Satisfying Customers and Protecting Revenue By Building a Credible Due Diligence Defense

Transcription

1 Satisfying Customers and Protecting Revenue By Building a Credible Due Diligence Defense June 15, 2006 Jim Martin, Innov-X X Systems

2 Slide Restrictions These slides are intended only for participants in the June 15, 2006 Due Diligence webinar. They may be used internally within participants company. They may not be distributed outside of participants company.

3 Webinar Sponsors GoodBye Chain Group Specialists in RoHS, WEEE, EuP and ISO Developers of compliance solutions utilizing services, software and training InnovX-Systems Innovative XRF Technology Due Diligence with XRF Screening NSL Analytical --Specializing in RoHS Testing and Elemental, Metallurgical and Polymer Analysis Since ISO/IEC Accredited

4 Overall Goal Assist companies in proactively implementing a comprehensive Due Diligence

5 Outline Due Diligence Perspectives Legal Regulator Business Due Diligence Experiences What are companies doing? What could/should your company do? Due Diligence Tools How do they fit into a Due Diligence Defense? How might you use them?

6 Satisfying Customers and Protecting Revenue By Building a Credible Due Diligence Defense June 15, 2006 Moderator, Harvey Stone Co-founder, GoodBye Chain Group harveystone@goodbyechain.com

7 Background: EU Legislative Roadmap Represents a 30-Year Macro-Shift Precautionary Principle Essential Requirements Battery ELV WEEE EuP RoHS REACH IPP? Sustainable Manufacturing? Packaging 1990s

8 Furthermore Extended Producer Responsibility legislation is becoming global Major corporations often going way beyond legislation Creates tremendous pressure on companies to: Comply Protect revenue Satisfy customers

9 RoHS The Riskiest and Most Costly EPR Directive RoHS Deadline July 1, 2006: 15 days

10 What Does RoHS Require: On the Surface, Straightforward Legal Requirements Substance Parts Per Million Cadmium 100 Mercury, lead, hexavalent chromium, PBDEs, PBBs 1000 So What s the Big Deal?

11 Risk of Unprecedented Financial Loss Sony Corporation estimates an impact on sales of approximately EUR 110 million and on operating profit of approximately EUR 52 million, including costs of rework (Press release, )

12 Tremendous Vulnerability Sony didn t t put the cadmium in the cable. 1/4200 th of its supply chain did.

13 and Unprecedented Requirements that Make it Easier than Ever to Be Non-Compliant Compliance is based on substance as a percentage of homogenous material Example of Homogenous Materials: Surface-mount IC chip structure Silicon chip Bond wire (Au) Lead-frame (Cu) Lead-frame plating (Cr) Solder bump (Sn-Pb) Die attach adhesive (silver epoxy or high lead solder) Plastic encapsulation Adapted from Paul Goodman, ERA

14 Substantial Business Risk (RoHS) is potentially the biggest issue to hit electronics manufacturers, suppliers and retailers in living memory Paul James, General Manager, Exel

15 Competitive Risk Sorry. We re not renewing your contract. You re the same as your competitors on price and quality. But their products are compliant, and your products aren t.

16 Public Relations Risks Greenpeace has rated major electronics producers for RoHS performance, and is rumored to be contemplating lawsuits against the lower ranked companies

17 Risk of an Audit Please show me Please show me the every one of the reasonable steps you ve reasonable steps you ve taken to comply with taken to comply with the RoHS Directive. the RoHS Directive.

18 Or Worse Tell me, again, why you think that s sufficient Due Diligence?

19 Risk Summary Legal High for Finished Goods manufacturers Business High Competitive High Headline High for Finished Good Manufacturers What to Do?

20 Build a Very Strong Due Diligence Defense as Your Risk-Reduction Strategy But what is a due diligence defense? What are reasonable steps? How do I implement it?

21 The EU RoHS Directive: Achieving Legal Compliance In Light of Legal Uncertainty June 15, 2006 Holly Evans, Strategic Counsel, LLC

22 RoHS Directive in Effect in 16 Days! RoHS Directive goes into effect on July 1, Producers will be prohibited from putting covered EEE on EU market that contains restricted substances in amounts that exceed legal threshold. With deadline looming, many questions remain!

23 RoHS Legal Issues 1. Product scope what products are covered? 2. How much restricted substance will be tolerated? 3. How determine whether substance thresholds are met? 4. When is RoHS Directive triggered? 5. How demonstrate compliance? 6. How will enforcement be handled by member states? 7. How allocate liability across supply chain?

24 Current Status of RoHS Legal Issues Legal Issue Status Comments Product Scope Maximum Concentration Value Grey area products, components vs. finished products, exemption requests Published in Official Journal 8/19/05 Testing methodology Put on EU Market Compliance Approach Enforcement Approach IEC TC 111 Draft Standard final expected in Fall 2006 IPC, ASTM? EU Blue Book but some EU states take different approach Self declaration approach, but how work in practice? How achieve uniformity across EU?

