Comply or Die Series – Blog #3 – Environmental Regulation – “But how exactly would a child ingest a magnet?”
In the previous blog from this series I looked at corporate governance as a driver for green-socio-economic compliance. I will now address the driver that is environmental regulation. Environmental regulation by its nature is exactly what it sounds, ensuring compliance to regulation. The regulations that we are focusing on for the consumer goods industry are primarily the global restrictions and use of hazardous substances (commonly referred to as ‘RoHS’) and the registration, evaluation, authorisation and restriction of chemical substances (better known as ‘REACH’). These are European born regulations but many governments have adopted their own variations and implementations that facilitate that same purpose. Although I am looking at hazardous substances there are other regulations that apply to different industries such as the end of life vehicles directive or the waste electrical and electronic equipment directive.
Generally speaking both REACH and RoHS set regulation for what substances are allowed within end-user consume products (and in what quantities) and which substances are restricted. A problem with regulations are that certain restriction apply in different jurisdictions and what may be acceptable in one area may fall foul of legislation in another which makes this whole area a huge problem area for globalised industry. Put simply if you are operating within consumer goods industry and REACH or RoHS are not on your radar, then you are walking a very dangerous tight rope, as the penalties can be severe.
The most famous case study within this area is probably Mattel (and their subsidiary Fisher Price) whom in 2007 were forced to recall over 18 million products world-wide over a six month period that included big brands such as Batman, Sesame Street and Barbie. It was found that in the majority of cases paint used to coat some of the toys was lead based and contained dangerous amounts of chemicals far in excess of those allowed by regulation. The chemicals used in the toy production were found to be extremely dangerous to children when ingested, and could potentially lead to death. Along with the massive cost of the recall on such a large scale, Mattel also faced government fines in excess of $2million, the cost of re-structuring the quality assurance process throughout its supply chain and the expected huge downturn in trade associated with the negative publicity.
In the Mattel case there is also the element of outsourcing manufacture. The investigation shows that in this situation Mattel had outsourced production of some of the toys in question to China (which is a common practice for most consumer goods companies). If it turned out that the manufacturer was responsible for an issue such as this, you would think that the instructing company would be able to absolve themselves of liability through normal contractual means. However the situation for liability can become extremely complex and protracted and in the first instance, the reseller/distributor would be bearing the liability both in terms of financial reparations (which if necessary would be sought back collaterally from the manufacturer further down the line) and also through their brand image which is ultimately stamped into the dangerous product.
These problems are not just associated with consumer products such as toys, a quick flick through the REACH website shows a number of garment manufactures facing similar problems: jeans which have non-compliant dyes used in their production; trousers which have non-compliant nickel in the button rivets; dresses which contain a non-compliant chemical called ‘benzidine’… the list is endless and for good reason to, the amount of processes and materials which are used in the manufacture of garments and the raw materials utilised are countless. A further problem comes into play that is common with regulation, what about chemicals and substances that are not currently restricted but perhaps may be placed on the restriction list a few years down the line?
I reiterate that with regulation going the way it is, this is going to be a huge issue for all companies operating in the consumer goods industry and it is only appears to be moving into greater levels of regulation. So what can a business facing this do and how can they limit their exposure?
The only way to stay on the right side of regulation is to know exactly what substances and materials make up your products. In is extremely common for most businesses to use a bill of materials but does it truly go into the detail necessary to identify risk?
Q. What is a standard bill of materials for a typical polo shirt?
A. Design ID, Fabric, Trim, Labels and Packaging.
That is a common BOM but unfortunately as environmental regulation becomes more assimilated it may no longer be suitable to provide the level of detail necessary to guarantee staying on the right side of the regulation or having security in being able to audit your products currently in the market should future restrictions come into play.
For the most cautious of businesses the detail required now needs to take the complete garment and split it down into separate libraries of fabric (raw materials, intermediate, aggregate), trim, labels, components, packaging, cleaning agents, transport mode, process energy and emissions. From this point it needs to further split into a micro level of precision such as (taking the trim and components sections): thread, rivets, buttons, seams, dyes, chemical composition, and chemical processing… Depending on how far you wish to take it, you could essentially drill right through to the chemical elements that make up a button rivet component (commonly made up of a nickel or steel alloy) and show what elements and quantities of other metals make up the alloy.
This is clearly quite a challenge for any company to be able to provide this data in real-time on call at last minutes’ notice. But then factor into chemicals used in the manufacture process? How does a company know that the suppliers providing the individual components or materials can provide this level of detail? This is another question of due diligence. Outsourced manufacturers should be using some sort of product data systems that equally allow them to provide bills of materials that can be plumbed into your PLM and allow you to audit your supply chain from cradle to grave. As creators of the garments or components they should also be able to audit their own processes and show the materials that make up the product.
Alongside integration with their systems, there is simply an ethical research point (that we will look into in the next blog in this series) that fundamentally highlights that knowledge of the restricted substances and educating the suppliers on regulation such as RoHS and REACH should be a simple first port of call. In the Mattel case above, it was not that the factory was trying to sneak in the restricted substances, but rather that Mattel did not advise them accordingly of the potential risk (something that they have gone on record and stated). This highlights such a simple yet effective point; when instructing suppliers, do they have full disclosure of all restricted substances and practices? Do they fully understand the areas where the end product will be marketed into? Do they fully understand the product’s use and application? Do they themselves show strong corporate governance and ethical compliance practices?
Environmental regulation is certainly a challenge for most companies at this point in time. But that does not mean it is not possible… A few of the current PLM suppliers have already identified this regulatory requirement and already implement solutions (or rather modules) that fit into the PLM framework to be able to provide this level of detail. The current trend is that environmental compliance modules are very much a retrospective add-on due to the speed at which this landscape has changed however there is certainly at least one supplier in the market that is putting this need into the foundation strategy of their PLM system, and I expect all others will shortly follow their lead.
Linked into the use of substances, we know that carbon footprint is also a huge topic currently being fought in the media and the legislation. Carbon capture regulation is not yet in a comprehensive and standardised form for international businesses however as the Environmental Protection Agency pushes for such legislation in the US and across the pond the EU is pushing through guidelines such as the EU Emissions Trading Policy no business can be ignorant to the fact that carbon regulation is just around the corner. But of course how do you analyse carbon capture? Well one thought and a strong one at that is looking at business processes and production materials and associating a carbon ‘cost’ at each stage of the lifecycle throughout the supply chain (Exactly how you quantify that cost is something that people far smarter than I will decide). But if you adopt this view then similar to tracking chemicals and processes for REACH and RoHS, carbon tracking is something that can be done in very much the same process and in a few cases by the very same systems.
As the world goes ‘greener’ the regulation is only going to become more comprehensive and meticulous, and with it the penalties for non-compliance will become more onerous. At this infant stage currently it is still not clear how the regulatory framework will take shape for a global business operating over multiple jurisdictions and for this reason it is probably best to analyse the level of detail required from your product’s lifecycle on a risk basis and at the very least promote education of the issues through your supply chain. However be under no illusion, environmental regulation is definitely no longer just a pipedream on the horizon. What it is, is actually a well laid tubular plastic section made from reinforced polymer mortar (RPMP), polyethylene (PE), chlorinated polyvinyl chloride (CPVC), cross-linked high-density polyethylene (PEX) and is being plumbed into every consumer products company operating in the global market.
Rob Smith is the head of enterprise projects within the Product Development Partnership Group of companies. He is also a fully qualified commercial solicitor.
Contact Rob at firstname.lastname@example.org