Conflicts of interest

Manufacturers work to keep supply chains free of conflict minerals

Posted on Nov 15, 2016 :: Back Office Operations
Sean P. Johnson
Posted by , Insight on Manufacturing Staff Writer

William Chapin harbors no conflicted sentiments when it comes to complying with the latest federal mandates regarding supply chains and war-torn regions of central Africa.

He will do the right thing. True, complying with Section 1502 of the Dodd-Frank Act may not be the easiest thing when managing more than 2,600 suppliers for Fond du Lac-based Mercury Marine, but as manager of global product compliance, he recognizes keeping so-called “conflict minerals” out of the company’s engines will also keep money out of the hands of guerilla groups terrorizing the region.

That is more than enough to justify the due diligence and costs of compliance.

“There are mines where warlords are using slave labor — including children — to extract the ore,” Chapin says. “The people there are being denied the opportunities of self-determination because of these groups.”

It’s the right thing to do, Chapin says, though that does not necessarily make it easy.

To most manufacturers, Dodd-Frank applies to the financial services industry and is not a cause for concern. For the most part, they would be right. But then, there is Section 1502, which was inserted into the legislation before its 2011 passage.

Essentially, Section 1502 of Dodd-Frank is what was known as the Congo Conflict Materials Act, which Congress failed to pass as stand-alone legislation in 2009. The act requires a publicly traded company to both disclose if any of the covered conflict minerals — tin, tungsten, tantalum and gold — are used in its products, and if they are, determine if those minerals were mined from the areas where human rights abuses are occurring.

At first, it might appear to be an exercise for large, publicly traded companies and not affect many of the privately held manufacturers that dot the landscape of Northeast Wisconsin. But many of those manufacturers are part of the supply chain for larger, publicly traded companies, which during the past three years have begun requesting that suppliers meet their policies for determining if conflict minerals are used. They’re also doing due diligence to determine the origins if those metals are used.

While companies do not have to declare products or components as “conflict free” — a court challenge by the National Association of Manufacturers struck down that component of the law — they still must report the findings. For companies committed to sustainability, compliance is important to protecting their reputation.

That means the companies downstream in the supply chain must also complete the due diligence for conflict minerals, which can be a challenge in both resources and time, says Brian Walczak, a partner with Wipfli’s commercial audit practice.

“A lot of smaller companies are now starting to get those inquiries from their customers upstream,” Walczak says. “They have to comply, but the resources are not as robust.”

In working with both the publicly traded companies as well as their private suppliers, Walczak says a lot of the communication between the two has been educational, with the publicly traded companies making their suppliers aware of the requirements and the information they will need. Now three years into the process, he expects the response rates throughout company supply chains will improve.

In the first three years of required reporting, 67 percent of companies required to file could meet the threshold of 75 percent compliance. About 10 percent of the companies were 100 percent compliant with the law’s provisions.

About 65 percent of filers still can’t verify the origins of conflict minerals used in their products, according to an analysis by Chris Bayer, a professor at Tulane University.

“I see a lot of our clients putting together a robust educational process for their suppliers,” Walczak says. “The challenge is getting the response rates and a definitive determination. We still get a lot of ‘we don’t know.’”

But that is changing. The non-governmental Conflict Free Sourcing Initiative has compiled data on many of the world’s smelting operations for these specific minerals, documenting where the ore is sourced and if it is conflict free. As that information works its way through the global supply chain, it becomes easier for companies to report with certainty, he says.

As companies become better acquainted with the policies and requirement of their customers, as well as the procedures needed to verify the sources for the covered minerals, compliance can be expected to improve, Walczak says.

As each level of the supply chain goes through the steps of determining if they use conflict minerals, the companies that supply them, and then determining the source, the transparency of the entire supply chain will improve, Walczak says. It’s still going to take time and resources, but that should diminish with each passing reporting cycle.

“We are moving the needle,” he says. “We are slowly getting to where we want to be.”

Recent analysis shows that the groups targeted by the act have lost more than 60 percent of the money they derived from suspect mining operations.

Given the challenges and costs of changing suppliers if they can’t verify the origin of minerals they use — or worse, are found to be using conflict minerals — the results are a positive sign, Chapin says.

“It’s not a perfect answer,” he says. “If one of our core values is to create a positive view of manufacturing, those are the steps that have to be taken.”