SUPPLY CHAIN RISK MANAGEMENT BLOG

How to REACH transparency within your Supply Chain Network (1/2)

Sep 15, 2014    Karsten Wunsch

 


If you believe in GARTNER – like a lot of people do – you might confirm that Supply Chain Visibility is the topic #1 for Executive Supply Chain Managers. Or at least should be…

A recent study provided by Supply Chain Insights discovered that around 80% of the questioned companies had on average 3 material disruptions in 2013. When I talk to Procurement Managers I usually ask the following question: “How can you know that your suppliers are still able to produce and deliver tomorrow?” In many cases the answer is that they have contractual obligations with their suppliers to be informed if anything could affect the production.

How shall that work? Let’s imagine that you would be “preferred customer” for your suppliers and that you would be the first they would call in case of emergency – a lot of “would’s” and there are more to come… The probability is very high that the supplier would wait as long as possible and would have several internal legal discussions before he contacts you. Especially if the term that he has to inform you regarding disruptions is close to the term that he has to pay penalties for non-delivery…

42% of disruptions happen beyond Tier 1 (Business Continuity Institute, 2013) which is a growth of 3% compared to 2011. Keeping that in mind everybody can estimate on its own how effective and reliable the information flow described above could be.   

 So why is Supply Chain Transparency not a standard for each and every company yet? Due to missing tools, support and especially the lack of understanding, it was nearly impossible in the past to handle the topic without massive budget and capacities.

But the market has changed: REACH, Dodd Frank Act, public sanctions such as the ones against Russia – there are a couple of regulations which have been recently announced or became effective.  They helped to evangelize the market to get more sensitive regarding Supply Chain Visibility:

REACH

REACH is a regulation which is obligatory for all member states of the European Union. On a high and rough level, REACH covers all chemicals which are produced or imported into the EU with an amount of over 10 tons per year (1 ton from 2018 on). Each and every chemical has to be Registered using an specific dossier. This dossier will be Evaluated and might be Approved. In case of critical CHemicals the approval might be limited to specific applications.  

This approval and especially the limitation is a very important point as it forces the whole supply chain to communicate over multiple tiers.

First of all companies need transparency from whom they buy. If they source outside the EU where REACH is currently not obligatory they might be responsible to register the substance on their own. And even if the substance and the supplier are registered but the usage does not fit to the approved limitations you might be in charge to adjust the registration.

To avoid unnecessary costs and possible delays it makes sense to discuss applications through the whole value creation chain.

REACH is not only obligatory for chemical companies but also affects a broad range of industrial sectors and companies. Being compliant to REACH is a continuous task.

Dodd Frank Act – 1502 (see also our May blog post)

Section 1502 of the Dodd Frank Act covers the usage of conflict minerals and has been a challenge for many companies in the last months and especially for the tin processing electronic sector.  The idea of the regulation is to ensure that in conflict regions mining is done in compliance with CSR and no illegal operations are funded with the money.

Each company which is SEC-listed has to ensure that itself as well as their suppliers are compliant. The problem is that most suppliers don’t have the processes and tools in place to drive compliance into their own supply chain. The deeper you dive the lower leverage you have.

Without a satisfying answer from your supplier you might be forced to look for an additional source. This might cause extra costs and delays which are not foreseeable and certainly not budgeted. Therefore the easiest way might be to support your suppliers and receive value able information regarding your 2nd Tiers in return.

The good news is that every mineral has to be smelted. Smelters are a perfect choke point to check where minerals are coming from. You might want to check out following web-page: www.conflictfreesourcing.org which shows a list of more than 150 smelters which are audited to be free of conflict mineral.

First reports had to be finished until June 2014. I recently joined a webinar discussing the results of the first reporting wave. One interesting take away for me was a question for the audience regarding their compelling event. More than 50% of the participants stated that they are not SEC-listed but currently feel a high pressure from their customers.

It seems that section 1502 has reached the 2nd Tier and the next reporting wave is about to come!

Sanction list screening

The Krim crisis is getting worse day by day. Europe is very uneven to sharpen sanctions. USA is not – they have added a couple of additional persons and companies on the black list. Keeping in mind that the biggest French bank was fined of nearly 9 billion US$ for the violation of US-Sanctions just 3 weeks ago – each and every company which is making business with the USA and Russia should be alarmed – especially as sanction checking is often an initial process and not done on a daily base. I don’t know how the Supreme Court would judge sanction validations in lower tiers of a supply chain but I bet you don’t want to be the first to find it out.    

So as the evangelism is done and the market is aware of the necessity of Supply Chain Visibility the next step is to implement tools and processes as well as to leverage existing information and the network to gain transparency. I will cover this topic in my next blog…


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