Got Sustainable Procurement? Yes! No! Maybe. Supply Chain Surveys Read the Tea Leaves (Part1)

Courtesy LeoReynolds via Flickr CC

To paraphrase  a timeless Bob Dylan song, “The Times They Are A’ Changin’” is no understatement.  You can read the details from across the globe in the news every day and are rapidly happening simultaneously on political, economic and social levels. And business is also making radical changes in the sustainability and corporate social responsibility (CSR)  frontier.

“Then you better start swimmin’
Or you’ll sink like a stone
For the times they are a-changin’.”- Dylan

One area that appears to be in movement is Procurement. You know, those folks on the third floor in the back that order stuff?  Well, wrong! I’ve maintained that the heart of a sustainable supply chain runs through its procurement function.  That’s because every product- every single purchase- has a hidden human health, environmental and social impact along the entire supply chain.  My previous posts have discussed how the procurement function is a vital cog in product value chain.  Purchasing staff are the “gatekeepers” that can access powerful tools and serve as a bridge between supplier and customer to assure that sustainability and CSR issues are taken into account during purchasing decisions.  2010 was a watershed year for sustainability initiatives and supply chain management and I predicted that 2011 would see greater progress.

So I was incredibly excited when I recently got my hands on a relatively new white paper from Ariba, entitled “VISION 2020 -Ideas for Procurement in 2020 by Industry-Leading Procurement Executives”.  According to the conveners of the document, the “objective [of the effort initiated in 2010] is to initiate a dialogue on the future of procurement and to create a roadmap for how to get there.”  For that, they connected with leading practitioners and executives from around the world and across a variety of sectors to share their ideas, best practices and to read the tea leaves as to where procurement might be in 10 years.

And while the initial report laid out some pretty intriguing and widely varying trends and predictions about the state of procurement in the corporate function, I was unfulfilled.  I was all ready to read about how the emergence of sustainability in the marketplace was going to drive procurement decisions.  I expected to hear how top flight companies around the world were collaborating with their supply chain, implementing staff training on ‘green purchasing’ practices, and implementing sustainability driven supplier audits and ratings scorecards.

Boy, was I wrong!  Only ONE  mention of the word “sustainability” (thank you Dr. Heinz Schaeffer, Chief Procurement Officer, Northern and Central Eastern Europe for AXA), and no mentions of “responsible sourcing”, “green supply chain” or “sustainable sourcing”.  I would have expected more from chief procurement representatives from the likes of KeyBank, Maersk, Sodexho, and former execs from Hewlett- Packard, General Motors, and DuPont.  Most of these companies are generally considered leaders in the sustainability space.  So why would there be a disconnect between what companies are doing in design, manufacturing and product life cycle management and the procurement function?

Before we go too far, its helpful to define what “sustainable procurement” is.  While there is no singular definition for it, I like the definition offered up by the  UK-based Chartered Institute of Purchasing & Supply (CIPS).  CIPS definition is  “a process whereby organisations meet their needs for goods, services, works and utilities in a way that achieves value for money on a whole life basis in terms of generating benefits not only to the organisation, but also to society and the economy, whilst minimising damage to the environment.”.  And what CIPS defines as  ‘whole life basis’ is that “sustainable procurement should consider the environmental, social and economic consequences of design; non-renewable material use; manufacture and production methods; logistics; service delivery; use; operation; maintenance; reuse; recycling options; disposal; and suppliers capabilities to address these consequences throughout the supply chain” [emphasis added].

It’s a good thing that the authors from Ariba stated that “The [2020 Vision]report is intended not as an end, but rather as a point of departure for much discussion and debate around where procurement can and should be setting its sights for the year 2020 and beyond.  In fact, Ariba invites readers to “join the debate and to extend the discussion with new ideas by joining the conversation.  I have and I hope you will too.  But I think I’ll start right here first.

Key Findings of Interest:

The report identified six key trending areas and take-aways among the participants who have weighed in so far, namely:

