Manufacturing, Suppliers & Retailers- Partnering for Better Chemical Data in the Supply Chain

(Photo Courtesy of Milosz1 under the Creative Commons license)

“WARNING: This area contains a chemical known to the State of California to cause cancer, birth defects or other reproductive harm.”

Now that I have your attention, have you ever seen one of these warnings posted outside your local convenience store or place of business?  Well, this is one of the many ways that consumers and workers are informed of the presence of chemicals in our everyday lives and the responsibilities that companies have to notify the public and workers of potentially hazardous substances.

This past week, GreenBiz editor Jonathan Bardeline highlighted a cross-sectoral effort by a unique assemblage of manufacturers and retailers, focused on meeting consumers demand for less toxic products. “Meeting Customers’ Needs for Chemical Data,” is a tool with information from major companies such as Johnson & Johnson, Walmart and Hewlett-Packard, SC Johnson, Nike and Seagate, detailing how they interact with chemical suppliers.  The scope of the document focuses on assisting suppliers to product fabricators and formulators[1] , and steps they can take to collaborate to bring safer products to the consumer.

The guidance document was prepared by the Green Chemistry in Commerce Council (GC3)[2], which promotes itself as a “business-to-business network which provides an open forum for participants to discuss and share information and experiences related to advancing green chemistry, design for environment, and sustainable supply chain management.  The projects focus is to “provide the opportunity for cross-sectoral collaboration on enhancing chemical data sharing along supply chains”.   The guidance provides clear signals to suppliers on the needs that fabricators and formulators have for chemical data and the consequences of not providing such data.

Chemical Data 101

To begin to understand what we are really talking about, let’s start at the beginning.  The document lays a great foundation by describing what types of chemical data exist.  Basically, chemical data includes, but is not limited to, the following types of information:

1. Chemical name, trade name, and CAS number of all chemical ingredients in an article or chemical mixture, including known impurities.

2. Function of a chemical ingredient in an article or chemical mixture (e.g. catalyst, plasticizer, monomer, etc.).

3. Human health and ecotoxicological characteristics of chemical ingredients and chemicals used in making that ingredient, as well as their physical safety properties such as flammability.

4. Potential for human or environmental exposure to chemical ingredients in an article or chemical mixture.

Much of the chemical data that exists for products is typically captured in Materials Safety Data Sheets (MSDS) or Safety Data Sheets (SDS).  A great deal of the chemical data must be made available to employees coming into contact with these materials in the workplace through Hazard Communication rules or (in the case of California, Proposition 65).  Other chemical disclosure requirements like TSCA, REACH, RoHS, WEEE[3] are in place to assure proper notification to customers of the potential of toxic constituents and to meet country or sector specific restricted materials rules.

(Photo Courtesy of Nebarnix under Creative Commons license)

Generally, this information is not necessarily required to be made available to the public unless that are product safety related issues i.e. lead or BPA free products.  The SC3 guide correctly notes that “MSDSs are often a company’s only resource for chemical ingredient, hazard, and toxicity information. While they could be more useful, they are better than having no information at all. Unfortunately, MSDSs fall short of providing enough information to satisfy the chemical data needs of many fabricators and formulators.”  This is primarily due to the fact that many MSDS’s do not contain all product constituents, different MSDS’s exist for a similar chemical constituent offered by different manufacturers, and MSDS’s do they apply  to specific products or intermediate products.

Ways Leading Companies are Engaging Suppliers

There are already many efforts already underway within various product sector supply chains to actively share relevant chemical information between fabricators, formulators, and their suppliers, and this report has no shortage of fantastic examples.  When engaging suppliers, the report suggests a few basic steps that every company depending on a deep supplier base must consider taking:

• Written guidance detailing chemical information needed
• Supplier questionnaires with specific questions addressing chemical ingredients, concentrations, toxicity information on chemical ingredients, etc.
• Web portals for chemical data entry.
• Training suppliers on chemical data reporting requirements

For example, the report cites Hewlett-Packard and how they developed a web portal that suppliers use to enter chemical data (the company uses the SAP/Environmental Health and Safety module to process the information.  SC Johnson provides training to suppliers on its internal Greenlist™ raw material rating system. The company focuses particularly on obtaining toxicity data from its suppliers for scoring chemicals and materials.

Managing Confidential and Proprietary Information

Notwithstanding suppliers efforts to obtain data, there are natural concerns that many suppliers may have in releasing confidential and/or proprietary information.  The GC3 guide offers some valuable advice and examples that companies can use to protect the often proprietary nature of their products.  As I have reported before, high-end office furniture manufacturer Herman Miller executed hundreds of Non-Disclosure agreements with its Tier 1 -4 suppliers in its effort to attain zero-landfill waste status and reduce its overall product life-cycle footprint. Method uses a third-party reviewer to evaluate all chemical ingredients for safety prior to their selection for a product formulation.  And SC Johnson uses three layers of confidentiality protection depending on the public availability, types, quantities and specialty formulations of the materials.

On the regulatory front, the U.S.  Environmental Protection Agency last year that it is taking steps to increase the public’s access to chemical information of consumer products, by restricting efforts chemical manufactures to keep chemical information confidential, except under narrower circumstances.  This only underscores the increased emphasis on product transparency, pushing the envelope on placing proprietary information in the public domain, and the possible negative consequences on a company’s business competitiveness.  Or maybe such openness can have a positive business outcome too!

