Conflict Minerals:

Yet Another Supply

Chain Challenge
As lawmakers target conflict minerals, companies
could face significant costs to comply. The focus is on
four metals extracted from the war-torn Democratic
Republic of Congo and adjoining countries.

Eight Power Moves

Manufacturers will face significant raw material cost pressures as lawmakers target conflict
minerals. The legislators' current focus is on the war-torn Democratic Republic of Congo (DRC)
and adjoining countries.
In the recent past, the supply of and demand for raw materials forced manufacturers to cope
with radical market-price fluctuations for commodities such as iron ore and steel; as they
formulated successful market strategies, the impact of commodity price spikes became
manageable. More recently, procurement professionals have been tested by the scarcity of rare
earth metals such as scandium, yttrium, and cer. China, which has the world's largest known
deposits of these metals, has exacerbated the challenge by enacting stringent export caps.
Again, manufacturers adjusted their strategies and are managing their predicament.
Now on the horizon is a new federal regulation to require companies that make products using
certain minerals to disclose whether their supply comes from or near the Democratic Republic
of Congo, where mining revenue has funded violent military groups. When this regulation
passes, companies with global supply chains will face the daunting task of adapting once again.

Recent Developments in U.S. Legislation

Many institutionsincluding the United Nations, the U.S. Department of State, the European
Union (EU), and numerous nongovernmental organizations (NGOs)have closely studied the
issue of conflict minerals and the militia groups in the DRC region that have taken over their
mining and sale. The peak of international focus came with the inclusion of Section 1502 into
the Dodd-Frank Wall Street Reform and Consumer Protection Act, a federal statute signed into
law on July 21, 2010. Subsequently, the U.S. Congress charged the Securities and Exchange
Commission (SEC) with its implementation. On December 23, 2010, the SEC proposed a rule
that would, if adopted, require publicly traded companies to conduct certified audits, submit
an annual report as part of their disclosure requirements, and disclose that information online,
thus incurring enormous compliance costs.

Companies using certain minerals will have

to disclose whether their supply comes
from or near the DRC.
Regulators are now struggling to create a rule for companies that use conflict minerals while
also avoiding a compliance nightmare for manufacturers with complex supply chains. While
the SEC has postponed the deadline several times, a final ruling seems imminent. Many believe
the regulation will be costly and difficult to put into practice. Although most companies affected
support the ultimate goal of the pending regulation, many are calling for phase-in periods and
allowances for the use of smaller amounts of the minerals without disclosure.
In its proposed rule, the SEC defines four minerals as conflict mineralscassiterite, the chief
ore to produce tin; columbite-tantalite, the ore from which tantalum is extracted; wolframite,
an important source of tungsten; and gold. The rule would require companies to disclose their
use of conflict minerals that originated in the DRC or an adjoining country. The term adjoining
country is defined as a country that shares an internationally recognized border with the DRC,
Conflict Minerals: Yet Another Supply Chain Challenge

which includes Sudan, Uganda, Rwanda, Burundi, Tanzania, Zambia, Angola, Congo Republic,
and Central Africa Republic. In 2009, the DRC countries made up 32 percent of global tantalum
mine production, 4 percent of global tin mine production, and 1 percent of both tungsten
and gold mine production (see figure 1).

Applicability: A Trickle-Down Effect

Section 1502 is applicable to U.S. domestic and foreign issuers, or companies that are required
to report to the SEC. These entities are directly affected if conflict minerals are necessary to the
functionality or production of a product manufactured or contracted to be manufactured. The
SEC conservatively estimates that this ruling will affect about 1,200 issuers. However, an indirect
effect resonates throughout the supply chain as companies ask their suppliers to look into their
sourcing practices for conflict minerals. Current estimates indicate 700,000 to 900,000
businesses would be subject to some degree of supply chain traceability effort.
Compliance costs would certainly be high. Although the SEC pinpoints implementation costs at
around $70 million, other estimates predict total compliance costs to be somewhere between
$5 billion and $7 billion for issuers and their associated suppliers. In one way or another, a wide
range of industries use conflict mineralsfrom automotive and aerospace to jewelry and leisure
(see figure 2 on page 4). The picture becomes even more complex at the product level. Although
found in very small quantities, conflict minerals can be used in products as diverse as cell
phones, laptops, canned food, automobiles, golf clubs, and wedding rings.

