterminable” without expending some level of
due diligence effort.
Taking steps to create a conlict minerals initiative
The conflict minerals rule has the potential to dramatically alter how companies view and manage their supply chains.
While supply chain executives have traditionally focused on product quality, efficiency and cost, conflict minerals requirements demand a
greater emphasis on supply chain transparency and visibility. When combined with similar compliance obligations such as RoHS, NDAA
or FSMA; sustainability initiatives; and a focus on supplier, product, and network resilience, managing the supply chain with a specific
lens focused on visibility can be turned into a supply chain management strategic advantage.
The first step to moving forward on conflict minerals is often crafting a conflict minerals policy that identifies short- and long-term goals
for the program, defines the relevance of the legislation to the organization, and begins to frame the scope of the effort (Figure 5).
Figure 5: Conflict Minerals Decision Tree
Conflict minerals decision tree

Some companies will need to file high-level specialized disclosures while others will be subject to additional detailed reporting
and auditing. Companies should evaluate each of their products to determine the extent of reporting requirements.
Start
Product contains Conduct inquiry

tantalum, tungsten, Yes into origin
tin, or gold?
Sourced from Conduct

the covered Yes/reason to believe due diligence
countries?*
No
Unknown Adequate chain Unknown

No of custody?
Free of Conflict-free Temporarily undeterminable** Conflict-free Not conflict-free

conflict minerals mineral (no audit required) mineral mineral
No disclosure File Specialized File Specialized Disclosure, Conflict Minerals Report,

requirements Disclosure with SEC and Audit Opinion with SEC
* Covered countries under the rule are the Democratic Republic of the Congo, Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda,
South Sudan, Tanzania, Uganda, and Zambia.
** Companies would reach this conclusion if they cannot determine whether their conflict minerals benefited armed groups. But this option is only available
for the first two years.
Source: PwC conflict minerals home page.vi
Companies often focus on prioritizing efforts, recognizing in many instances that resources may be scarce. Organizations commonly
attempt to stratify their product portfolio to those areas of greatest complexity and potential for exposure to tin, tantalum, tungsten,
and gold.
When appointing an executive to manage the conflict minerals initiative, it’s important to assess the candidate’s experience in leading
cross-functional efforts. A comprehensive assessment of the company’s supply chain will require a compliance team that can work ef-
fectively across a wide range of departments, including supply chain/sourcing, legal/SEC reporting, internal audit, product design
and development, IT, and corporate social responsibility.
The conflict minerals executive also must understand supplier touchpoints throughout the business ecosystem. This is particularly criti-
cal in organizations that manage supply chains independently across the business, a practice that is common among large corporations.
For instance, siloed divisions may employ disparate processes and technologies to manage procurement or sourcing. An effective con-
flict minerals program will align these disparate efforts by, for example, approaching a vendor only once rather than multiple times across
each business unit. Doing so will help reduce duplicated efforts, create efficiencies, and assist in performing subsequent due diligence
(if required) up to and including SEC reporting.
The conflict minerals program should include effective communications and training programs for those who interact with suppliers.
It is critical that the conflict minerals team enable tier 1 suppliers—most of whom will not be SEC registrants—to fully understand the
issue as well as the practical processes of gathering information, issuing surveys, and responding to surveys.
Internally, the conflict minerals team should be prepared to work closely with business-unit leaders from diverse departments. Larger
companies educate and train internal employees, particularly product-development engineers and sourcing teams, on the use of con-
flict minerals in the design process. They also often pre-empt use of suppliers who source conflict minerals by embedding key ques-
tions and activities regarding conflict minerals into procurement processes.
Leveraging it for compliance Next Steps