Chemical Industry and the Consumer …Two Green Peas in a Pod

This development gels nicely with the issues recently brought up at the European Petrochemical Association Interactive Supply Chain Workshop that I attended. During my keynote speech on sustainability efforts by the chemical industry, I noted that a number of key indicators were coming to light, particularly in the chemical industry. I noted growing customer concern, public-driven mandates, product preferences, and growing demand for supply chain transparency. I noted too that customers and consumers want to know what’s in that product, it’s environmental footprint, what chemicals it contains, the carbon emissions generated in manufacture.

For many year the internationally accepted Responsible Care Initiative has been a hallmark effort within the chemical industry in safeguarding materials transport and driving innovation in manufacturing, and making safer products. Along with Responsible Care, there has been increased emphasis on environmental and “greener” specification in logistics, and the expansion of communications relating to toxic and hazardous materials. Now, the industry is seeing the growth of environmental indexing, environmental footprints and benchmarking, and less toxic) products in response to the demands of consumer-facing customers such as WalMart and other major retailers.

There is, as the GC3 document states “ a need for communication to be a two-way street to enhance the ability of suppliers and fabricators, formulators, and retailers to work more effectively together in advancing transparency, product safety, and sustainability.”

Get Your Green Chemistry Hat On

Demands for chemical data are likely to increase as government agencies, customers and consumers ask for detailed information on life-cycle impacts of chemicals, materials, and products.  Therefore, its advantageous for suppliers to jump ahead of coming trends, work with their customers to identify data gaps and work collaboratively to fill them.

Photo: © Sebastian Kaulitzki - Fotolia.com

So if you are a supplier just starting to collect chemical data for your customers; or if you are currently responding to customers’ requests for chemical information and additional information that to fulfill your customers ‘requirements; or are a chemical user that needs to communicate with your suppliers about their chemical data; it’s time to begin gathering this value-added data.

The GC3 Guidance provides some great advice, offers solid tools and case studies to drive the business case, and tools to effectively engage both upstream suppliers and downstream customers to green up the supply chain, support product stewardship,  and make consumer products safer.

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[1] The document defines “fabricator” as a manufacturer (or a company that directs suppliers to fabricate) of an “article”. The document defines an” article” as a “finished product, component of a product (such as a circuit board), or source material (such as a textile or leather) sold to other organizations or directly to consumers.  The document also describes a “formulator” as a manufacturer of a chemical preparation or a mixture of substances, such as paint, liquid cleaning products, adhesives or a surfactant package”.

[2] a project of the Lowell Center for Sustainable Production at the University of Massachusetts Lowell (http://www.greenchemistryandcommerce.org)

[3] Toxic Substances Control Act (TSCA), Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH), Restriction of Hazardous Substances (RoHS) Directive, Waste Electrical and Electronic Equipment Directive (WEEE)

A Year After the BP Oil Spill- a Slow Recovery, Continued Risk Management Challenges

A year ago last week, and for months afterward, we were bombarded with horrible images of potentially catastrophic proportions.  The Gulf Coast was under siege from the Deepwater Horizon blowout and resultant spill.  Dead or dying waterfowl and sea life haunted our dreams.  Tourists scooped up tar balls from Gulf Shores, Alabama to Pensacola, Florida.  Round the clock news coverage of the economic devastation was heaped unexpectedly on the gulf coast.   Cleanup crews deployed nearly useless 20^th century solutions to a 21^st century problem.  Hapless oil executives spun their stories and federal government agencies did too little, too late.  And the problem kept growing while the oil kept spewing from the blown out well, miles below the surface.

Risk Control Lacking

Just after the spill occurred, I wrote a piece on the lack of risk management protocols  and oversight that matched the nature of the work and how it was inevitable that this type of event would occur.

“I have no doubt that there has been a central breakdown in process risk management, commonly used by organizations to establish procedures to safely manage the greatest of uncertainties of its daily operations.  This means that if a company is going to drill a mile under the Gulf of Mexico, they should FIRST make certain that all possible failure scenarios are identified, evaluated, tested and implemented, before that first barrel of oil is extracted…While it’s vital that 24 hour protocols be applied to day-to-day activities that may be a threat to environmental well-being, unforeseeable events involving human error or equipment failure must be managed too… inadequate steps have been put in place to 1) evaluate “worst case” impacts associated with catastrophic failures of equipment or systems; 2) establish policies and program to mitigate short and long-term environmental risk factors and 3) assure that there are financial cushions (cleanup and reclamation bonds, for instance) that continue to hold those liable before they can run or hide.”

Spring turned to summer and finally on July 15, 2010 the leak was stopped after it had released about 4,900,000 barrels of crude oil, the well was capped.  But the troubles were far from over and as I reported shortly before the well was finally capped, recovery takes time. When writing about the possibilities of a rebounding gulf coast (both ecologically and economically), I spoke of resiliency, the “structural issues” that appeared in the oil exploration, approval and development process, and the steps needed to nurture a full recovery.

The current, devastating Deepwater Horizon oil spill and ecological crisis in the Gulf of Mexico presents a great set of uncertainties and human-induced risks not realized before in terms of scope and magnitude…Ecosystems are dynamic and ever-changing.  This changing dynamic flow continues its natural cycles and fluctuations at the same time that it continues to recovery from impacts of spilled oil.  As time passes, separating natural changes from oil spill related impacts becomes harder to distinguish.  So time will tell, and after the well is finally plugged (and it will be plugged) and the last drop of oil spills, the long term ecological “rebound” will begin.

