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Sourcing decision-making shaped by conflict mineral laws .

TechnologyRiskManufacturing and engineeringNorth AmericamanufacturingRaw materialsGovernance and Legal ComplianceReputational RiskConsumer Electronics+-

In this post, Procurement Leaders research analyst Liz Maffei examines the response to US legislation introduced to highlight the sourcing of conflict minerals. As the third anniversary of Dodd-Frank's passing looms, how are companies affected responding?  

 

In July 2010 the US Senate passed the Dodd-Frank Act, which was the country's response to the financial crisis and the legislative omissions which contributed to it. The law also champions the rights of consumers to protect their interests. 

 

To the casual observer it was, therefore, something of a surprise to find that the sourcing of "conflict minerals" found itself its way into the Act.  In fact, Section 1502 of the Act obligated the US Securities and Exchange Commission (SEC) to provide visibility of such minerals.  SEC finalised its reporting requirements in August 2012, requirements which almost immediately became subject to a, still pending, legal challenge. 

 

The "conflict" area in question is the eastern Democratic Republic of Congo (DRC) where there are longstanding concerns that the region's mineral wealth has exacerbated its often brutal conflict.  The minerals targeted are: tin, tantalum, tungsten and gold (as well as their derivatives) which are plentiful in the region. Such minerals are especially important to the electronics industry but are widely used in other technology based industries.

 

The intensity of the lobbying prior to SEC's finalisation of the rule (which occurred 2 years after the Act had been passed) and the subsequent legal challenge might lead one to imagine that the punishment for a business being found to have conflict minerals in its supply chain is unduly harsh.  But no, the harsh glare of public scrutiny is the rule's only consequence.  If businesses identify conflict minerals in their supply chain the rule demands no sanction of any kind, nor is there an obligation to remove the tainted product. 

 

Regardless, of the absence of sanctions imposed by the rule it must be presumed (if only by the companies which have filed the lawsuit) that investors and consumers alike will recoil, in horror, at the thought of profiting from conflict and the moral pressure will itself underpin the business case for change. 

 

In fairness to the litigants - the DRC and its surrounding countries do routinely come pretty close to the top of international corruption tables.  The arguments highlighting the difficulty of accurate supply chain monitoring in these locations therefore cannot be dismissed out of hand.  Nevertheless, if fears of SEC non-compliance result in businesses exiting the area (which has happened to a significant extent) the economic damage will be immense. 

 

Perhaps we would all be better served if the litigants decided to make that argument, to their shareholders, in their annual reports rather than among lawyers in the courtroom.

 

However, Motorola which has a significant demand for coltan, a derivative of tantalum, has taken a different approach.  Its Solutions for Hope project launched in June 2011 was designed to source and ship conflict-free tantalum from the region. The pilot proved a success and by May 2012 the ongoing viability of the scheme was confirmed with Motorola entering into a long-term contract with its chosen supplier. 

 

Motorola's innovative approach demonstrates how very substantial obstacles can be overcome to achieve reliable supply-chain transparency.  Given that KPMG research has shown that 15% - 20% of the world's tantalum comes from the region it seems possible that Motorola has gained an advantage over its competitors which are so lacking confidence in their supply chain controls that they feel their only option is to exit the market. 

 

Yet again, the question arises: Is securing competitive advantage by guaranteeing transparent, ethical sourcing the procurement manager's challenge of the future?   

Liz Maffei
Posted by Liz Maffei

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