The Silver Lining in Conflict Minerals Compliance

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MetalMiner welcomes guest commentator Trevor Stansbury, founder and president of Supply Dynamics. (For a more complete bio of Trevor, click here.Supply Dynamics is a provider of raw material forecasting and fulfillment solutions, commonly used to manage “Material Demand Aggregation” programs across an extended supply chain.

With other likeminded businessmen, I braced myself when it became clear that Section 1502 of the Dodd-Frank Act — known as the “conflict minerals requirement” — would go into effect this year.

While no one would argue the good intentions behind it, like most of the legislation to come out of Congress in recent years, it is chock full of requirements that lack definition and is going to cost industry a pretty penny to figure it all out.

In a lawsuit filed by the National Association of Manufacturers (NAM) this week, the group estimated that the initial compliance costs could amount to $3 billion to $4 billion dollars. About the only people that seem to be celebrating are the legions of lawyers, accountants and auditors that companies are now turning to for help in interpreting the new rules.

today's metal prices - MetalMiner IndXIn the midst of this confusion, and as I watched the emails begin to fly as people try to figure out the obscure details of the rule – such as whether or not trace amounts of conflict minerals due to “impurities” or “contaminants” are exempt – it occurred to me that there might be a silver lining in all of this.

You see, for decades, billions of dollars’ worth of manufacturing has left our shores for places where cheaper labor rates and lax environmental regulations beckoned. In the C-suite of most major US companies, this all seemed quite logical and even necessary at the time.

How else, after all, were companies to remain globally competitive? What most companies overlooked, however, is that 30 to 60 percent of the cost of most manufactured parts has little or nothing to do with their supplier’s labor rates, overhead or machine speeds and feeds.

In fact, 30-60 percent of the cost of most parts can be attributed to the raw materials that go into them – materials such as bar, sheet, plate, castings and forgings.

The difference between then and now is that now, labor rate arbitrage opportunities are not what they used to be, and leaning out the raw material component of total product cost has suddenly become the new frontier for cost reduction and efficiency gains.

Much to their regret, the same companies that were once so heavily involved in outsourcing are discovering that what used to be an attractive, consolidated raw material buy when parts were made in-house is now a fragmented mess with demand for common raw materials distributed globally across dozens – and sometimes even hundreds – of contract manufacturers.

The silver lining of the conflict minerals law will become even clearer in Part Two and Part Three.

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