Then the fingers started pointing, lawyers got involved, congressional testimony began and yielded few results.  Few companies claimed immediate responsibility nor were they held accountable.  BP said that they would pay “all legitimate claims”.  But that promise seemed hollow to those immediately affected, and the restitution payments flowed like the oil drifting on the surface of the gulf waters.  The status of claims paid can be found in this interview with U.S. Claims Administrator Ken Feinberg, but in a nutshell roughly 25% of the $20 billion set aside by BP has been paid out.

Government Call for Better Risk Management

On January 5, 2011, White House National Commission convened to review the oil spill released a final report detailing faults by the companies that led to the spill.  The report noted that “Better management of decision-making processes” within BP, Halliburton and Transocean (the three key players in this ordeal), “better communication within and between BP and its contractors” and “effective training of key engineering and rig personnel” would have prevented the blowout.  The panel also noted a key breakdown in communicating with government agencies, which did not have “sufficient knowledge or authority to notice these cost-cutting decisions”.

The record shows that without effective government oversight, the offshore oil and gas industry will not adequately reduce the risk of accidents, nor prepare effectively to respond in emergencies. However, government oversight, alone, cannot reduce those risks to the full extent possible. Government oversight … must be accompanied by the oil and gas industry’s internal reinvention: sweeping reforms that accomplish no less than a fundamental transformation of its safety culture. Only through such a demonstrated transformation will industry—in the aftermath of the Deepwater Horizon disaster—truly earn the privilege of access to the nation’s energy resources located on federal properties.

Economy and Ecology- Rebounding…Slowly

Flashing forward to this last week, on the economic side, only seven of the 34 deep water rigs operating at the time of the explosion are in operation (due to the moratorium that was put in place by the Obama Administration last year).  Following the sunset of that moratorium last fall, it’s been reported that off shore production may ramp up to about 15 or 20 by the end of the year, meaning the addition of the thousands of oil industry and related service jobs that have been lost since the spill.  A Wall Street Journal article last week highlighted the struggles that small businesses (small marinas, seafood restaurants, commercial fish operations etc) have had in the past year.

A BBC report last week noted that “scientists have warned that it is too soon to attempt to offer a considered assessment on what impact the Deepwater Horizon oil spill, the largest of its kind, has had on the Gulf of Mexico’s wildlife.   In short, they said, nature did not work in such a way that the full picture will present itself within just one year.  It’s clear that given the rate of recovery from the Exxon Valdez spill over 20 years ago that more data will be needed in the years ahead to assess the full extent of the ecological damage done.

But Dr. Jane Lubchenco (Administrator at the National Oceanic and Atmospheric) believed that reports of systems recovery suggest that the health of the Gulf is “much better than people feared”, but the jury was out about what the end result would be.  According to some reports, signs 60 pounds of tar balls still wash ashore daily along the 33-mile stretch of beach that runs near the Interstate 65 corridor near Orange Beach, Ala..  Meantime, one thing I can tell you is that Louisiana Governor Bobby Jindal was plugging gulf coast seafood big time last week on National Public Radio and elsewhere.

Not Out of the Woods, More Work Needed

Progress toward requiring safer drilling, protecting natural resources and compensating victims has been uneven at best.  As reported in an Op-Ed last week, “Without the reforms fully in place, the administration is plunging ahead despite the well-documented inability of industry and government to prevent accidents in deep water. For starters, the federal government needs a better understanding of how operating rigs under the intense pressure of deep water can cause blowout preventers — the so-called last lines of defense — and other critical equipment to fail…. There also should be a more complete picture of whether rig operators have the assets — people, vessels, know-how, and money— to respond to a spill.”

The Op-ed also stated “The Federal government needs a better sense of the risks of offshore drilling and a better process for sharing that analysis with other agencies — the Coast Guard, the National Oceanic and Atmospheric Administration, the Environmental Protection Agency — that play a key role in any emergency response.”  For instance,  the newly created Bureau of Ocean Energy Management has added only 4 new inspectors (now at 60) to cover more than 3,500 drill rigs and platforms in the Gulf.  New monies allocated by Congress may alleviate that serious oversight deficiency, but it will take time, training and education to get new inspectors up to speed.  Meanwhile, inspection and oversight is spread too thin and the oil industry appears to be in no rush to help fund additional inspectors (especially at the same pace they are lobbying at to get more drill rigs operating again in the Gulf).

Photo by alancleaver_2000. (via Creative Commons license)

In the second post on risk that I published last year after the gulf spill, I noted that a continuous risk management process helps organizations understand, manage, and communicate risk and avoid potential catastrophic conditions that can lead to loss of life, property and the environment.  I laid out a typical six-step process to achieve effective risk management and failure mode control.  I also noted ”What will be … fascinating will be the lessons learned and if businesses truly embrace risk management planning and implementation as a central function of business, take it seriously and hold themselves accountable.”

