Supply Chain Compliance: Defining an Emerging Discipline and Exploring Requirements for Conformance

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November 27, 2012Connie Prostko-BellBlog

As discussed in the Ask the Expert column of this month’s edition of the 3E EH&S Express, supply chain compliance is an umbrella term describing the discipline emerging to manage the evolving business condition in which access to the environmental, health, safety and social risks of raw materials and finished goods becomes a critical component of transactions and customer/supplier relationships.

According to Robert Malone of  “The new focus on risk in business has a special case when it comes to the supply chain. It is part of a sea change in focus on risk as essentially financial to risk as an overall business issue involving a broad range of uncertainties centered in the supply chain.”

Rapid and seemingly inexhaustible changes to the global compliance landscape have triggered a proliferation of uncertainty and have compelled savvy organizations to wield the power of spend to demand compliance assurance from their suppliers. Suddenly many of the traditional methods of evaluating risk and measuring success may be based on false assumptions.  In order to mitigate operational, legal and business continuity risk ahead of the dynamic compliance climate, businesses must increase certainty, impose standards, and communicate more transparently with their supplier and customers.  Best practices require compliance assurance and material disclosure from suppliers as a condition for doing business.

One of the positive consequences of this market shift is that by using spend to drive transparency organizations amplify the reach of their own risk abatement priorities and enforce sustainable practices. By driving substances of concern from products compliance activities can fuel a benefit rather than simply feed a bureaucracy.

The explosion of obligations will likely continue in parallel with efforts to investigate and better understand impacts and consequences of products, substances, and processes on human health and the environment.

Consider lead as an example. There is now general consensus that lead is not good for children. Thus lead is regulated in many jurisdictions and applications. Further, many companies restrict or ban the use of it in their products and therefore in the raw materials they procure from suppliers. Hence supply chain compliance assurance becomes a critical process to ensure that lead is not present in materials procured from raw material manufacturers or in the case of retailers, from consumer goods manufacturers. As a result lead is less likely to be present in products and the waste stream and risk to human health is reduced.

An effective supply chain compliance strategy can also help reduce or eliminate risk in the supply chain, which often occurs very early in the life cycle of a product, when raw materials are extracted. This is true for conflict minerals. Gold, casserite, wolframite  and coltan are extracted by a relatively small number of companies, many of which are far removed  from the companies utilizing the minerals in their finished goods. But the obligation — in this case, primarily proof of due diligence — weighs ultimately on the manufacturer producing a finished good which contains one of those minerals, not the extractor.

Understanding what products are made of, the regulatory status of products and components, and where these materials come from, are the basic building blocks for ensuring compliance.  Capturing information about products, raw materials, processes, and even packaging, throughout the entire supply chain is a critical component to managing compliance obligations.

Most successful EHS and risk professionals have mastered domination of the value chain, weaving compliance efficiency and risk mitigation throughout all the internal components that make a business matter.  However, in the new compliance reality, scrutiny and liability have profoundly proliferated, impacting both risk and obligation. As a result, compliance risk has moved beyond “My Product” and “My Processes,” with a new variable blossoming in the compliance equation. That variable is the supply chain. The new compliance reality dictates ensuring compliance and qualifying the risk profile of not just your finished goods but also for your raw materials or distributed products, including packaging. This is also the new reality for your customers and so the need for information, and thus the burden of compliance, requires pulling and pushing information upstream and downstream. A one dimensional approach and linear assumptions no longer inform a successful compliance strategy.

Because compliance is no longer a one dimensional problem, a linear compliance solution will not work. Compliance obligations exist in many parallel and intersecting planes within an organization, therefore compliance solutions should combine the skill sets and resources of many functional groups. A cooperative effort with cross discipline resources can work together to build up a portfolio of information about raw materials and then at the finished good level. Such an initiative can be quite complex – and expensive – to undertake.

Take a moment to consider the vast number of end points possible for one moderately complex product. For each raw material / supplier combination a material profile is needed to detail the compliance attributes of the material. The specific types of data and documentation may vary between product types (food, electronics, chemicals etc) but there are a lot in most cases.

A nested compliance strategy is necessary to determine and prove compliance for products you provide to the marketplace. Nested compliance looks to suppliers to comply with regulations, to document that compliance and to provide you, their downstream user, with compliance assurance.

Thus the burden of proof falls to suppliers.  Conformance seems highly unlikely, when you consider the inability of many suppliers to provide even basic information for a safety data sheet (SDS).  Compare that to asking for a completed Conflict Minerals survey or IPC 1752 file, and you have upped the complexity quotient exponentially.

On the other end, companies receive hundreds of isolated communications from their customers requesting information about their business and specifics about their products.  Organizations can expend significant resources providing one-off responses to incoming inquires and chasing esoteric data points from suppliers.  By utilizing a nested compliance approach and creating a reusable data asset from the collected and created information, it is often possible to satisfy customer requirements for information with significantly less effort.