Supply Chain Compliance

This is a series on Supply Chain Basics looking at the discipline from the Society of Operations Management perspective. Supply chain is also essential to project management as PMs are typically trained in world class contracting. For example, my Masters program had several courses involving contracting and the Defense Acquisition Workforce Improvement Act, DAWIA, certification highlights the combination of project management and supply chain. In this post, we will explore supply chain compliance issues adding some additional support as well.

Supply Chain Compliance

Business operations are subject to a width variety of compliance concerns from associations, regulatory agencies, nation-states, and performance standards. Compliance issues originate from but are not limited to:

• Tariffs and taxes 
• Environmental concerns 
• Financial reporting 
• Transaction activities 
• Control measures 

Two important areas of regulations are financial disclosure (Sarbanes-Oxley) and material content reporting.

Sarbanes-Oxley Act (SOX)

SOX, as applied to supply chain, was enacted by the US Government with the intent to protect investors by segregating duties in an effort to diminish conflicts of interest. For example, a buyer and seller must remain segmented having no associations that would influence the transaction towards personal gain between the two parties. The US Securities exchange commission is responsible for enforcing SOX. The two provisions that affect supply chain are sections 401 and 404.

Section 401 applies to all publicly traded companies but has limited applicability to contracts requiring quarterly and annual reporting of off-balance sheet transactions. This section requires disclosure of material off-balance-sheet transactions, arrangements, obligations (committed and contingent), and other relationships of the issuer with entities or persons if the arrangements have current or future material effect on the organization's finances and operations. This impacts service contracts particularly. Carriers and vendor managed inventory (VMI) are often used arrangements to hedge risk and move inventory off balance sheet.  VMI often involves the supplier retaining control and ownership of the inventory even at the customer site rather than having the customer take ownership upon receipt. Pre-expended inventories are often based on consumption where the vendor owns the inventory at the customer site until the piece is removed from the bin and installed.

Section 404 is broadly relevant to supply chains including outsourcing. Firms that move in this direction open opportunities to improve management and develop a competitive advantage.  This section requires internal controls that do two things; 1) expresses management's responsibility for establishing and maintaining controls and procedures for financial reporting and 2) contains an assessment of effectiveness of the controls and procedures.  Supply chains must be well structured processes in order to meet the level required by SOX. Transparency across all supply chain processes is necessary. Isolated practices such as inventory tracking is not sufficient for SOX efficiencies and effectiveness.

Sections 401 and 404 apply to outsourcing and off balance sheet agreements with suppliers must be reported (401) with effective internal controls (404). Everyone in the supply chain needs to be aware of the implications when dealing with publicly traded companies.

SOX also requires reporting of risks and strategies that will go into effect after disruptive events in order to mitigate the effects. This includes events like Acts of God, accidents, and threats of various sorts.

The Securities and Exchange Commission has an enforcement arm that investigates misconduct and violations of US Law. The SEC works in conjunction with other law enforcement to bring justice to criminal conduct.  Penalties range from civil violations where fines are $1,000,000.00 and 10 years in prison to criminal which includes fines of $5,000,000.00 and 20 years in prison.

Material Content Reporting

Material reporting is part of a larger effort to encourage the use of safer, recyclable, and recoverable materials as well as responsible end-of-life handling. Dangerous goods are often referred to as Hazardous Materials or HazMat. There is a plethora of laws regarding the movement, storage, and use of HazMat. All such goods must be accompanied by a Material Safety Data Sheet, MSDS, and be tracked cradle to grave. 

The Global Reporting Initiative (GRI) is composed of several hundred stakeholders that disseminates globally applicable sustainability guidelines for voluntary use. The Initiative works in cooperation with the UN.  GRI is assisting in the development of reverse logistical KPIs that assess and improve environmental performance in advance of likely legislation and laws issued by governments.

The US shoe manufacturer Timberland has developed 'EcoMetrics' to assess environmental impacts. These metrics include:

• Energy to produce
• Global Warming Carbon Footprint
• Material Efficiencies
• Percentage of renewable energy used in manufacturing

Comment:  The improper storage of sodium hypochlorite and violations at Aberdeen Proving Grounds that resulted in a massive fire put both military and civilian employees in prison. While at Naval Air Miramar, The Home of Top Gun, I was assigned collateral duties as the HazMat officer in conjunction with my duties in materiel control. When I took the program it was non-existent and within three weeks of a major inspection by California EPA. I immediately enrolled in training for HazMat handling.  The program we put to together involved several activities; segregating the materials into three categories (general hazards, oxidizers, and combustibles), establishing storage for each category and tracking usage, then we organized the administrative aspects of policies, contingency response, and tracking cradle to grave.  While other tenant commands were fined for their programs and handling of HazMat, our command received no fines or violations. The lesson gleaned from this was that the civilian inspection authorities mean business and the fines can mount up quickly. There is personal accountability for violations and poor decision making.

US Food and Drug Administration, FDA

Good Manufacturing Practices, GMP, require attributable control of the manufacturing process to ensure safety and quality in goods that for human consumption. This affects the supply feeding the raw materials into the manufacturing process. The US FDA has developed regulations requiring more thorough documentation of the chain of custody of drugs. The supply chain must provide the information documenting the movement materials and account for losses of controlled substances.

Environmental Concerns

Environmental concerns are mounting as nations and even regional cooperatives focus more and more on international commerce. The concerns focus on the introduction of foreign insect and bacterial species as well as the disposal of hazardous materials or foreign materials that become hazardous when mixed with indigenous life and materials.

ISO 14000 is a voluntary environmental standard which often conflicts with local laws by creating legal issues for companies when the intent was to be responsible to the environment and ecology. Therefore, companies often avoid voluntary compliance standards like ISO 14000.

Overall, there is very little cohesive international standard. Supply Chain Managers must look to the local laws as well as think through situations with forethought to ensure the safety and sustainment of the ecologies. This may mean the use of shields on mooring lines to prevent rodents from either boarding the ships or leaving the ships while in port. Another approach to some environmental concerns may be to use steel pallets rather than wooden pallets to avoid transmission of invasive insect species that may bore into the wood. There may also need for Clean in Place (CIP) standards before loading and transporting containers. CIP standards require hot water wash downs in which water temperature and pressures must attain standard ranges during the wash down.  Water solutions may include soaps and disinfectants.

Overall, the degree of environmental compliance concerns are generally locally mandated or should be consistent with the organizations core sustainability initiatives. 

Reference:

(2011). APICS Certified Supply Chain Professional Learning System. (2011 ed.). Version 2.2.