Last week, Bob Dudley the Chief Executive of BP, wrote an opinion letter in the Wall Street Journal.  In the piece, Mr. Dudley indicated that the company was “creating a central safety and operational-risk organization reporting directly to me. This organization has the mandate and resources to drive safe, reliable operations that comply with regulations, and it has the authority to intervene in our operations anywhere in the world. We are also linking the management of employees’ performance and reward directly to safety and to compliance with BP’s standards….We will not use rigs on our projects that do not conform to our standards. We have either turned away rigs or are negotiating for modifications to particular rigs that will bring them up to our standards.”  Dudley also noted that “… around 7% of the world’s oil supplies are coming from the deep water, a total we expect will rise to nearly 10% by the end of this decade. That means we must have better safety technology, more effective equipment and the capability to deal with a blowout in the deep water.”

Summary

The National Commission on the spill and members of industry, academia and Congress have made solid “suggestions” for beefing up the regulatory framework for oil exploration and drilling, including: tougher inspections; higher fees from industry to self-fund more policing programs; greater financial liability for companies that spill into waterways as a means to encourage responsible behavior and to cover accident cleanup and recovery costs.

It appears, looking back, that industry and government have moved in the right direction to address the systemic problems that emerged from the Deepwater Horizon spill and follow-up investigations.  But as the current status clearly shows, I’ve grave concerns about on-going performance and genuine progress in adopting genuine, effective risk management tools, oversight and governance. Until there is 100% assurance that such a system is fully in place, fully staffed, fully operational and with full oversight assurance, I am fearful of a repeat…whether it’s in deep water or in other harsh environments, such as the Arctic.

Meanwhile it’s vital that the U.S. continue expanding the search for alternative forms of land-based fuel and energy and support the funding of alternative, cleaner fuels and greener technologies.

Conflict Minerals- Can Consumers, Manufacturers & Policy-Makers Rise to the Challenge? – Part 2

Part 1 of this series highlighted the issues, regulatory and supply chain complexities and efforts by industry to tighten the control of precious minerals sourcing.  This is especially critical in developing nations, where human trafficking, regional conflict and lack of environmental laws and basic human rights are the rule rather than the exception.  This post will look into a few examples of key manufacturers and efforts to date audit, validate and trace the precious minerals supply chain and what roles non-governmental organizations and we consumers have played so far in addressing this prickly issue.

“Conflict Areas” 101

The Organisation for Economic Co-operation and Development (OECD) issued a comprehensive guidance document in 2010 entitled Due Diligence Guidance for Responsible Supply Chains of Minerals From Conflict-Affected and High-Risk Areas.  In this document, the OECD defined conflict-affected and high-risk areas as identified by the presence of armed conflict, widespread violence or other risks of harm to people.

“Armed conflict may take a variety of forms, such as a conflict of international or non-international character, which may involve two or more states, or may consist of wars of liberation, or insurgencies, civil wars, etc. High-risk areas may include areas of political instability or repression, institutional weakness, insecurity, collapse of civil infrastructure and widespread violence. Such areas are often characterised by widespread human rights abuses and violations of national or international law.”

Recent efforts by global industry associations and grassroots efforts by non-governmental organizations such as the Enough Project and its Raise Hope for Congo initiative have shed a good deal of light on a previously ignored issue. Unlike other countries, ore extraction in the Congo is both cheap and lucrative for the militias that control many of the artisanal mines. There has been widespread reporting about how child laborers are kidnapped from neighboring nations to work under forced conditions in the mines, (where miners often work for an average of $1 to $5 per day). An excellent article that describes the political and institutional issues that affect conflict affected areas, see the article Behind the Problem of Conflict Minerals in DR Congo: Governance by the International Crisis Group.  This analysis places a lack of governance  within the Congo squarely as a cause of the rampant growth of the conflict minerals trade and diversion of proceeds from sale to armed militias.  Despite the “technical assistance” the author says the country receives from outside organizations, this “is not enough to compensate for the notorious lack of administrative capacity”.

Industry Under the Microscope

Courtesy David Lieberman/Flickr (Creative Commons license)

The intensity of recent news reports and discerning lack of detail in publicly reported data to date begs the question- have Intel and Apple really completely taken the “conflict” out their precious minerals sourcing, as recent headlines suggested?  Or has their recent announcement been taken out of context and only another (positive) phase in their supply chain sourcing strategy.   And if neither actually procures these materials from the Congo, are they merely shifting the issues to Asia?

Intel

To start answering these questions, I looked more deeply into the efforts to date by Intel to “get the DRC out” of the sustainable sourcing question.  According to Suzanne Fallender of Intel on their corporate social responsibility blog, the company has made significant strides since 2009 to stay ahead of this issue.  Specifically, according to Ms. Fallender (who I attempted to reach out to but had not yet returned my inquiries), Intel initiated a series of efforts in 2009 (prior to the CFS program), including: 

• Posted its Conflict-Free Statement about metals on its Supplier Site
• Requested that its suppliers verify the sources of metals used in the products they sell us
• Increased the level of internal management review and oversight, as well as  transparency and disclosure on this topic in this report
• Engaged with leading NGOs and other stakeholders to seek their input and recommendations.
• Hosted an industry working session at its offices in Chandler, Arizona in September 2009 with more than 30 representatives from mining companies, traders, smelters, purchasers, and users of tantalum to address the issue of conflict minerals from the DRC.
• Funded a study with EICC members on defining metals used in the supply chain, and continues working on a similar project to increase supply chain transparency for cobalt, tantalum, and tin.

