Are You Seeing the Supply Chain Domino Effect of Regulations?

March 17, 2016
By Jean-Grégoire Manoukian

Regulatory compliance is one of the most important outcomes of any EHS program. Without regulatory compliance, companies would not be able to operate. However, compliance efforts have a high cost associated to them. Therefore many companies focus on the regulations that apply to them directly, while some decide to go beyond regulatory compliance and adhere to higher standards to improve EHS and sustainability performance, despite the higher costs.

But when it comes to the supply chain, it can be dangerous to focus solely on the letter of the law and dismiss regulations that are not directly applicable. Even if a specific regulation does not apply to them, companies may need to take them into account because of other actors in the supply chain.

U.S. Conflict Minerals Rule

Let’s look at two examples. In the U.S., section 1502 of the Dodd-Frank Act on Conflict Minerals applies to companies that file reports with the SEC. Here is what the SEC says:

The final rule applies to a company that uses minerals including tantalum, tin, gold or tungsten if:

  • The company files reports with the SEC under the Exchange Act.
  • The minerals are “necessary to the functionality or production” of a product manufactured or contracted to be manufactured by the company.

On the surface, it may appear that if you are a U.S. company not listed on a U.S. stock exchange and that does not produce SEC reports, or a foreign company, then you do not need to worry about the U.S. regulation on conflict minerals. But what about your customers in the supply chain? Imagine a Japanese company selling circuit boards to a private company in the U.S. that sells electronic parts to a U.S. public company selling electronic products to consumers. Although the SEC regulation on conflict minerals only applies to one of the three actors (the U.S. public company), the other two actors may also be impacted. In order to produce its disclosure on the use of conflict minerals, the U.S. public company may need to inquire about the materials purchased from the U.S. private company, while the latter may need to follow up with the Japanese company. Hence we have a domino effect where all three actors in the supply chain are impacted by the U.S. conflict minerals rule, even though, according to the letter of the law, only one of the three has regulatory obligations.

EU REACH Regulation

The second example is the EU REACH regulation on chemicals. REACH is very complex, so we will focus on two clauses only. First, if you manufacture or import substances in quantities above one ton in the EU, you need to make sure that the substance is registered for the particular uses you support, with exposure scenarios and risk management measures provided in extended Safety Data Sheets (SDSs). Second, if you supply an article in the EU that contains a Substance of Very High Concern (SVHC) at a concentration above 0.1% (w/w), there are obligations that apply, regardless of volumes. Here is what the European Chemical Agency says about SVHCs:

EU or EEA suppliers of articles which contain substances on the Candidate List in a concentration above 0.1% (w/w) have to provide sufficient information to allow safe use of the article to their customers or upon request, to a consumer within 45 days of the receipt of the request. This information must contain as a minimum the name of the substance.

On the surface, it may appear that if you are a company outside of the EU that does not import any chemicals in the EU at quantities above one ton, or any articles, then you do not need to worry about REACH. However, your supply chain may include actors that are affected by the REACH regulation. Imagine a company in Ohio selling chemical mixtures to a Canadian company that sells specialty chemicals (e.g. adhesives, cosmetic additives, construction chemicals, flavors, food additives, fragrances, polymers) to an EU company selling articles or chemical products in the EU. Only the EU company and to some extent the Canadian company may have some obligations under REACH. But the supplier in Ohio, while not selling anything to European firms or into the EU, suddenly may find itself on the receiving end of requests regarding full compositions and physical-chemical properties of its products. Hence we have a domino effect where all three actors in the supply chain are impacted by the EU REACH regulation, even though, according to the letter of the law, only two of the three may have regulatory obligations.

The supply chain is one of the biggest risk factors that impact a company’s regulatory compliance and brand reputation. Despite great efforts to comply with regulations from around the world and demonstrate corporate social responsibility, materials procured from the supply chain, or the social and environmental performance of suppliers, can undermine these efforts. As a result, companies are placing more priority on supply chain collaboration.

Suppliers need to be aware of the domino effect of regulations that do not impact them directly. Pressures from downstream actors in the supply chain mean that suppliers need to have a robust product stewardship and compliance system in place, and greater visibility on their upstream suppliers.

If you want to learn more about the topic of product compliance and the supply chain, download the report Improving Product Compliance by Going Beyond the Four Walls. The paper is based on a survey of 187 organizations, and looks at the Best-In-Class practices they have established regarding product compliance across their supply partners, and how their supply chain organizations are responding to support compliance requirements.

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