1. Procurement devolves- with spend management requirements shrinking, companies are being forced to optimize what resources they have and make better informed decisions.  More work at the business line level will occur, possible eliminating the central procurement function entirely.  Money and metrics will drive most decisions as companies face leaner profit margins.  There will be a need to engage end customers more and more and leverage relationships.
2. The new supply management emerges– some traditional sourcing functions may become outsourced.  Strategy “will tie directly to an enterprise’s end customers and it will be more cognizant of the diversity of desires and requirements within the customer base”.
3. Skill sets change.  The Chief Procurement Officer and staff must have broader skills that allow them to not only create opportunities for revenue enhancement internally and optimized “spend”, but also be more in touch with end customer values-driven needs. Procurement staff need to be tuned into multiple tiers of the supply chain, dive deep “inside the supply chain and bring [issues] forward to the designers within [individual] companies”.
4. Instantaneous intelligence arrives.    Market pricing will become more transparent [the Cloud forces transparency to some degree].  Companies will have to rapidly extract innovation and other value from supplier bases, and build exclusive commercial relationships with leading suppliers that share both risks and rewards.
5. Collaboration reigns- There will be as the report notes a “big emphasis on driving and taking innovation from the supply base… the supply role will be less ‘person-who-brings-innovation-in’ and more ‘person-who-assembles-innovation-communities-and-gets-out-of-the-way’.  Suppliers are being asked more often to participate in early design and product development as a way to leverage risk and control overall product life cycle management risks.
6. Risk management capacity and demands soar– as companies are already realizing, effective procurement relies on response to risk management variables (financial, ethical, and operational performance).  Companies must create “360-degree performance ratings and provide greater transparency into market dynamics, potential supply disruptions, and supplier capabilities”.  A few participants noted that  there will be a “big expansion in the kinds of risks companies address in their supply chains, considering, for example, such things as suppliers’ sustainability, social responsibility…”.

Now if I read in between the lines, I can easily pluck out a number of key procurement trends from the 2020 report that transfer well to sustainability and responsible sourcing.  Risk Management.  Collaboration.  Design phase (life cycle) engagement of multi-tiered suppliers.  Key performance metrics. Responding to consumer demands. Supplier performance ratings. 

Courtesy babycreative via Flickr CC

One takeaway for me appears that there may be a disconnect still between the procurement function and other functions within organizations. So is the procurement function still operating in obscurity in most organizations?  It all depends who you talk to but also on your skill at reading the tea leaves.

Rest assured that compared to only a few years ago, more companies that are seeking to manage the life cycle environmental impact of their productsfrom design and acquisition of materials through the entire production, distribution and end of life management.  They’re finding sustainable procurement to be a valuable tool to quantify and compare a product or component’s lifetime environmental and social impact early on in a products value chain while positioning the company for smart growth in a rebounding economy.  We may be at a sustainable procurement “tipping point” and Part 2 will present the results of a very promising benchmark report recently released by HEC-Paris and Ecovadis, which tells a much different story.

The times they are [indeed] a’changin’.

“Eeny, Meeny, Miny, Moe”- Selecting Best Conflict-Free Minerals Supply Chain Sourcing Strategies (Part 3)

(Photo courtesy of Julien Harneis under a Creative Commons license)

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.  Part 2 of the series dove a bit deeper into efforts by key manufacturers in how they are auditing, validating and tracing the conflict minerals supply chain.  The post also presented some ideas on and what responsibilities non-governmental organizations have had in shaping the debate over conflict minerals, and the roles or responsibilities that we as consumers should take in this thorny human rights- environmental impacts meets consumer products issue.

The final part of this series highlights specific international guidance and steps that industries and consumers can and are taking to proactively address supply chain minerals sourcing and maintain a high level of corporate social responsibility.

But before I go further, a postscript to Part 2.  Following my second post, I was contacted by Suzanne Fallender of Intel with an update on the company’s efforts that I described in the second post.  In her response, for which he apologized for the delay, she provided a copy of a white paper prepared and posted in late April.  In it, the company states “we continue to work diligently to put the systems and processes in place that will enable us, with a high degree of confidence, to declare that our products are conflict-free. Our efforts on conflict minerals are  focused in three main areas: (1) driving accountability and ownership within our own supply chain through smelter reviews and validation audits; (2) partnering with key industry associations, including the Electronic Industry Citizenship Coalition (EICC) and the Global e-Sustainability Initiative (GeSI); and (3) working with both governmental agencies and NGOs to achieve in-region sourcing”. 

The Intel white paper concludes by stating “From the time we became aware of the potential for conflict-metals from the DRC to enter our supply chain, we have responded to this issue with a sense of urgency and resolve. We have approached this issue like we would address other significant business challenges at Intel.”  I believe Intel and their efforts to date bear that out.  They are encouraging comments on their plans and efforts, which can be submitted at http://www.intel.com/about/corporateresponsibility/contactus/index.htm.

By the way, I am still waiting on Apples reply to my inquiries.

Comparing Proposed Steps to Action

As mentioned in the second post, the OECD guidance, Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, serves as a common reference for all suppliers and other stakeholders in the mineral supply chain.  The guidance also meshes well with current industry-driven schemes like the EICC and GeSi and AIGG guidance, and clarifies expectations regarding responsible supply chain management of minerals from conflict-affected and high-risk areas.

