Environmental / Social Responsibility

From WikiSCM

Introduction

In order to safeguard the environment, many countries are pursuing “green” initiatives to regulate how manufacturers design their products, and to make them responsible for collecting their products for recycling or disposal at the end of their life. This trend has now caught up with the electronics industry. Several countries have adopted new regulations affecting the composition and disposal of electrical and electronic products. The major focus of these regulations is: (1) reducing hazardous material content; and (2) mandatory recycling of all electronics products. Jurisdictions with such regulations include the European Union (EU), China, South Korea, Taiwan, Japan, California. and other U.S. states. All electronic components and products that enter the stream of commerce in these areas are subject to full compliance with the respective regulations.

The two regulations that have received the most recent attention, and are the subject of this report, apply to the 25 member nations of the European Union. They are the Restriction of Hazardous Substances (RoHS) directive and the Waste Electrical and Electronic Equipment (WEEE) directive. Both have significant implications for electrical and electronics companies in terms of product design, manufacturing, sales, and management accounting. In fact, AMR Research has predicted it will be similar to the effect produced on IT systems by preparation for Y2K and conversion to the Euro.

The Two EU Directives: RoHS and WEEE

1. Restriction of Hazardous Substances (RoHS) Directive The RoHS directive took effect on July 1, 2006. It is designed to protect human health and the environment by restricting the use of certain hazardous substances in new equipment. Specifically, it requires electronics manufacturers, sellers, distributors, and recyclers to certify that new electrical and electronic products (and their components) sold in the EU contain no more than specified trace amounts of lead, mercury, cadmium, hexavalent chromium, and polybrominated biphenyls (PBBs) or polybrominated diphenyl ethers (PBDEs). For example, lead content is limited to 0.1% despite the fact that lead is now widely used in component solder material. Consequently, cost estimates for the lead-free conversion are huge – nearly US$1 billion in Europe alone. When North America and Asia are considered, companies in the electronics supply chain are expected to spend from $5 to $10 billion on compliance. These costs reflect design and supply chain alterations, the research and development involved in producing lead-free alternatives, and the capital expense of new equipment to produce compliant parts.

All participants in the electronics manufacturing supply chain – OEMs, ODMs, EMSs, and component suppliers – will need to collaborate in the exchange of compliance information. Producers must be able to demonstrate compliance by submitting technical documentation or other information to the enforcement authority on request and retain such documentation for a period of four years after the product is placed on the market.

Producers will be responsible for self-declaring if products comply with the RoHS directives or obtain material declarations or certificates from their suppliers. By placing this burden of proof on producers, RoHS effectively creates a need for collaborative compliance. The challenge will be to capture, audit, and communicate materials composition across a large network of trading partners throughout a product’s life cycle.

2. Waste Electrical and Electronic Equipment (WEEE) Directive WEEE took effect in August 2005. It sets collection, recycling, and recovery targets for all types of electrical goods. It required manufacturers to provide the means for consumers to return electronic waste free of charge by August 13, 2005. Manufacturers need to finance the return of 75% of all products. The provisions of the WEEE directive apply to products and producers irrespective of the selling technique, including distance and electronic selling. Producers are defined as companies that manufacture affected electrical or electronic equipment, resell equipment produced by other manufacturers, or import such equipment into a member state.

Producers will find that WEEE fundamentally changes the product life cycle, as well as the configuration of their supply chains. Traditionally, the life cycle has terminated at a product’s point of delivery to a consumer after purchase. It will now extend through the product’s ultimate delivery to a recycling center. This extended life cycle will require adjustments to inventory management, both in tracking and reporting inventory, as well as creating a reverse logistics operation to move end-of-life products from consumers to recyclers. Product collection and recycling schemes, often performed by third parties, will entail additional communication and collaboration throughout the supply chain. Products covered by WEEE include: • Household appliances (large and small) • Consumer durables such as computers, printers, radios, and televisions • Telecommunication equipment and mobile devices • Lighting equipment • Medical devices and instruments • Metrological devices and process control devices such as valves and actuators • Consumer electronics games and automated sports equipment • Electric and electronic tools and accessories

RoHS and WEEE Carry Significant Costs

Both RoHS and WEEE represent major potential expenses to electronics manufacturers in terms of expenses associated with compliance and penalties for non-compliance. Gartner has estimated that RoHS compliance will cost the European PC industry US$450 million this year. In addition, RoHS is expected to cost the UK electronics industry by itself $450 million a year. Other estimates suggest that the cost of compliance for the electronics industry could reach $20 billion over the next decade.

