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The Information Squeeze

Do any of the components in your product contain conflict minerals? Are they manufactured in sweatshops? Do their factories follow environmental best-practices? Are you sure about your answers?

These may be tough questions for many companies to answer. In fact, it seems as if many companies don't want to know the answers. But the days of secrecy in your supply chain are over. Government regulations, as well as demands from consumers, are forcing companies to not only ask these questions, but to share publicly the answers.

If supply chain transparency is not a top strategic issue in your company, re-evaluate your priorities. The issue is taking on a new urgency as new laws and regulations requiring identification, tracking, and reporting on materials, components, and working conditions start kicking in.

As of January 2012, the California Transparency in Supply Chains Act requires companies that sell goods in California (i.e., everybody) to disclose what efforts, if any, they are undertaking to eliminate forced labor and human trafficking from their supply chains. The law assumes, of course, that companies are aware of any such activity at any point in their supply chains. (You can find a good description of the act and its requirements here.)

Meanwhile, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 contains provision requiring companies to identify and disclose whether their products contain any minerals from the Democratic Republic of Congo. Although the US Securities and Exchange Commission has been dragging its feet in coming out with final rules, Congress recently sent a letter chiding the agency for the delay and asking for quick action. Presumably, the regulations will be issued soon. (See: The Great Congo Paper Chase.)

And starting in September, a provision included in the National Defense Authorization Act is going to require government contractors to systematically identify and report on any counterfeit or suspected counterfeit parts in their supply chains. Apparently, even when these companies find counterfeits, they don't readily share that information. Not only don't they share the information with the government and industry — they are supposed to file a GIDEP (Government-Industry Data Exchange Program) report — they don't even share the information with other divisions within their own company, according to a speaker at a recent conference on counterfeit electronics.

These are just three examples of the growing pressure for supply chain transparency. Yet the industry seems ill-equipped to deal with these requirements. Most companies do a poor job of tracking information on materials, component sources, working conditions, and environmental impacts in their supply chains, according to Gil Friend, CEO of Natural Logic, a sustainability consultancy. In a recent report from the Wharton School, “Greening the Supply Chain: Best Practices and Future Trends,” Friend claims that even the world's largest corporations simply use Excel spreadsheets to compile the data. At one company, Friend found a senior vice president actually collating those spreadsheets himself.

It may have been an executive doing the work, but such an approach is far from strategic. How are you gathering and reporting this information? Do you have a strategy? Without one, the new requirements could put you at a competitive disadvantage.

12 comments on “The Information Squeeze

  1. _hm
    July 25, 2012

    Thease are reasons, why many organization prefer CM for their production. Once full manufacturing responicibility is given to CM, it is easy for orginzation to not get involved with so much of extra paper work and legal liability. For small size company, these are major overheads. 

  2. ITempire
    July 25, 2012

    @ _hm

    Are you sure that by outsourcing the production to a contract manufacturer, the company is exempt from filing reports and data to comply with regulations. I doubt that. In my opinion, the organization is to be held fully responsible for the product it sells and makes profit out of, if the regulations are to be implemented in their full spirit.

  3. ITempire
    July 25, 2012

    An organization that is involved in selling products built from counterfeit part, are the regulations expecting that organization to report on those counterfeit parts honestly?

    Obviously, the truth may never come out. The regulations, if they are to be successful, should, besides requiring companies to file reports, include intense audit as well to capture any non-compliance and fraudulent reporting.

  4. elctrnx_lyf
    July 26, 2012

    These new regulations could definitely put lot of pressure on many electronic OEMs and the over head could result in price increase. How the companies will actually compete with other low cost alternatives who doesn't follow all these regulations effectively?

  5. ITempire
    July 26, 2012

    @ elctrnyx_lyf

    “How the companies will actually compete with other low cost alternatives who doesn't follow all these regulations effectively?”

    That certainly is a wide concern of all organizations that follow regulations and are also competing in intense competition markets where price-war exists. The organizations that dont comply however take a big risk of bearing penalties and sanction if being caught as the non-compliance means being involved in counterfeiting and certainly, if caught, there wont be tolerable penalties.

     

  6. FLYINGSCOT
    July 26, 2012

    I imagine a company will need to keep strict tabs on all its suppliers and contract manufacturers to make sure the end product complies.

  7. Tam Harbert
    July 26, 2012

    I'm not sure that any of these regulations expressly mention contract manufacturers, but they do hold the OEM liable for ensuring that their products meet the regulations. That means pushing the requirements back through the supply chain, to subcontractors and to parts suppliers. That's what's happening in the case of the conflict minerals and counterfeits, at least. Defense contractors, for example, are putting new language in their contracts to hold partners liable.

  8. _hm
    July 26, 2012

    @Altaf: Process becomes much more simplfied. In place of few thousands of items, it becomes few products or assemblies.

  9. syedzunair
    July 26, 2012

    Waqas, 

    The concern is you mention is genuine as manufacturing without compliance leads to some bad after effects for the firm. Sanctions and fines are just one part of the equation. The bad will that such a case might bring to a manufacturer is unimaginable. 

  10. ITempire
    July 28, 2012

    @ Tam

    “Defense contractors, for example, are putting new language in their contracts to hold partners liable.”

    If there is a lacuna in law to hold responsible the actual supplier and not the finished good manufacturer, regulatory authorities will find it hard to chase down the actual culprit. There should be a law which holds liable the finished good manufacturer to ensure that parts being used are fulfilling all legal requirements.

  11. ITempire
    July 28, 2012

    @ syedzunair

    True. My concern, however, is more about how to capture the companies that report fraudulent information. It demands actions on the part of regulator to catch through audit or other techniques.

    Once, the manufacturer is caught, then obviously the damages will be, rather should be, unimaginable, if the law is to be kept in existence in spirit.

  12. syedzunair
    July 28, 2012

    @WaqasAltaf, I think your concern can only be overcome by more stringent compliance rules and random compliance audits. If a manufacturer is reporting false information about a product to the authorities, I an audit report should be able to highlight the anomalies. Once, the fraud has been established the authorities may penalize the concerned accordingly. 

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