The OECD guidance approaches minerals sourcing and supply chain management from a “risk management” and “due diligence” perspective and offers a framework to promote accountability and transparency.  A fundamental problem with the OECD guidance is that it’s voluntary.  And with any voluntary guidance, there’s reluctance or little pressure to fully commit to implementation, unless key market or financial drivers threaten or pressure companies to do so.  Also, what is challenging as mentioned before are the many steps and sometimes fragmented nature of the minerals sourcing supply chain.  The myriad of hands that minerals often pass through on the way to the smelter, and in turn on to intermediate and final product manufacturers is numerous and admittedly difficult to accurately trace. Risk levels are particularly high when minerals are derived from the artisanal mining operations (as compared to larger scale operations).  Consequently, being able to control and influence risk along the entire minerals sourcing network and assure that adequate due diligence mechanisms are in place to keep track of intermediary activities is daunting to say the least.  All the more reason to seek ways to streamline the sourcing process by limiting the number of materials exchanges, stepping up oversight, and disengaging activities with underperforming  or high risk suppliers

The OECD suggests a five step framework for risk-based due diligence in the mineral supply chain  that strongly advocates for traceability and accounting systems for both upstream and downstream supply chain organizations:

Step 1: Establish strong company management systems

Step 2: Identify and assess risks in the supply chain

Step 3: Design and implement a strategy to respond to identified risks

Step 4: Carry out independent third-party audit of smelter/refiner’s due diligence practices

Step 5: Report annually on supply chain due diligence

In some contrast to the OECD guidance, the Enough Project offers its own set of valuable ideas and frameworks for the electronics sector and others working in east Africa to follow.  Enough Project, in its recent report entitled  Certification: The Path to Conflict-Free Minerals from Congo , states that international certification efforts are vital to long-term solutions to conflict minerals issues  and on assuring revenue “transparency”.  The Enough Project offers its “five key lessons that should be incorporated into a certification scheme for conflict minerals:

• A “conductor” is needed to convene a high-level diplomatic partnership on certification and help transform words into action. A “conductor”—a leader with gravitas and political support—is needed to bring stakeholders to the table and to issue a call to action. President Bill Clinton provided a precedent for this when he called together companies and sweatshop labor campaigners in 1996, resulting in the Fair Labor Association certification process.
• Certification should be governed and funded by a multi-stakeholder body that includes companies, governments, and NGOs. The legitimacy of a process rests on a multi-stakeholder governing and funding framework that ensures accountability.
• Certification must include independent third-party auditing and monitoring. Regular independent audits assure the public that the process is credible, and on-the-ground monitoring ensures accuracy.
• Transparency of audits and data is essential to making certification work. Certification processes are moving rapidly towards full disclosure of data and audits.
• Certification must have teeth. Certification can only work if its standards have meaning on the ground and are enforced through penalties for noncompliance.”

The Enough Project report calls on the United States, through Secretary of State Hilary Clinton, to convene a senior partnership on certification with industry and the International Conference on the Great Lakes Region (ICGLR).  The report also states that “the United States must act quickly, as minerals traders in Congo are already seeking alternative, opaque markets for their minerals. An internationally accepted certification process would deter this development.”  Last week, a letter writing campaign launched encouraging U.S. Secretary of State Clinton to state a public U.S. position on this issue and convene a high-level partnership on certification with leading electronics and end-user companies, together with Congolese President Kabila and regional governments.  The goal of this summit would be “aimed at unifying the regional and industry-led initiatives and gaining consensus on a system of independent checks on the ground”.

Meantime, Conflict-Free Smelter the industry protocols proposed and under development by the EICC and GeSi are focused on two key areas targeted at what they characterize as the “pinch point” in the supply chain- the smelter:

Business Process Review: Evaluate company policies and or codes of conduct relating to conflict minerals

Material Analysis Review: 1) Conduct a complete material analysis to demonstrate that all sources of materials procured by the smelting company are conflict-free; 2) Evaluate whether source locations are consistent with known mining locations; and 3) Establish whether material identified as “recycled” meets the definition of recycled materials.

The CFS program is moving forward in spite of the delay by the SEC for final rulemaking.   CFS assessments for tantalum began in the fourth quarter, 2010 and are expected to be posted on the EICC website starting this month.  Tin, tungsten and gold are planned to commence later this year.

What Makes a Good Auditor?