The penalties for non-compliance carry even greater costs. Failure to comply with RoHS and WEEE carries severe penalties including significant criminal and monetary fines and even jail time. But the largest potential penalties are sales bans and product recalls. Although enforcement approaches will vary by country within the European Union, violators can expect non-compliant products to be kept out of major markets resulting in millions of dollars in lost sales and lost market share.

In addition, non-compliance may significantly damage the reputation of a product or company’s brand if a product is not deemed “green.” Given two products of similar price, quality and reputation, most consumers will choose the one from a “green” company over the one from a “non-green” company. Therefore, a company portrayed as non-compliant or “non-green” is likely to lose sales as a result.

Therefore, choosing the wrong solution to enable compliance with RoHS and WEEE will be a costly mistake. Flexibility will be a key consideration. Manufacturers will need a system that can quickly adapt to new trading partners and new regulations – because both will keep changing. RoHS and WEEE are moving targets. No one expects the current versions of these directives to be the last word that the EU issues on them. Without a system that’s flexible, it will be more difficult and costly to exchange the data needed to establish the required audit trail and to re-engineer the supply chain. Manufacturers will have to be able to constantly coordinate and collaborate with their trading partners.

Key Impacts of RoHS on Supply Chain Management

The major impacts of RoHS will involve data collection and communication. Manufacturers will have to implement internal systems to capture the required data from their own operations. They will also have to communicate that data externally across their supply chain, which means enhanced collaboration with their trading partners.

Compliance with the RoHS directive creates problems in two major areas. First, manufacturers must identify, track, and almost totally eliminate the hazardous material content of their products. On a basic design and engineering level, this will pose a challenge as manufacturers try to replace the lead in solder. It will also pose a logistics challenge for OEMs who typically haven’t tracked the hazardous material content in their bills of material, supply chain management, or procurement functions. Second, companies will need documentation to prove that all components in a given product are free of the banned substances. Brand owners like HP and Dell will be on the hook for an audit trail that stretches all the way back into raw materials.

1. Identification, tracking and elimination of hazardous material content (especially lead). In order to achieve compliance, companies will need to: (1) collect detailed information on millions of items from thousands of suppliers, (2) enter it into supply chain, enterprise resource planning (ERP), and product information management systems, and then (3) track and validate the progress of suppliers in eliminating the specified materials from their products. How will manufacturers differentiate RoHS compliant components from traditional lead containing devices? Unfortunately there is no simple answer. Component manufacturers have not agreed to a consistent method of identification. Some manufacturers have generated new ordering codes to designate RoHS compliant product, others employ temporary designators to be utilized during FAB transition, while several IC manufacturers have openly stated there will be no planned component ordering modifications.

The National Electronic Distributors Association (NEDA) and the International Electronics Manufacturing Initiative (iNEMI) have recommended that suppliers use new part numbers for RoHS compliant components, to enable control throughout the supply chain and provide clear identification of RoHS-compliant material. But many suppliers have balked, saying it’s too cumbersome to maintain a completely new set of numbers. It would also require expensive upgrades to ERP systems. A cheaper alternative advocated by some manufacturers is to label a product as RoHS compliant but not change the device part marking. Material control will be affected by physical identification, labeling policies, and handling procedures. The bottom line? Currently, there is no standard way of distinguishing a part that contains lead, or another prohibited substance, from one that does not.

Another problem for component suppliers is that, at least for the next several years, they will need to find a way to manage two separate sets of compliant and non-compliant product designs, production lines, and inventories. That’s because the RoHS directive includes exemptions for certain electronic devices such as military equipment. So component suppliers must be prepared to provide RoHS-compliant parts to OEMs that need them while still producing RoHS non-compliant parts for customers with exempt products. That means they will have to update their systems and processes dealing with inventory management, documentation, marketing, and sales. RoHS compliant and non-compliant components will have added complexity in their requirements, such as separation of storage and at different temperatures as specified by regulation. As a practical matter, they will have to service two sets of customers, which means carrying two inventories and having two sets of data sheets and price books.

2. Certification Issues Complying with RoHS certification requirements raises two key issues: transfer of certification data between manufacturers, suppliers, and governments; and accuracy of the certification data.

a. Certification Transfer The RoHS directive will require large amounts of data transfer. Manufacturers will have to send compliance documentation to various European governments. Suppliers will have to send material compliance documentation to manufacturers. Unfortunately, no standard documentation currently exists for either of these data transfers.

