Department of Operations & Supply Chain Management

Perry's Corner: Building a Responsible Supply Chain

November 1, 2010

Perry A. Trunick
Associate Editor, Inbound Logistics Magazine
OSM Adjunct Faculty

When the U.S. Congress prepared the Wall Street Reform Act, it added an amendment which has potentially significant implications for certain supply chains. The goal is to end human rights abuses in the Democratic Republic of Congo, but the unintended consequence is added complexity, cost, or even exclusion of supplies of certain raw materials used in most electronics - from mobile phones to music players, and computers. While much of the impact of the regulation is centered on U.S.-based companies at the consuming end of the supply chain, the weakest link is at the source end of the supply chain. Add the fact that each step the minerals take from source to smelter, to manufacture and assembly further obscures the origin of the minerals. In many cases, the various steps may occur in different countries, and the U.S. law has no jurisdiction along that portion of the supply chain.

The issue centers on what are termed Conflict Minerals. These commodities are mined in the Congo where armed rebel groups accused of human rights violations control the flow or exact "taxes" on the minerals produced by certain mines. The U.S. rule wants companies to ensure they are not using these Conflict Minerals and to post that information publicly.

There are alternative sources for the minerals within the Congo (mines not under control of the rebels) and in other countries. But the first problem is that there is no "fingerprint" that would differentiate legitimate minerals from those coming from conflict sources. One suggestion is to tag the legitimately sourced materials with a low-level radioactive marker that would be absent from the minerals mined in conflict areas.

With or without the radioactive marker, a process of tracing, auditing, and certifying the source and documentation is needed. Tracing the source can follow both the physical goods as they move from mine to trading house to smelter and on through the supply chain and also the money trail. Many of these methods are in place on much of the supply chain for quality control and even homeland security reasons. But, getting back to the source in a developing nation where many of the supply chain participants lack technology or standardized business practices is difficult. Add the potential for corruption and the ease of moving the materials to a nearby non-conflict country where they may be certified as originating there, and the solution almost demands a neutral third party to audit and certify the source.

Financial and tax records that follow the materials can provide some evidence of origin. Transport records tied to a certificate of origin and lot number can add authentication. But this can all begin to get into proprietary company information which can affect a company's competitive advantage if the information is publicly available for competitors to view. Failing to provide assurances that a product is free of Conflict Minerals could affect consumer preference and brand reputation.

Would consumers pay more for the assurance they are not buying products that contain Conflict Minerals? There is certainly a cost implication to adding the checks and balances to the supply chain. And, since the law is directed at U.S.-based companies, what about non-U.S. companies that are not required to document their sources? They could be at a market disadvantage with U.S. consumers. Or, U.S. companies might actually gain market preference in other regions if consumers value the "No Conflict Minerals" certification.

The detailed discussions of problems, solutions, and potential consequences of the Conflict Minerals ban would go a long way towards informing legislators on the issue.

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