Important to note is that Intel was the first company in the electronics supply chain to conduct on-site smelter reviews. Since the end of 2010, Intel has visited more than 30 smelters to assess if any of its suppliers were sourcing metal from conflict zones in the.   According to Ted Jeffries, Director of Fab Services and Consumables at Intel (who I also attempted to reach for this article), he recently stated “I don’t know that we have a complete handle on the whole supply chain, but we at least have a better handle on the nuances”.   Despite a letter campaign to its suppliers, Intel elected to visit each site and see for themselves to verify what was being self reported. “For the most part, for the Intel supply chain, the smelters that we’ve visited have been very truthful. There have been little caveats here and there, but for the most part, we can trace all of their sources to plants in Australia, South America and other parts of the world,” Jeffries said at the Strategic Metals for National Security and Clean Energy Conference in Washington D.C. in mid March.

“It really takes someone stepping up to the plate and taking a leadership role and taking a risk on a strategy. We can sit around and debate these things until the cows come home and nothing will change. At the end of the day, if we want to move forward on this debate, someone needs to make a strategic decision and start moving in that direction”. -Ted Jeffries (Intel)

Apple and Hewlett-Packard

As I’ve reported in Part 1 of this series, the multitude of supply chain layers and sourcing channels developed over the years may be a difficult weave to untangle (often 5-10 layers between the mine and the end product).  Take Apple, who (according to its recently released 2011 Supplier Responsibility Progress report ) has 142 suppliers using tin; these suppliers source from 109 smelters around the world. As a key participant in the EICC/GeSi CFS initiative, smelter audits are in process.  Additional efforts to contact Apple supply chain and sustainable sourcing staff have been unanswered.  Unlike Apples sub-par sustainability efforts with its Chinese electronics supply chain, it’s heartening that the company is taking some leading action in this area.

Hewlett-Packard says, “[T]hese issues are far removed from HP, typically five or more tiers from our direct suppliers.”  But they have gone a long way in developing an aggressive auditing, tracking and reporting mechanism. HP and Intel have published the names of their leading suppliers for the 3T metals, as well as some smelters.  On April 8^th, HP issued its revised Supply Chain Social and Environmental Responsibility Policy as part of list supplier compliance program (which HP began developing ten years ago). HP’s suppliers are expected to “ensure that parts and products supplied to HP are DRC conflict-free”. Moreover suppliers are to establish policies, due diligence frameworks, and management systems, consistent with the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas.

Confronting Our Electronics Addiction

“I’m a Mac and I’ve got a Dirty Little Secret”.  That was the title of parody of the Apple ad campaign, issued last year by the Enough Project.  While the video took a soft-handed approach to helping consumers make a visceral connection with conflict minerals, it also suggested that consumers’ purchasing power can influence corporate sourcing behaviors…and they can.

Last year, Newsweek magazine looked at this issue square in the eye.   The article stated “It takes a lot to snap people out of apathy about Africa’s problems. But in the wake of Live Aid and Save Darfur, a new cause stands on the cusp of going mainstream. It’s the push to make major electronics companies (manufacturers of cell phones, laptops, portable music players, and cameras) disclose whether they use “conflict minerals… Congo raises especially disturbing issues for famous tech brand names that fancy themselves responsible corporate citizens. As Newsweek also reported, the Enough Project and its allies “believe awareness drives better policy. So as we lovingly thumb our latest high-tech device, perhaps some self-reflection: after all, the final point in the supply chain is us.”

As an effort to raise consumer awareness of efforts that companies are (or are not) taking, the Enough Project[1] surveyed the 21 largest electronics companies to characterize progress made toward establishing documented and verifiable conflict-free supply chains in Congo.  The project ranked electronics companies in and four other product sectors on actions in five categories that have significant impact on the conflict minerals trade: tracing, auditing, certification, legislative support, and stakeholder engagement.  Four levels of progress (ranging from Gold Star to Red) were established based on efforts to date and suggestions to shore up perceived weaknesses.  The user-friendly ranking can be used by consumers to support purchasing decisions and offers a way to get in contact with each company to communicate calls to action. 

Enough Projects analysis (as shown in the graphic) indicates that six electronics companies are leading industry efforts to address conflict minerals, while two-thirds of the appeared to be taking limited action.  This graph also suggests that the bottom -third are way behind the industry curve.

Meanwhile, the auto, jewelry, industrial machinery, medical devices, and aerospace industries are well behind the electronics sector and only now beginning to address the role that conflict minerals may play their respective supply chains.  I’ll be watching with interest what the Automotive Industry Action Group does.  So the opportunity for direct end-consumer advocacy to influence corporate social responsibility in sourcing is bountiful.

Evidently, the biggest challenges to grabbing the conflict minerals issue by the reins is in untangling the convoluted supplier network, building a robust product traceability and independent verification process, and enacting sound policy that drives accountability and transparency among all stakeholders.  Not an easy task, but compared to years past, a vast improvement for sure.  The final part of this series will highlight specific international guidance and steps that industries and consumers can continue taking (while we wait for the SEC rules to get finalized) to proactively address supply chain minerals sourcing and maintain a high level of corporate social responsibility.

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[1]  The Enough Projects focus is on conducting field research, consumer and issues advocacy, and communications to support a grassroots consumer movement.