Figure 1
Democratic Republic of Congo and adjoining countries

Global production
Ta

Tantalite (Columbite)

Sn

Tin (Cassiterite)

4.0%

Au

Gold

0.7%

Tungsten (Wolframite)

1.4%

32.4%

Sudan

Central Africa
Republic
Congo Republic

Uganda
Democratic
Republic
of Congo

Angola

Rwanda
Burundi
Tanzania

Zambia

Source: A.T. Kearney analysis

Conflict Minerals: Yet Another Supply Chain Challenge

Ta

Tantalite (Columbite)

Sn

Tin (Cassiterite)

Au

Gold

Tungsten (Wolframite)

Leisure goods

Jewelry

Industrial equipment
and tools

Industrial applications

Healthcare

Food

Electronic applications
and equipment

Consumer electronics

Communications

Chemical

Automotive

Agriculture

Aerospace

Figure 2
A wide range of industries use conflict minerals

Source: A.T. Kearney analysis

A Complex and Twisted Supply Chain

The complexity of conflict minerals becomes apparent when looking at a communications
company as an example. The company would need to sift through 35 manufacturers, 60 to
80 parts suppliers, more than 1,000 commodity parts suppliers, and an unknown number
of distributors to get to all of its sources. Because only very small quantities of conflict minerals
are typically integrated into any given product, traceability is even more difficult. For example,
a 2 kilogram (4.5 pound) laptop contains 10 grams of tin, 0.6 grams of tantalum, 0.3 grams of
gold, and 0.0009 grams of tungsten. Smelters, where metals of diverse origins come together
to be processed, have been identified as the crucial traceability point. Fortunately, the number
of smelters within the overall supply network is still manageable (see figure 3).

Figure 3
Smelters are the critical point of supply chain traceability

Mine

Trading
house

Smelter

Refiner

Manufacturer

Customer

Critical point
for supply chain
traceability
Number of players

Source: A.T. Kearney analysis

Conflict Minerals: Yet Another Supply Chain Challenge

Electronics and automotive companies are on the forefront of this issue and are trying to
anticipate the exact configuration of conflict minerals regulation. They have been implementing
supply chain traceability systems such as conflict-free smelter validation programs, risk
assessment programs, and contractual requirements. Engaging downstream suppliers both
voluntarily and through contractual measures is essential to supply chain transparency.

Supply Chain Traceability in Other Industries

Similar cases in other industries reveal how best to deal with the conflict minerals supply chain.
Food and hazardous goods industries are no strangers to traceability, which has also found
its way into clothing and forestry industries as environmental sustainability has become increasingly important to consumers and businesses alike.
In the early 2000s, the food industry enacted supply chain traceability systems in the wake
of several food safety and health crises. Chemical companies and supermarket chains implemented traceability systems that allow consumers to trace the origins of particular products
through the entire supply chain using their smart phones. Many food companies are using radio
frequency identification (RFID) technology to track food from its point of origin to its retail
outlet.1 An RFID track-and-trace system can be used not only to track the location of food
as it moves through the supply chain from the grower to the grocer, but also to provide vital
information about environmental fluctuations in temperature, humidity, and light.

The struggle is to create a rule for

companies that use conflict materials
while avoiding a compliance nightmare for
manufacturers with complex supply chains.
The supply chain for hazardous goods mandates an even more sophisticated system because
of the danger to public health and safety. This technology enables real-time tracking on the
product level, and parameters for humidity and temperature can be checked while the materials
are en route. For conflict minerals, these systems allow for boundary alerts that prevent the
materials from crossing certain geographical boundaries.
Even without explicit regulatory provisions, some businesses have introduced supply chain
tracking systems to promote their products sustainability and eco-friendliness. A New Zealandbased company and maker of merino clothing engages its customers by allowing them to see
the source of its products online, thus fostering consumer involvement.

Lessons from the Scarcity of Rare Earth Metals

The shortage of rare earth metals last year prompted suppliers to adapt their strategies. Some
of the lessons learned can serve as forward-looking guidelines for avoiding conflict minerals.
The RFID uses microchip tags that respond to radio waves. Unlike traditional barcodes, RFID tags, also called smart labels, do not require
a line of sight to relay information. Instead, information is accessed by simply placing the tag within range of an RFID radio transmitter.