Although there are no standardized forms, these declarations need to state that materials, parts, and/or components may be used to produce RoHS-compliant equipment. Manufacturers deal with hundreds of suppliers, so the lack of standardization for certification documentation has already become a problem. Suppliers are getting requests for different formats from their OEM and EMS customers. The challenge of managing compliance data is a heady one from OEMs. This data has to be collected at the bill-of-materials level. New regulations will require companies to account for all items included in all bills of materials for both existing and new products.

b. Certification Accuracy Manufacturers hold the ultimate liability for non-compliance – not suppliers. An OEM may have 4,200 suppliers involved in a product. If one of those suppliers has a component that is out of RoHS compliance, then the entire product is out of compliance even if the other 4,199 components are RoHS compliant. Companies shouldn’t think for a moment that having a supplier’s declaration will satisfy the EU if a product is found to be non-compliant. If a product does not comply with the RoHS legislation, and producers cannot prove that they have taken reasonable steps to comply, authorities will prevent the sale of equipment and issue a penalty, which can include fines and/or imprisonment.

So how can manufacturers ensure that their suppliers’ certifications are accurate? Several approaches have been suggested. • Accept a supplier’s word that a component is or isn’t RoHS compliant. This is the least expensive but riskiest approach. • Only use suppliers that have already been certified by other OEMs. Accepting other OEMs’ suppliers as compliant is really inexpensive but it exposes the manufacturer to a lot of risk – not least, the likelihood that a competitor’s compliance procedure may not cover your own are as of operation. • Create an in-house compliance organization to test and certify every product component. An in-house organization may not be within large companies’ core competencies and direct costs are rather high. On the other hand, it does give a high degree of control. • Use third parties (independent laboratories) to test and certify product components. This may be the optimum solution, for a number of reasons. First, external auditing is already a familiar process; second, the external organization is likely to be able to bring benefits of scale – and global benchmarking – to the process. And third, external approvals and certifications tend to have higher credibility.

Key Issues in WEEE Affecting Supply Chain Management

Like RoHS, WEEE raises issues regarding the collection and distribution of data across the supply chain. Producers must collect and provide information on components and materials used in their products to enable treatment facilities, re-use centers, and recycling facilities to disassemble, re-use, and recycle them.

In addition, WEEE raises the issue of reverse logistics. Electronics manufacturers are used to operating supply chains that go mostly in one direction – forward. Traditionally, the reverse direction applies only to a tiny percentage of products – overstock from retailers, warranty returns, repairs, and mistakenly ordered items. And even this tiny percentage is considered a costly operational headache to handle. Unfortunately, under WEEE, this tiny percentage will rise to a return rate of 100% because WEEE shifts the end of the product life cycle away from the consumer back to the producer. This will require the creation of a “reverse” network for inventory management, logistics, and transportation management.

With electronics manufacturers responsible for disposing of end-of-life products, industry observers expect most manufacturers to rely on third parties to handle the task. Again, this highlights the need for communication and collaboration. Flexibility is particularly important in this area because no uniform scheme for collection and recycling has been adopted. Rather several schemes have emerged and they vary by country within the EU. The three primary schemes are retailer take-back, producer take-back, and municipal collection sites. The schemes vary in cost, complexity, and specific details including: • Data collected and reported according to different categories and criteria • Treatment standards and provisions that vary between countries • Variations in the definition of “recycling” and recycling targets

Most of the schemes operate as national monopolies. All of them outsource the bulk of their recycling and transport activities. Not surprisingly, the number of recycling and transport providers varies dramatically by country. And the issue of whether to implement a single or multiple competing solutions within a given country remains a contentious one.

In addition to dealing with multiple schemes throughout the EU, manufacturers face a further wrinkle in complying with WEEE. Initially, they will need to keep track of two streams of returned products – new products issued after WEEE takes effect and old products issued before WEEE took effect. This is because under WEEE, manufacturers are responsible for recycling already existing products as they reach their end of life. That means manufacturers must be able to track products and their components made before they knew they had such responsibilities.

The unsettled nature of WEEE schemes combined with reporting variations and the probability of changing requirements puts a premium on flexibility. Manufacturers that want to stay in compliance need the agility to adapt quickly to the regulatory situation as it develops.

Conclusion

At the dawn of a new era of environmental regulation in the EU, many questions have yet to be answered and many issues remain unsettled. Documentation showing compliance with RoHS and WEEE is not yet standardized. Similarly, there is no standard for communicating RoHS and WEEE data between involved parties – whether they are part of the supply chain or government entities. Collection schemes for WEEE are still evolving. It is also unclear whether one set of schemes will be applied throughout the EU. Despite these uncertainties, electronics manufacturers are expected to comply with RoHS and WEEE. And non-compliance will result in severe penalties. These can range from fines and jail time to product recalls, sales bans, and damaged corporate reputations. So manufacturers must be ready – even though they are aiming at a moving target.