Conflict Minerals- The “Perfect Storm” of CSR, Sustainability, Politics and Supply Chain Management- Part 1

Photo Courtesy of Sasha Lezhnev/Enough Project (under Creative Commons License)

Last week, it was widely reported that both Intel Corporations and Apple Computers had pulled the plug on sourcing of precious minerals typically used in the manufacturing of its high-tech products from the Democratic Republic of the Congo (DRC).  These basic building blocks of our cell phones, computers and other consumer electronics are widely known as “conflict minerals”, mainly because of the large spread connection the “artisanal” and industrial mines that produce the materials and the flow of money to supply arms to rebels fighting in the DRC.  Conflict minerals are to the 21st Century high-tech world what “blood” diamonds were to the 19th and 20th centuries.

Apple, Intel and other U.S. based corporations have signed onto the Conflict-Free Smelter (CFS) program, which applies to shipments of tin ore, tungsten, gold and coltan from Congo and its neighbors.  The CFS program demands mineral processors prove purchases don’t contribute to conflict in eastern Congo[1]. The regulations were developed by the Washington-based Electronic Industry Citizenship Coalition  (EICC) and Global E-Sustainability Initiative (GeSI) in Brussels (Belgium), representing electronics companies including Intel and Apple, Dell etc.  The program is being marshaled by the GeSI Extractives Work Group, and summarized on the EICC website.

Regulatory Framework

The CFS initiative was established in response to the conflict minerals provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010), signed into law last July (page 838 of the 848 page Act  to be exact). Section 1502 requires companies to make an annual disclosure to the Securities and Exchange Commission regarding whether potential conflict minerals used in their products or in their manufactur­ing processes originated in the DRC or an adjoining country. If the minerals were sourced from these countries, companies must report on the due diligence measures used to track the sources of the minerals if they were derived from the DRC or neighboring nations. In addition, the Act will require a 3^rd party audit to verify the accuracy of the company’s disclosure. Finally, a declaration of “DRC conflict-free” must be provided to support that goods containing minerals were not obtained in a manner that could “directly or indirectly … finance armed groups in the DRC or an adjoining country”.

The U.S. Securities and Exchange Commission was to have issued regulations to stem purchases of conflict minerals this week.  However, on Monday the SEC delayed issuance of the specific rules to the August-December timeframe.  Ultimately, U.S. companies will be required to audit mineral supplies next year to identify purchases that may be tainted by the Congo fighting, according to draft SEC regulations.

Two groups of companies will be directly impacted by the Conflict Minerals Law: companies that are directly regulated by the SEC, and companies that are not SEC-regulated, but are suppliers to impacted companies. Starting April 1, the CFS scheme began requiring due diligence and full traceability on all material from the Congo and other neighboring conflict zones.  Then, these audits, or at least their summaries, are to be incorporated into SEC regulatory findings (in some manner, as yet to be defined by the SEC).

California Steps Up

Meanwhile, this past Tuesday, committee of the California State Senate passed a Senate Bill 861 Tuesday that will curb the use of conflict minerals from Congo.  The 9-1 vote in the Governmental Organization Committee was a first step to making California the first “conflict-free state”.   If it passes the full assembly, the bill would prohibit the state government from contracting with companies that fail to comply with federal regulations on conflict minerals.

According to D.C. attorney Sarah Altshuller (@saltshuller) “The California legislation, even if passed, is unlikely to impact many companies: it would apply only to companies against which the SEC has filed a civil or administrative enforcement action. That said, California’s legislative activity reflects significant stakeholder concern, as well as advocacy activity, regarding the ways in which the sourcing of specific minerals may be contributing to the ongoing conflict in the DRC.”  Many engaged in the initial debate were concerned too that the state was too early to move forward in the absence of final SEC rules.

Supply Chain Ripples?

Courtesy of rasberrah (Creative Commons Licence)

Leon Kaye (@leonkaye), reporting last week in Triple Pundit, “The CFS identifies smelters through independent third-party auditors who can assess that raw materials did not originate from sources that profit off the conflict in the Democratic Republic of Congo.  Now Intel and Apple have stopped purchasing minerals from this region, which has transformed a voluntary program to what the president of an exporter association in Congo called “an embargo.”

Also, as  reported also last week by Bloomberg, “There is a de-facto embargo, it’s very clear,” said John Kanyoni, president of the mineral exporters association of North Kivu, in the Democratic Republic of Congo. “We’re committed to continue with all these programs. But at the same time we’re traveling soon to Asia to find alternatives.”

Defacto or preemptive, this move is long overdue and is bound to bring to light an elephant in the room that manufacturers and consumers alike have been quick to run from and avoid.   I’ve reported in recent posts my dismay over the approach that Apple has taken in addressing its supply chain sustainability issues, especially in Asia.  The fact that Apple has electively chosen, along with Intel to be a first mover to shake the supply chain up and seek to right some corporate social responsibility wrongs is encouraging.  However as my colleague Mr. Kaye correctly notes, neither may have had a choice.

As noted in an article by Future 500’s Juliette Terzieff  this week, “buyers for Chinese, Indian and other countries’ manufacturers who are not part of the CFS program or subject to U.S. legislative requirements coming in effect in early 2012 face no regulatory requirements to ensuring their purchases are conflict-free. This could prove particularly valuable for those seeking to sidestep controls given that Chinese demand for minerals like copper are predicted to rise 7% every year between 2010 and 2014.”

How Many Companies are affected?

