Regulatory compliance refers to adherence to laws and requirements set forth by local, regional, or national governments that oversee how products are made and sold in specific regions. Regarding supply chains, regulatory compliance focuses on the actions involved in the sourcing and manufacturing of products.
Regulatory compliance in the supply chain can be broadly separated into three buckets, and each affects businesses and the bottom line differently:
- Product Compliance: Products containing banned or restricted substances risk being blocked at customs, denied market entry, recalled, or rejected by institutional purchasers.
- Vendor Management: Supply chain disruptions such as regional conflict, natural disasters, or political unrest can lead to production delays and supplier insolvency.
- Corporate Social Responsibility (CSR): The discovery of unethical practices in a supply chain can reduce brand value, and lead to a competitive disadvantage and loss of investor funds.
In a landscape where a single detail out of place can lead to penalties, a company’s ability to generate a complete and accurate profile of the parts or products they manufacture determines their success at maintaining regulatory compliance. However, maintaining transparency is often imperfect, expensive, and time consuming. One McKinsey study found that 84 percent of supply chain activities exist outside of the immediate corporate structure, making it extremely difficult for manufacturers to prove due diligence in their supply chains.
Why Is Regulatory Compliance Important?
Complying with regulations in any given region is a key part of doing business. Fines, recalls, reputational damage, litigation, and loss of contract are just a few ways non-compliance can cause damage to a company. Some examples of real-life penalties include:
- In 2019, a number of technology companies were named in a lawsuit over the deaths of Congolese children being used to mine cobalt.
- Companies risk legal action over the presence of substances restricted under the California Safe Drinking Water and Toxic Enforcement Act (Proposition 65).
- In 2015, a car manufacturer had to recall over 8.5 million cars, costing them 4.8 billion British pounds.
- Medical device companies have paid over $1.1 billion USD in lawsuit settlements as a result of hernia mesh devices that did not meet requirements.
Discover how regulatory non-compliance negatively impacts businesses in our whitepaper, Enforcement Action: A Piece of the Business Case for Transparency.
How Complex Is Regulatory Compliance by Industry?
Businesses in every industry have complex laws and regulations they must abide by. Some are more heavily scrutinized, while others are inherently complex due to the number of parts and substances contained in products.
Aerospace & Defense
Regulatory compliance requirements for the aerospace and defense industry are complex. Contractual and performance requirements are strict, and this creates major risk and supply chain obsolescence.
Rolls-Royce understood the importance of regulatory compliance when in 2014 they were granted the first authorisation to use a substance of very high concern (SVHC) restricted under the European Union (EU) Registration, Evaluation, Authorisation, and Restriction of Chemicals (REACH) Regulation, allowing them to continue manufacturing jet engines without delay.
Every year, the substances and materials used in automotive production are subject to greater restrictions. At the same time, investors and consumers are increasingly concerned about human rights in the supply chain, and tariffs and trade agreements threaten the economic viability of any materials or parts used to manufacture vehicles.
Vehicles must be built to meet rigorous ISO/TS 16949 manufacturing standards, precise specifications, and production part approval processes (PPAP), and the margin for error is thin. New and updated regulations, such as the United States-Mexico-Canada Agreement (USMCA), also bring stricter rules and requirements. For example, the USMCA requires that North American raw materials, such as steel and aluminum, be used during manufacturing; that locally-made parts are used in manufacturing; and that guidelines for the minimum cost of labor used to manufacture vehicles are followed.
Electronic components can be found in almost every kind of consumer product, and the speed at which those products evolve means companies must minimize their impact as they enter the waste stream. Companies that do not manage waste correctly risk millions of dollars in fines.
Electronics companies are also under heavy scrutiny due to the offshore production of materials that often leads to red flags that can cause damage to brands. In response, many companies are being proactive in protecting themselves from risk, as Apple did in 2019 when it directed suppliers to drop 18 smelters for refusing to participate in audits.
With thousands of parts spanning many years of service, being able to monitor for and report on substances that are brought into scope of new and evolving regulations makes compliance challenging for industrial equipment manufacturers. Additionally, with electronics increasingly being used in industrial machines, the requirements and regulations these companies are in scope of have increased.
The United States Department of Energy is only one organization of many that has proposed increased requirements, including those related to enforcement of testing and conservation requirements, and removing avenues for challenging enforcement actions.
Medical device companies are under enormous pressure to not only meet performance requirements, but to also manufacture products that have a positive impact on the world. This imperative extends as far as employee retention: because staff resources are involved in saving lives, discovering a company’s supply chain supports unethical business practices can lead to heavy staff turnover. As a result, CSR is often an initiative championed by internal company leadership and staff.
Manufacturers are also obligated to comply with the requirements of the markets they operate in. The United Kingdom (UK) National Health Service (NHS) and the Copenhagen Hospital are just two that promote a higher standard for their suppliers. Companies that do not meet their requirements risk losing access to those markets entirely.
Oil & Gas
The impact of oil and gas on the environment, as well as the prevalence of bribery and human rights violations in remote extraction installations, means oil and gas companies must go above and beyond due diligence to show they are not causing adverse impacts in the supply chain or the environment.
To demonstrate their commitment to sustainability, many of the largest oil and gas companies in the world — including BP, ExxonMobil, Halliburton Company, and Saudi Aramco — utilize the Global Reporting Initiative (GRI) to respond to the sustainability concerns of stakeholders.
Retail & Consumer Products
The turnaround rate of retail and fast fashion products often leads to difficulties in mapping the supply chain. When issues such as forced labor appear, whistleblowers tend to go after the brand owners because they are misusing the supplier.
Many brands have been flagged for human trafficking, poor wages, and other unethical business practices in their supply chains, causing damage to brand reputation.
Overcoming Challenges in Regulatory Compliance
Every industry has unique challenges in maintaining regulatory compliance, and the key to solving many of these challenges is data. The ability to reliably track where parts and materials come from, what substances they contain, and how they’re produced gives companies the insight necessary to map risks to products and business, and the transparency to build trust between the company and its clients.
Assent Compliance helps companies acquire the data needed to build proactive due diligence programs, allowing businesses to drive transparency throughout their supply chains. To learn more about how Assent can help you maintain market access, protect brand reputation, and mitigate the risk of fines or recalls, contact us today.