In addition to “what” types of certification schemes are needed and how they should be administered or governed, there’s the matter of “who” should do the auditing and third- part certifying.  What I see as critical here is Step 4 of the OECD process and Step 3 of the Enough Projects documents, both of which the EICC and GeSi programs are attempting to fulfill.  However, key to this audit process is the “independence” and competency factor as well as what qualifications auditors have to perform these assessments.  The Enough Project gleaned through numerous frameworks in order to develop its proposed certification approach, which deserves careful consideration.  In addition, while the SEC has yet to clarify the specifics of the Dodd-Frank provision, ELM Consulting’s Lawrence Heim in a recent AgMetal Miner series, notes:

… There are a number of auditor certifications that could be considered applicable to this scope of audit, but none should be considered to automatically qualify an auditor for these engagements. These audits require a unique blend of expertise in general auditing processes/procedures, environmental knowledge, accounting basics, chemistry/industrial processes, procurement controls, contracts and supply chain fundamentals. Finally, the auditor must be able to execute the engagement in accordance with the auditor/engagement standards of the Government Auditing Standards, such as the standards for Attestation Engagements or the standards for Performance Audits (GAO–07–731G) GAO-07-731G contains standards on auditor independence.

Associations consist of multiple members who have varying degrees of business relationships with each other and the audited entities, putting the auditor in a position of serving “multiple masters” relative to influence over the audit scope, process, information, report and payment. Our research and inquiries to qualified experts in SEC auditing requirements indicates that there appears to be no precedent in any other legally-required audit in the US that has been fulfilled in this manner.

Comparisons and Contrasts

I had the chance last week to listen in on an informative webinar by STR Responsible Sourcing.  The company is an accredited monitor for numerous social certification programs, and partners with many organizations that share our mission of assuring responsible sourcing practices.  The company compared governmental, regional, industry schemes for addressing minerals mined in conflict regions.  The figure below summarizes each of the initiatives and target areas.

According to STR, there are a series of challenges lying ahead for both upstream suppliers (e.g. miners (artisanal and small-scale or large-scale producers), local traders or exporters from the country of mineral origin, international concentrate traders, mineral re-processors and smelters/refiners) and downstream users (e.g. metal traders and exchanges, component manufacturers, product manufacturers, original equipment manufacturers (OEMs) and retailers) of precious minerals.   Downstream Supply Chain parties are faced with some unique challenges, namely:

• No clearly defined requirements of “due diligence”
• No guarantees for “conflict-free”
• Limited transparency in upstream supply chain
• No traceability in downstream supply chain
• No generally accepted standard / certification

For the upstream supply chain, primary challenges include:

• Complexity of the supply chain
• Difficulty to include small and artisanal mining
• Challenges for implementation of traceability schemes in the DRC due to militarization of mines and widespread lack of formalization of small scale mining

Meanwhile, according to STR,  the downstream supply chain might consider the following approaches to start on the path of responsible sourcing of precious minerals:

• Implement a procurement policy and due diligence procedures
• Develop consistent supplier engagement processes (awareness raising, communication and training) throughout the supply chain
• Monitor downstream suppliers’ due diligence procedures and gather data on organization of supply chain (desktop or onsite)

For the upstream supply chain consider the following:

• Support certification schemes and industry efforts
• Join certified trading chains / buy certified products
• Government lobbying

Where to Start

If you are a manufacturer of electronics, jewelry, automotive parts or other goods that may be subject to sourcing through the DRC or other conflict prone areas of the world, consider (at a minimum), the following steps:

• Read the OECD and Enough Project guidance documents to understand the issues and risks associated with responsible sourcing
• Stay tuned into the progress that your industry associations are achieving to bring a better sense of responsible management to this issue
• Follow the development of the SEC conflict mineral guidelines
• Work with procurement, operations, legal, environmental and communications staff to craft a procurement policy & selection of supplier selection process (along the lines that Intel, HP, Motorola and others have)
• Request origin and chain of custody documentation for purchases to assure traceability
• Establish adequate record-keeping system
• Ensure that relevant staff is trained on procurement policies, procedures to receive material and identification of potential conflict material

If I were to look at where industry was a few short years ago on this issue compared to now, there’s no doubt that increased minerals sourcing tracing and accountability in conflict-free minerals is improved.   The system as presently planned, in pilot stages or in process certainly has some flaws as most new initiatives have.  But given the industry, region, national and international levels of cooperation that is rapidly becoming evident, I’ve no doubt that the positive outcomes will be great.

Aaron Hall, Policy Analyst at the Enough Project in a recent interview with Resource Investing News said “It’s a start. You have to take small steps forward. The fact that governments and industry are thinking about this shows concern and to a large extent they are willing to tackle the problem,” said Hall. “I think it’s remarkable that the multiple stakeholders involved in this process have been able to come together in such a short amount of time and make progress towards setting up a regional certification regime for these minerals.”