Conflict Minerals: Yet Another Supply Chain Challenge

Suppliers have tried to reduce demand by shifting to alternative technology, new manufacturing techniques, or other materials. This has made companies less dependent and less
vulnerable. They have also intensified recycling of these materials, a strategy that is of particular
interest for conflict minerals because recycled materials lack the connection to DRC violence.
Finally, severe Chinese restrictions that have limited the export of rare earth metals since 2009
have made the situation worse. Suppliers reacted by investing in extraction capabilities outside
of China, thus becoming less dependent on volatile Chinese export policies. Shifting demand
and involvement in other regions where conflict minerals are also mined is another possible
solution, especially for gold, tin, and tungsten, for which DRC production constitutes less than
5 percent of the global volume.

A Process for Supply Chain Traceability

As supply chain transparency becomes a legal requirement, a structured three-pronged
approach can help companies not only adapt to the immediate affect of regulatory requirements, but also better understand the longer-term social and environmental affects
of the products they make as well as the impact on competitive advantage (see figure 4).
Our approach takes place in three phases:
Phase 1. Create transparency
Phase 2. Develop a traceability strategy
Phase 3. Comply with regulations
Create transparency. Companies must understand the regulatory and compliance requirements that arise within a network of associated suppliers. In other words, what information is
required by associated suppliers or regulatory provisions? Next, an internal identification of

Figure 4
Three phases in supply chain traceability

Create transparency

Develop a traceability strategy

Comply with regulations

Evaluate degree of compliance

requirements

Strengthen supply chain

traceability systems

Identify conflict-free sources and

establish conflict-free supplier base

Assess risk of conflict mineral

involvement on a product level

Establish a conflict-free smelter

validation program

Report supply due diligence (and

publish online)

Assess risk of conflict mineral

involvement in the supply chain

Evaluate possible conflict-free

manufacturing techniques and
technology

Carry out independent thirdparty audit

Design and implement a

comprehensive risk management
program

Source: A.T. Kearney analysis

Conflict Minerals: Yet Another Supply Chain Challenge

the risks associated with conflict minerals must be followed by identifying those same risks
downstream in the supply chain so that a company can fathom the potential scope of the issue.
Develop a traceability strategy. Strategies must be developed and implemented for supply
chain traceability systems and validated conflict-free smelters. The breadth and depth of these
programs depend on the risks identified in Phase 1. Vertical integration of systems along such
a supply chain is tricky but potentially necessary. Compatibility is crucial in this roll-out phase.
Industry associations including the Association Connecting Electronics Industries (IPC) have
taken a lead in coordinating it. This specifically relates to reconciling different IT systems
and proposing unified standards. At the same time, companies should identify and evaluate
potential alternative manufacturing techniques and technology that would make them less
dependent on conflict materials. Weighing all possible options, a comprehensive strategy
should be designed and implemented to adequately respond to the risks identified in Phase 1.
Comply with regulations. In the third and final phase, the transition to a conflict-free supplier
base is initiated. This could mean making use of recycled materials or shifting demand to
other conflict-free sources. Finally, compliance requirements regarding due diligence and
disclosure are followed according to the assessment of Phase 1. This can range from mere
information requirements and associated suppliers all the way to conducting a full audit with
all disclosure requirements.

Outlook: Adapting, Once Again

The SEC has not yet issued a final rule, but a decision is imminent. Therefore, it is of utmost
importance for supply chain managers to prepare accordingly. Thorough preparation and
anticipation will have an immediate impact on efficiency. The general direction of the issue
is manifested in the SECs proposed rule from 2010. Once implemented in the United States,
a global roll out is likely as institutions such as the EU follow suit. The potential challenges for
supply chain traceability include complexity, small quantities, and lack of transparency, as
outlined above. Given the pressure of NGOs and other organizations, corporate social responsibility and consumer awareness are additional challenges, which is why some companies have
made conflict minerals a priority. Meeting all of these challenges will be importantfor, as
other industries have shown, supply chain traceability is here to stay and will be instrumental
in helping companies capture an enduring growth advantage.

Authors
Christian Schuh, partner, Vienna
christian.schuh@atkearney.com

Michael Strohmer, principal, Vienna

michael.strohmer@atkearney.com

The authors wish to thank Nino Mori for his valuable help in writing this paper.

Conflict Minerals: Yet Another Supply Chain Challenge

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