Opinion by Bart Perkins

Supply chains: Danger ahead!

Among the many things that can complicate the supply chain for multinationals, legislation and regulation can be the hardest to master

chain
Credit: Mark Schellhase

Poor Chipotle! No company wants CNN, Forbes, MSNBC or other news services reporting on its latest corporate debacle. An E. coli outbreak in the food industry is a company’s worst nightmare, and can tank a company’s reputation (and stock price!). Businessweek’s barfing-burrito cover is an image that will live in advertising history and, unfortunately, customers’ memories. While I hope Chipotle will not back away from its commitment to small, local farmers supplying hormone- and antibiotic-free meat, the outbreak highlights the difficulty of managing a complex supply chain with a large number of suppliers.

The supply chain in most multinationals has evolved over many years to minimize the cost of raw materials, labor, transportation and taxes. The supply chain is further complicated by mergers, acquisitions, divestitures and partnerships. Given the pace of business, it is unlikely that underlying business processes and supporting IT applications are thoroughly analyzed and improved to accommodate each change.

New regulations are making supply chain management even more complex. In recent years, the U.S., the European Union and others have created a number of regulations that are creating a great deal of work for large companies that manufacture or handle physical products. The regulations require such companies to regularly gather and report additional data about their supply chain. New IT support will be required whether the company gathers the information itself or engages the services of a third party.

The supply chain team must understand all significant legislation, including:

  • Dodd-Frank regulations require companies to report to the SEC if their product contains tantalum, tin, gold, tungsten or other “conflict minerals.” Conflict minerals are extracted in war zones, such as the Democratic Republic of Congo, then sold to fund continued fighting. The rule applies to companies that report to the SEC under the Exchange Act and that either manufacture or have “actual influence” over the manufacturing process. The companies must report on the covered materials’ country of origin, along with the chain of custody.
  • The California Safer Consumer Products Regulation requires manufacturers, importers, assemblers and retailers to notify the Department of Toxic Substance Control when their products contain a “Chemical of Concern.” Subsequently, the manufacturer or other responsible party must determine how to limit exposure to these products. These regulations are part of California’s Green Chemistry Law, which seeks green alternatives to dangerous chemicals.
  • The California Transparency in Supply Chains Act requires retailers and manufacturers with annual gross receipts of more than $100 million doing business in California to disclose, on their websites, their “efforts to eradicate slavery and human trafficking from [their] direct supply chain for tangible goods offered for sale.” The act requires companies to confirm whether or not they attempt to assess the likelihood of human trafficking across its supply chain. The act does not require the retailer or manufacturer to attempt to stop the human trafficking but relies on public pressure to force the hand of offending suppliers.
  • The Transparency in Supply Chain provisions of the U.K.’s Modern Slavery Act requires businesses with sales above £36 million operating in England and Wales to post a statement on their websites describing the steps taken to ensure that slaves are not used in the business or in any part of the supply chain. This act also relies on public pressure.
  • The EU’s Regulation on Registration Evaluation, Authorization and Restriction of Chemicals (REACH) was adopted to protect people and the environment from dangerous chemicals. In addition to industrial products, REACH applies to chemicals in paint, clothing, electronic products, furniture, etc. Any company manufacturing or marketing a product containing restricted chemicals in the EU has to demonstrate to the European Chemicals Agency that the product is safe for use.
  • Washington State’s Children’s Safe Product Act requires manufacturers selling children's products in Washington to report to the state if their products or their packaging contains a “Chemical of High Concern to Children” such as formaldehyde or benzene. Although manufacturers are supposed to self-report, the Department of Ecology tests products to ensure compliance.

The U.S. and the EU have other supply chain regulations in addition to the ones listed above.

China, Denmark, Malaysia, South Africa and others have created or are creating their own regulations. Most of this legislation has three primary goals: keeping products safe, reducing human trafficking and helping stem the use of product profits to fund continued fighting. While these goals are laudable, these new requirements complicate supply chain management even further.

Moreover, since these regulations are being created by different governments, the resulting data is not shared, and the enforcement processes are neither coordinated nor consistent. Even within the U.S., regulations vary from state to state. Complicating matters even further, requirements will likely change as the list of conflict materials grows and war zone boundaries spread or contract. Compliance violations can result in stiff fines, publicity nightmares and lawsuits from plaintiffs alleging unfair business practices.

Since supply chain software products were typically not designed with all these regulations in mind, creativity will be necessary to collect and manage the additional data mandated. If it has been some time since your supply chain was reviewed, leverage the demands of these regulations to create a business case that justifies renovation of your supply chain monitoring processes. Even if your supply chain was recently streamlined and associated processes upgraded, the regulations are likely to result in significant amounts of work for IT. Start lobbying for additional budget and staff now.

Bart Perkins is managing partner at Louisville, Ky.-based Leverage Partners Inc., which helps organizations invest well in IT. Contact him at BartPerkins@LeveragePartners.com.

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