25 European Commission RoHS Guidance Documents Frequently Asked Questions - released May ment/waste/pdf/faq_weee.pdf RoHS Enforcement Guidance - released May anunion/rohs_enforcement_info.html Designed to guide member states - are not legally binding

26 Given RoHS Uncertainty, What Should Producers Do? Despite legal uncertainty, producers of covered products must develop legally defensible RoHS compliance strategies. Good faith efforts to achieve RoHS compliance can and should be taken. Efforts should be recorded and documented as proof of due diligence.

27 Due Diligence Compliance Approach A due diligence compliance approach was presented to EU member states by EICTA - a European trade group, in May Rather than expecting manufacturers to prove that every part they buy is RoHS compliant, member states will expect manufacturers to establish and implement documented and auditable systems to prevent noncompliant product from entering EU market. EICTA Approach was followed in May 2006 Commission Enforcement Guidance document.

28 RoHS Enforcement Hierarchy 6. If testing verifies non-compliance possible enforcement action 5. If insufficient evidence, verification to occur through testing 4. Is there sufficient evidence of active supply chain RoHS management in place? If yes, no further action. 3. Enforcement request for technical document that supports selfdeclaration 2. Presumption of Conformance 1. Producer self-declaration and placing of product on market *Based on technical documentation

29 Importance of Active Supply Chain Management System Process-based Technical Documentation Internal system to ensure RoHS compliance Integration with quality and management systems Evidence of active control Product/Part-Based Technical Documentation Supplier warranties Material declarations Internal or external testing results Active supply chain management system may support no further action determination

30 Future Product-Related Substance Restrictions China RoHS - issued February 2006, effective March 2007 Japanese RoHS labeling requirements Proposed Korean RoHS Proposed Argentine RoHS Proposed Australian RoHS Proposed California RoHS AB 2202 is moving! Industry working to harmonize requirements, but some requirements may differ More resources and attention will be required in future!

31 Resources for Further Assistance UK s National Weights and Measures Laboratory website: UK s Department of Trade and Industry website: html EU European Commission website: m US Commercial Service Buy USA website: Holly Evans, Strategic Counsel, LLC ( , h.evans@cox.net)

32 Questions?

33 Implementing a Compliance Assurance System as the Heart of Your Due Diligence Defense Harvey Stone GoodBye Chain Group

34 The Good News Methods and tools are now much more defined for building b a very strong and very credible Due Diligence Defense

35 Recent Guidance from the UK s National Weights and Measures Lab Generally, businesses shall: --Have taken all reasonable steps or precautions and --Have exercised all due diligence to avoid committing the offense (Source: NWML)

36 A Good Practice Guide You should identify any weak links in the process chain. This requires you to analyze each stage of your operation and identify precautions. (Source: NWML)

37 Establish What You Are Going To Do About It You should aim to control all risks by putting in place as many precautions as you think necessary..either eliminate any chance of anything going wrong or control the risks so that errors will be detected early on (Source: NWML)

38 You should consider the following Purely relying on certificates or other documentation without assessing their validity is unlikely to be considered as adequate It is recommended that all the activities of the business which may cause a breach of RoHS should be identified, controlled and checked by a system of working (Source: NWML)

39 Document Your Solution Document your control system so that it can be followed. Unless you do so, it will be difficult to claim any defense. Give training to those responsible for operating the system Documented records should be kept which outline procedures followed and the checks operated to validate these processes. (Source: NWML)

40 Operate Your System In order to satisfy the defense, you have to show that you created a control system, that it worked and that you operated that system. This may require you to audit your system of checks and keep records of the audit. (Source: NWML)

41 Very Recent Guidance: RoHS Enforcement Guidance Document, Version 1, issued May, 2006 Caveat: the document is informative and advisory, but has no legal authority Individual Member State RoHS enforcement authorities are bound by their own national legal structures

42 Guidance to Member States decide which EEE categories and products (you) wish to select for further investigation Possible criteria: Market intelligence Random selection Products known to contain materials of high concern High volume products Short life products Consumer products unlikely to be recycled Notification of concern from external parties Notification of concern from other Member States

43 the Member State enforcement authority may, at this stage, decide to submit a formal request to the producer enforcement authorities may take whatever actions are appropriate to the circumstances, including removal of goods from the market where this is deemed to be necessary

44 Overall, What Can We Expect? Highly-publicized Sony Playstation enforcement actions will likely be rare Less adversarial compliance actions will be more common Analytical testing is a last resort for authorities Enforcement focuses on examining processes and documentation: 2 Routes to Comply