In an excellent analysis by ELM Consulting and reported in a series on AgMetal Miner last fall, the amount of companies falling into the two previously mentioned categories is unclear.  According to the analysis:

For the first category, the SEC estimated that 1,199 companies will require a full Conflict Minerals Report. The methodology for determining this number is worthy of mention. The SEC began by finding the amount of tantalum produced by the DRC in comparison to global production (15% – 20%). The Commission selected the higher figure of 20% and multiplied that by the total number of affected issuers, which they stated is 6,000. (75 Fed. Reg. 80966.)  Clearly, this methodology does not consider many additional factors and the actual number of companies that will require the full audit is certain to be higher. For the second category – the suppliers – no estimate has been made.  But if one anticipates 10 suppliers (we have data indicating that the number of suppliers ranges from one to well over 100 for a single directly-regulated company; an average of 10 suppliers may be conservative, especially given the wide range of conflict mineral-containing products) for each company directly regulated, the number of additional companies impacted would be 12,000.

Verifying Mineral Sources Is Tough Work

Photo Courtesy of The Enough Project

As I noted in a past post on “materiality”, surveys taken from manufacturers suggest a lack of confidence in being able to confidently trace conflict minerals to the source (excluding the likelihood that illegal extracted minerals are also blending into the marketplace).  So you could see the difficulty in companies demonstrating due diligence in tracing the chain of materials flows from point of origin.

According to Treehugger ace writer Jami Heimbuch , plugging the supply chain to assure the at all minerals come from conflict free zones is no easy task.  Ms. Heimbuch reported that even Apple has noted how it is nearly impossible to know the exact source.

The proposed SEC rules do attempt to take on suppliers who have “influence” over contract manufacturers who provide name brand products for larger companies.  The proposed rules also apply to retailers of private-brand products and generic brands.   Finally there is some ambiguity around how scrap electronic waste is to be treated.   The SEC has not defined what is recycled or scrap material and manufacturers have a fair degree of latitude in their disclosure reports as to how they will treat scrap/recycled material.

The BBC reports that Rick Goss, of the Information Technology Industry Council (ITIC), whose members include Apple, Dell, Hewlett Packard, Nokia, states that “it will be impossible to make sure that not one single illicit shipment entered the supply chain….It is too complicated in terms of corruption – illegal taxation – to absolutely guarantee that an illegal shipment did not enter the supply chain, regardless of all private and public sector efforts,’ he warns. The minerals could go elsewhere. Asian smelters are sourcing from any number of countries.”

Summary

If it is impossible to track the source of all the minerals going into the stream, then the big question is what countries and companies will do to fix inadequate governance and systems.   And if U.S. companies shift their sourcing to other nations, will this be enough?  Is global manufacturing merely playing “kick the can”?

The conflict minerals issue just may be the “perfect storm” that combines elements of resource consumption, consumerism, corporate social responsibility, supply chain management, politics and product stewardship.

The next post in the series will dive a bit deeper into efforts by key manufacturers in how they are auditing, validating and tracing the conflict minerals supply chain and what responsibilities we as consumers have in lessening the impacts of this perfect storm.

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[1] As part of the Conflict-Free Smelter program, participating tech companies must provide third-party verification that their processors don’t contain commonly used minerals that fund armed conflicts in Central Africa, specifically the Democratic Republic of Congo. Minerals from Central Africa commonly sourced for tech components include gold, titanium, tungsten and tin; the DRC provides 5 percent of the world’s tin supply, as well as 14 percent of tantalum.

Navigating Sustainable Supply Chain Management in China Takes a Keen Eye & Business Sense

2010 marked a watershed moment in supply chain sourcing among worldwide manufacturers and retailers. Sustainability observers and practitioners read nearly weekly announcements of yet another major manufacturer or retailer setting the bar for greener supply chain management.  With a much greater focus on monitoring, measurement and verification, retailers and manufacturers Wal-Mart, Marks and Spencer, IBM, Proctor and Gamble, Kaiser Permanente, Puma, Ford, Intel, Pepsi, Kimberly-Clark, Unilever, Johnson & Johnson, Herman Miller among many others made major announcements concerning efforts to engage, collaborate and track supplier/vendor sustainability efforts, especially those involving overseas operations.  Central to each of these organizations is how suppliers and vendors impact the large companies’ carbon footprint, in addition to other major value chain concerns such as material and water resource use, waste management and labor/human rights issues.Meanwhile, efforts from China’s manufacturing sector regarding sustainable sourcing and procurement, was at best, mixed with regard to proactive sustainability.  From my perspective as a U.S. based sustainability practitioner (with a passion in supply chain management), the challenges that foreign businesses with manufacturing relationships in China can be daunting.  Recent events concerning Apple Computers alleged lax supplier oversight and reported supplier human rights and environmental violations only shows a microcosm of the depth of the challenges that suppliers face in managing or influencing these issues on the ground.  Apple recently did the right thing by transparently releasing its Apple Supplier Responsibility 2011 Progress Report, which underscored just how challenging and difficult multi-tiered supply chain management can be.  But all is certainly not lost and many companies have in recent years begun to navigate the green supply chain waters in China. 

According to a World Resources Institute White Paper issued in the fall of 2010, China faces a number of supply chain challenges.  First, the recent spate of reports alleging employee labor and environmental violations can place manufacturing partnerships with global corporations at risk.  According to the report, Chinese suppliers that are unable to meet the environmental performance standards of green supply chain companies may not be able to continue to do business with such firms. Wal-Mart has already gone on record, announcing that it will no longer purchase from Chinese suppliers with poor environmental performance records. In order to be a supplier to Wal-Mart, Chinese companies must now provide certification of their compliance with China’s environmental laws and regulations.