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.

A Green Supply Chain Takes Innovation, Systems Thinking, Collaborative Approach–And Patience

As I have been involved with organizations through the years on environmental issues, I have discovered many things about supply chain management:

• Contractors and suppliers often create environmental impacts, sometimes related to the nature of their product or work, sometimes by accident
• Most organizations for some reason feel “powerless” to control their suppliers products
• Many companies are constrained by cost factors (purchase from the lowest cost vendor or bidder)

So when considering how to effectively manage and influence contractors and suppliers, raise expectations and take control of your supply chain, it may be valuable to take a “systems thinking” approach. Those that do realize that doing so may unlock significant revenue and cost savings potential.

Consider Starbucks. In mid 2009, Starbucks announced a legitimate attempt to address some very vocal stakeholder issues to clean up its supply chain by staring efforts to ensure that single-use cups are recyclable by 2012. So they convened a “cup summit” with representatives from every part of the paper and plastic cup supply chain, including raw material suppliers, cup manufacturers, retail and beverage partners, local municipal governments, Starbucks employees, and environmental NGOs. They brought in systems thinking guru Peter Senge. This effort is no small task given the internal (vendors and suppliers) and external (end use customer) variables necessary to make this program a success. They modified their goal to 2015. Starbucks reconvened this past spring and they are continuing down this open, transparent path to a sustainable supply chain. They are taking on this approach one city, one franchisee at a time. They are working with customers and cities to develop more proactive, use friendly recycling solutions.

To date, in its approximately 2,200 company-owned stores in North America that control their own waste collection, recycled items are made from one or more materials. While the company has continued to encourage recycling in cities where it’s “marketable,” a great deal remains to be down on the customer side (see Triple Pundit 8/20/10 article http://bit.ly/9SOJig). The company is also reaching deep and is offering farmers incentives to prevent deforestation, with pilot programs currently underway in Sumatra, Indonesia, and Chiapas, Mexico. This represents both an upstream and a downstream approach to green supply chain management. Sustainability is built into the company’s business vision, all performance metrics and product development decisions.  Starbucks has a long way to go to meet its goals but heretical goals like theirs may be takes time, coordination, patience, and above all, will.

Like Starbucks, Hewlett-Packard, the obvious Walmart makeover and others, forward-thinking companies are making efforts to consider how parts or components of a system are interconnected and examines the linkages between them. In the manufacturing and delivery of a product, a systems approach recognizes the interconnectedness between product components and delivery systems. So changing the way one component is manufactured, delivered, used and reused can effectively change behaviors and operations along the “value chain.” And along with this product systems thinking approach, sustainability data and metrics will flow with it, demonstrating the benefits to all those in the value chain.

So by standing back and viewing the supply chain in a systematic or holistic manner, organizations can apply that “big-picture thinking” needed to be truly innovative. Doing so can create leverage points that companies never realized they had before with their suppliers. So how does a company like Starbucks, or HP, or Walmart tackle such a beast, with literally tens of thousands of suppliers in their supply chain? Well nothing comes easy and overnight. Get yourselves into that mindset first before you proceed. But there are some relatively simple ways you can proceed and make the progress you have set out to achieve:

Develop macro and micro-scale process maps of the critical stages of the supply chain, with an emphasis on key sustainability inputs (energy, materials use, waste generation, carbon footprint), to fully understand where supplier processes and products connect. Identify those processes that you do not even have direct control over–this is vital because you may gain a better appreciation of you supply chain partners’ priorities as well

Identify the critical supply chain partners that have the greatest product impact and begin evaluating the strengths and weaknesses of the current relationship. If need be, can you effectively influence or control what they do and how it’s done?

Create a sustainable sourcing plan (with a two- to five-year window) where you develop a relationship with partners at those critical phases in your supply chain, from Tier to Tier. Develop a long-term engagement plan (as shown on the figure below), that incorporates your supply chain one tier at a time. Also make sure that the approach is collaborative and transparent (as I recently noted) in order to manage your suppliers expectations–and your own.

The upsides of collaborative, systems-based thinking is that suppliers feel ownership of the process, feel more invested in its outcomes and better positioned for a value-added business relationship. This is the essence of a green supply or “value chain.” All parts really are pulling together–this is the new wave of business in the 21st Century.

This post was originally published on my New Green Supply Chain Blog, which can be found at https://community.kinaxis.com/people/DRMeyer/blog