45 Other Expectations Analytical testing is a last resort for authorities Enforcement focuses on examining processes and documentation: 2 Routes to Comply

46 Guidance to Producers RoHS Enforcement Flow-Chart Is the product outside the scope of RoHS? Carry out targeted XRF analysis of higher risk products to detect infringements (Relevant only for some EU States and optional) Request technical documentation showing that the producer s RoHS compliance assurance system is effective (within time limit specified by the enforcement authority) Source: RoHS Enforcement Guidance Document, Version 1 - May, 2006 Route A Producer to provide documentation including: - items from Table 1 and, - items 1-6 from Table 2 Does process-based documentation exist? Route B Producer to provide documentation including: - items from Table 1 and, - items 7-10 from Table 2 Cf. document for flow-chart details Is there sufficient evidence of active supply chain RoHS management process in place and being followed? Producer to provide additional documentation as specified by Enforcement Authority Is there sufficient evidence that all homogeneous materials are RoHS compliant?

47 Route A: Process-based Technical Documentation Typical information relating to the producer s internal system to ensure RoHS compliance Establish a Compliance Assurance System based on Total Quality principles Mostly larger companies Governs internal design and manufacturing practices

48 Route B: Product/Part-based Technical Documentation Typical information relating to a product s/part s/part s physical attributes that ensures RoHS compliance of a specific product Establish a documentation Audit Trail Collect and maintain from suppliers: Warranties Certificates of Compliance Material Declarations Perform audits and checks to assure they are trustworthy In many cases, a combination of Routes A and B

49 Overall Goal of Implementing a Compliance Assurance System via Routes A and/or B Y Is there sufficient evidence of active supply chain RoHS management process in place and being followed? No further action

50 Key Question How do we get a handle on all the many, many activities that could/should go into a Compliance Assurance System?

51 GCG s Compliance Assurance System Model Internal Activities Customer-facing Activities Supplier-facing Activities

52 Customer-facing Activities Proactive customer surveys Company XYZ verified that military and aerospace customers did not want RoHS-compliant parts

53 Company ABC: Protected Revenue Products were out-of of-scope components Nevertheless, implemented Customer Survey Program Learned that major customer with exempt medical products was about to cancel an order Used RoHS materials to educate customer Saved a $207,000 order

54 Internal Activities Establishing RoHS as a corporate goal Installing and utilizing new equipment Converting to Pb-free manufacturing Documenting regular RoHS-compliance meetings

55 Integrating RoHS Into an Environmental Management System Communication Systems SEMS Project Model Environmental Support Systems ISO Prog. Mgmt. Internal: Intranet External: Website Customer Inquiries: EMS Information MDDS Product Information Supplier: Selection Qualification Audit Survey Directives: RoHS WEEE Others Engineering: Lead Free RoHS Free Packaging Recycling Facilities: Internal Recycling Chemical Control Energy Conservation Documentation Training Audits Certification Maintenance EH&S

56 Providing Extensive Staff Training

57 Getting Third-Party Exemption Documentation Product Description and Typical Application XYZ Equipment is highly specialized equipment used for generating humidity in assembly plants. Photograph or diagram

58 Supplier-facing Activities Geared towards what is perhaps the most difficult and time-consuming aspect of Due Diligence: collecting, verifying and reporting the data you need from your suppliers What do I get? How do I get it? How do I make sure it is accurate?

59 Today s Challenge: Building a Compliance Assurance System in regard to Supplier Data

60 Key Element #1: Implementing a Data Collection, Management and Reporting Process IPC 1752 Solution Internal System ERP / PLM System 1 6 Parts BOMs AVL 2 MDW Data File Export 1752 XML File MDW CAS Tool 3 CAS Audit Trail Import 5 Internet Supplier/Manufacturer Form/ MDW

61 Recommendation: Utilize the IPC 1752 Material Declaration Management Standard Industry standard released in March, 2006 Six different classes of declaration, including: Yes/No or PPM in regard to RoHS, JIG A&B, full disclosure Plus, if wanted, manufacturing information

62 Generate 1752 Class 1-6 Material Declaration Requests

63 Create an Audit Trail while Distributing 1752 Declarations & Certificates

64 Case Study: IC Network Products Company Corporate need: Provide full disclosure compliance data to customer Implement RoHS compliance process 1752 declarations for 200 products Assistance provided: Gap analysis 1752 solution: software and project plan Results: Full disclosure customer declarations: RoHS Compliance Assurance System in place Retention of customer contracts Program start: January 2006 Full disclosure declarations provided in June 2006

65 Element #2: Utilizing Screening Devices Homogeneous Samples Non-Homogeneous Samples Quantitative Analysis (IEC Table 6.2) All Measurement techniques expect homogeneous samples! Qualitative Screening Methods