Photo Courtesy of http://www.flickr.com/photos/scobleizer/ under Creative Commons license

Wal-Mart, like many other IT and apparel manufacturers also conducts audits on a factory’s performance against specific environmental and sustainability performance criteria, such as air emissions, water discharge, management of toxic substances and hazardous waste disposal. These actions are extremely significant as Wal-Mart procures from over 10,000 Chinese suppliers.  This increased scrutiny on environmental and corporate social responsibility through supplier scoring and sustainability indexing, says the WRI report may trump price, quality, and delivery time as a decisive factor in a supplier’s success in winning a purchasing contract.

Chinese Government Stepping Up Enforcement

Finally, what good news I hear about the depth of environmental regulations on the books in China is buffered by the apparent lax enforcement of the rules and regulations.  That is however appearing to change.  The WRI report indicated that the Chinese State Council is directing key government agencies, including the National Development and Reform Commission, the Ministry of Finance, and the Ministry of Environmental Protection to prohibit tax incentives, restrict exports and raise fees for energy intensive and polluting industries, such as steel, cement, and minerals extraction.   Also, it’s been reported in the past years that the People’s Bank of China and the Ministry of Environmental Protection are also working with local Chinese banks to implement the ‘Green Credit’ program, which prevents loans to Chinese firms with poor environmental performance records. In addition, the National Development and Reform Commission and the Ministry of Finance have issued a notice to all Chinese central and local governments to purchase goods from suppliers that are ‘energy efficient’. Finally, on a local level, governments have developed preferred supplier lists for companies producing environmental-friendly products for their purchasing needs.

Supplier Challenges Are Not Just Environmental

A China Supply Chain Council survey conducted in 2009 identified a huge gap in knowledge between (1) clear understanding of which environmental issues posed the greatest risk (2) what to do to manage significant environmental risks.  Also, nearly 40% of the company’s surveyed thought sustainability to be cost prohibitive, too complicated or where particular expertise was lacking don’t have the expertise (on the other hand 60% did!).  Two- thirds of respondents did consider sustainability to be a supply chain priority, although many were not confident of the return on investment.  However, more than half of the respondents reported that they had begun collaborating with their larger supply chain partners.    In fact, according to the World Resources Institute White Paper, despite increasing pressures to improve their environmental performance, Chinese suppliers face many financial challenges to operating in a more sustainable manner

World Resources Institute White paper notes increasing  non-environmental pressures, including: “Extended green investment “payback”: While improving resource consumption, such as energy and water, provides long-term cost savings, the payback for making such environmental investments may be as long as three years, which is financially impossible  for many Chinese suppliers. Lack of financial incentives from green supply chain buyers: Multinational buyers are often unwilling to change purchasing commitments and long-term     purchasing contracts to Chinese suppliers that make the investments to improve their environmental performance. Rising operational costs: Chinese suppliers face  rising resource and labor costs. For example, factory wages have increased  at an average annual rate of 25 percent during 2007 to 2010. Rising costs dissuade suppliers from making environmental investments which may raise  operating costs. Limited access to finance: The majority of Chinese suppliers are small and medium-scale enterprises (SMEs) with limited access to formal financing channels such as bank loans.  Chinese SMEs account for less than 10 percent of all bank lending in China,  and as a result, Chinese suppliers frequently do not have the capital to     make the necessary environmental investments. Intense domestic and global competition: Chinese suppliers face intense competition from thousands of firms, both  domestic and international, within their industries. This intense competition puts constant pressure on suppliers to cut costs, which can  include environmental protections, in an effort to stay in business.

Leveraging the Supply Chain to Gain “Reciprocal Value”

Leading edge, sustainability –minded and innovative companies have found “reciprocal value” through enhanced product differentiation, reputation management and customer loyalty.  I recently highlighted the model efforts that GE has implemented with its China based suppliers to implant responsible and environmentally proactive manufacturing into their operations.  GE’s comprehensive supplier assessment program evaluates suppliers in China and other developing economies for environment, health and safety, labor, security and human rights issues. GE has leaned on its thousands of suppliers to obtain the appropriate environmental and labor permits, improve their environmental compliance and overall performance.   In addition, GE and other multi-national companies (including Wal-Mart, Honeywell, Citibank and SABIC Innovative Plastics) have partnered to create the EHS Academy in Guangdong province.  The objective of this no-profit venture is to create a more well-trained and capable workforce of environmental, health and safety professionals.

Summary

Many of my prior posts have highlighted the critical needs for increased supply chain collaboration among the world’s largest manufacturers in order to effectively operationalize sustainability in Chinese manufacturing plants. This is especially evident for large worldwide manufacturers operating subcontractor arrangements in developing nations and “tiger economies”, such as India, Mexico and China (and the rest of Southeast Asia). Global manufacturer efforts underscore how successful greening efforts in supply chains can be based on value creation through the sharing of intelligence and know-how about environmental and emerging regulatory issues and emerging technologies.

Suppliers and customers stand so much to gain from collaboratively strengthening each other’s performance and sharing cost of ownership and social license to operate.  But as I have stated before, supply chain sustainability and corporate governance must first be driven by the originating product designers and manufacturers that rely on deep tiers of suppliers and vendors in far-away places for their products.

Note: This piece is adapted from a recent article that I wrote, “Navigating China’s Green Road” that appears in China Sourcing Magazine