While several vendors have introduced information technology (IT) Waiting to launch a compliance initiative for the
solutions to support compliance with the conflict minerals rule, conflict minerals rule is no longer an option for
purchase of a new technology solution is often not the best ap- most public companies. May 31, 2014 is quickly
proach. A more effective tactic leverages existing systems to help approaching and delays will only intensify the
manage conflict minerals requirements without additional IT in- challenge to achieve substantive progress.
vestments.
That challenge will vary by company, of course.
Businesses should assess existing solutions—such as product For some, designing a conflict minerals compli-
lifecycle management; materials compliance management; sup- ance program may place pressure on resources
plier management systems; and governance, risk, and compli- and expertise. For many, understanding the prod-
ance tools—to determine if the existing solutions can support ucts within scope, the number of suppliers that
the conflict minerals compliance process. provide conflict mineral components, and the
accessibility of information beyond tier 1 suppli-
Adapting these systems for conflict minerals compliance will re-
ers will be a challenging effort to gather data
quire that companies integrate existing risk and compliance pro-
that may not be readily available.
grams and adopt controls to accommodate conflict minerals. For
instance, supply chain executives can leverage existing supply Compliance with the conflict minerals rule will not
chain programs—such as surveys used for social and environ- happen overnight. And for most companies, com-
mental audits, materials-testing initiatives, and the like—to en- pliance will be more than an endeavor that ends
courage engagement with suppliers around conflict minerals on May 31. Instead, the initiative may emphasize
and embed compliance as a part of supplier interactions. the compliance process and the progress made
toward that process, rather than stressing an im-
In doing so, companies may find that they already have estab-
mediate achievement of a final result.
lished teams, processes, or technologies that fulfill many of
the needs defined by the SEC. Many companies are making progress in com-
pliance with the conflict minerals rule. But with
a short time remaining where the timeline and
required activities are largely dependent on ven-
dor responses, the clock is ticking. The time to
make substantive strides is now.
Endnotes
i
United States Securities and Exchange Commission, Specialized Corporate Disclosure http://www.sec.gov/spotlight/dodd-frank/
speccorpdisclosure.shtml
ii
http://blogs.wsj.com/corruption-currents/2012/08/22/sec-narrowly-approves-reporting-rules-for-energy-mining-firms/
iii
http://www.nam.org/Issues/Trade/Conflict-Minerals.aspx
iv
PwC, Conflict minerals: How companies are preparing, July 2013
v
Governance and Accountability Institute, 2012 Corporate/ESG/Sustainability/Responsibility Reporting - Does It Matter? December
2012
vi
http://www.pwc.com/us/conflictminerals
333 East Butterfield Road, Suite 140, Lombard, Illinois 60148-5617 USA
Phone +1 630.574.0985 • Fax +1 630.574.0989 • cscmp.org
How Complying with the Conflict Minerals

Rule Can Improve Your Supply Chain
This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from the
12 Council of Supply Chain Management Professionals (CSCMP). You may not upload any of this site's material to any public server, online service, network, or bulletin board

How Complying With The Conflict Minerals Rule Can Improve Your Supply Chain PDF

Uploaded by

Copyright:

Available Formats

You might also like

How Complying With The Conflict Minerals Rule Can Improve Your Supply Chain PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

How Complying With The Conflict Minerals Rule Can Improve Your Supply Chain PDF

Uploaded by

Copyright:

Available Formats

CSCMP

Educating and Connecting the World’s Supply Chain Professionals.™

The Ascent of Supply Chain Transparency.............................................. 4

2013-2014 CSCMP Research Strategies

© 2014 Council of Supply Chain

Figure 1: Number of Direct Material Suppliers in Respondents’ Supply Chains

How many direct material suppliers are in your supply chain?

Source: PwC conflict minerals survey (2013).

Figure 2: Perceived Repercussions from Non-Compliance

Not sure/not applicable 39.9%

We don’t expect our conlict status to

Brand risk 22.7%

Possible loss of customers 19.0%

Shareholder backlash 9.2%

Possible boycotts of products 6.4%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Source: PwC conflict minerals survey (2013).

Figure 3: Perceptions of Compliance

Source: PwC conflict minerals survey (2013).

Visibility into the external supply chain

Do you intend to perform due diligence beyond your Tier 1 suppliers?

Source: PwC conflict minerals survey (2013).

Can I File as “Undeterminable” and be Compliant?

Figure 5: Conflict Minerals Decision Tree

Conflict minerals decision tree

Product contains Conduct inquiry

Sourced from Conduct

Unknown Adequate chain Unknown

Free of Conflict-free Temporarily undeterminable** Conflict-free Not conflict-free

No disclosure File Specialized File Specialized Disclosure, Conflict Minerals Report,

Source: PwC conflict minerals home page.vi

Leveraging it for compliance Next Steps

How Complying with the Conflict Minerals

You might also like