66 Why Screening for RoHS? RoHS Directives apply to homogeneous samples: Uniform plastic or solid materials, alloys Well documented procedures for use of XRF and other analytical instruments for RoHS Compliance (IEC Guidelines). Real world is typically heterogeneous samples: Circuit boards Electronics components Plated materials (plating is to be treated separately from substrate) Impractical, if not impossible, to break parts down to homogeneous samples and test each

67 Benefits of Effective Screening Risk Management Checking Suppliers (suppliers know you are checking) Focus laboratory testing save on analytical costs, delays

68 Plus Fast, yields high throughput Non-destructive Easy to use, non-technical operators Upfront investment, very little per-test expense

69 Case Study Small electronics assembler to large OEM Manufactures wire assemblies Shipped 100k of product late in Q1, 2006 Their supplier certs from wire supplier stated all wires RoHS compliant

70 Test Results Seven wires bundled together Some had high Pb Screening: Test bundle, XRF provides positive on Pb Test individual wires to determine failures Analytical cost savings! Sample Pb (ppm) 1 - Casing 55, Casing 80, Casing 73, Casing Casing 1, Casing Casing 1,707 RoHS Pb limit = 1,000 ppm

71 Why do you need Laboratory Testing for RoHS? Third Party Verification of Compliance Proof of Compliance Process Controls Spot Checks of Supplies

72 Proof of Compliance from 3 rd Party Laboratory

73 Methods Used for Accurate RoHS Analysis X-Ray Fluorescence (XRF) Inductively Coupled Plasma /Atomic Emission Spectroscopy (ICP/AES) Inductively Coupled Plasma/ Mass Spectroscopy (ICP/MS) Atomic Absorption (AA) Cold Vapor Atomic Absorption (CVAA) Gas Chromatography Mass Spectroscopy (GCMS)

74 Laboratory s Responsibilities Comprehensive Quality Systems Documentation Controls Review of Data by Experienced Technical Staff Reference Standards Recoveries Instrument Calibration using NIST traceable standards Spike Recoveries Blanks The key is to make sure the laboratory is providing Legally Defensible Data

75 Key Question: How Would a Regulator/Auditor View a Compliance Assurance System and a Supplier-Facing CAS in particular?

76 Due Diligence from the Perspective of a Regulator/Auditor Heidi Wittenborn Texas Commission on Environmental Quality

77 Audit Premise Management Techniques Operator Behaviors Results Reduced Risk Reduced Environmental Impact Compliance

78 What an auditor is looking for Coherence Performance Reinforcement

79 Coherence Expectations Are all staff and management levels aware of the issue Does each person understand how the issue impacts his job Does each person understand what is expected of him in response to this issue

80 Coherence Auditing Can I talk to anyone in the plant and find awareness of the issue Can the person explain what he does in his daily job in response to the issue Are all parts of the organization working together

81 Performance Expectations Each person is doing what is required to achieve success Are the actions by one person creating the conditions for success in the next person s s task Are the actions of one group creating problems for another group

82 Performance Auditing Compare performance requirements to actual performance Is each person taking the appropriate action at each decision point How do groups coordinate their activities

83 Reinforcement Expectations Are the performance requirements built into Job descriptions Training Performance evaluations Is performance regularly checked If a failure is found, is effective corrective action taken Is management regularly informed of success or failure Does management take action

84 Reinforcement Auditing Review Human Resources processes for Incorporating requirements into job descriptions and performance evaluations Review training to determine if it actually produces competence Review internal auditing procedures Review management processes for correcting and improving performance

85 Recommendation: Conduct a Multi- Functional Audit re: Current RoHS Activity Marketing Engineering Design & Evaluation Sourcing Manufacturing & Assembly Sales Service Purchasing Legal / EHS / Quality / Risk Management / Financial / Government Relations / IT

86 Develop a Gap Analysis Describe the ideal process Understand the real process Determine where real and ideal don t t match

87 Implement and Document Your Plan Do it in phases Do it steadily Do it as a routine part of conducting business

88 In sum Audit your current practices Develop a plan that you can show auditors Steadily implement your plan Document everything you do

89 Last Words Implementing a Due Diligence Defense/Compliance Assurance System is the best way to: Satisfy customers Protect revenue Create a foundation for future Directives Processes and tools are now available to assist you in implementing your Compliance Assurance System

90 Follow-On Due Diligence Webinars Implementing a Data Collection, Management and Reporting Solution, including IPC 1752 Implementing an XRF Screening Device Program Implementing a Third-Party Lab Testing Program Dates and times to be determined Invitations will be sent

91 Contact Information GoodBye Chain Group: Harvey Stone Innov-X X Systems: Jim Martin jmartin@innov-xsys.com NSL Analytical Services: Carm D Agostino cdagostino@nslanalytical.com

92 Thank you for Participating Questions