Our company procures many raw materials, packaging materials, technical products, components and services from across the world. The overarching goal of Group Procurement, in close collaboration with our supply chain departments of each business sector, is to protect the stability of these supply chains and always provide our customers with the best possible products and services at optimal quality. In this fast-paced world, we believe that secure supply chains are the key to our success. We expect our suppliers to adhere to the same ethical, social and compliance standards as we do.
Our approach to making our supply chains more sustainable
One of the goals of our supplier management is compliance with fundamental environmental and social standards, alongside high quality, reliable delivery and competitive prices. To achieve this, we've introduced relevant strategies, processes and guidelines that we are continuously improving to prevent violations of supply chain standards. Our supply chains are diverse and differ in their characteristics. While some supply chains are automated, others, especially in the service sector, are labor intensive. Our risk-based supplier selection and management approach takes this diversity into account. If the risk probability exceeds our risk appetite, we take further actions. For example, we ask the supplier to conduct a sustainability assessment or an audit. This additional step helps our sourcing employees to identify required mitigation actions with relevant suppliers and work on improvements.
We further developed our supplier and material risk management and launched a new program in 2018. This program covers our key suppliers and aims to identify, assess, respond, and monitor third-party risks that could have an impact in our supply continuity. It has four main elements:
- Supplier Risk Assessments: to capture the overarching risks at supplier legal entity level, including multiple risk domains. This system was tested and implemented in 2018.
- Alert system: to notify our Procurement unit when any of our suppliers face a potential disruption. The system was implemented in 2018.
- Material Risk Assessments: to capture the risks of relevant materials that make up our most significant finished products. The Material Risk Assessments were aligned with our business in 2018.
- Risk Response Tracker: to create and monitor risk mitigation activities. The Risk Response Tracker is currently under development.
A “risk factor” for the Supplier and the Material Risk Assessments is calculated by multiplying risk probability and risk impact. Risk probability considers 29 risk titles such as “Economic freedom”, “Social unrest”, “Unfair business practices” or “Poor labor practices” throughout the five “risk domains”: financial, geo-political, compliance, operations, and sustainability. Risk impact is calculated by considering supplier spend and the number of our businesses impacted. The aspect of risk impact will be further refined to take into consideration the impact to our finished products and our customers.
How we implement Corporate Responsibility standards in the supply chain
Group Procurement is responsible for integrating corporate responsibility (CR) requirements into the relevant stages of our sourcing and supplier management processes. It is a global organization with direct accountability and resources in procurement-relevant local subsidiaries. Our Center of Excellence for Supplier Sustainability coordinates all relevant measures, such as updating our guidelines where necessary, examining processes and coordinating our participation in external initiatives. Our Procurement employees in all countries are kept up to date on these guidelines and processes through internal communication channels such as our company intranet. Sourcing staff are responsible for the supplier selection process and collaborate closely with the stakeholders in each business sector. All new Sourcing staff are trained on those sustainability aspects that are of importance for procurement.
Our commitment: Guidelines and standards
We expect all our suppliers and service providers to comply with environmental and social standards, which are primarily derived from the core labor standards of the International Labour Organization (ILO) and the UN Global Compact.
Moreover, we support the Compliance Initiative of the German Association for Supply Chain Management, Procurement and Logistics (BME) and have endorsed the BME Code of Conduct. In particular, this code sets out rules for combating corruption, antitrust violations and child labor, as well as for upholding human rights, protecting the environment and public health, and promoting fair working conditions.
Our Group Procurement Policy stipulates expectations for our suppliers and specifies how we monitor compliance with our standards. This policy reflects both internal and external guidelines, such as our Code of Conduct, our Human Rights Charter, our EHS Policy (Environment, Health and Safety Policy), ISO 14001, and the BME Code of Conduct. In our Responsible Sourcing Principles we set out these expectations for our suppliers and formally oblige them to apply these standards to their own vendors.
All modifications to legal frameworks are incorporated and appropriate measures are initiated where necessary.
In total, the goods and services we purchased in 2018 from more than 60,000 suppliers in almost 150 countries amounted to around € 7.4 billion compared with € 7.0 billion in 2017, representing an increase of 4.8%. Of these (including R&D services), we purchased 50% from suppliers based in EU countries and 35% from vendors based in OECD countries outside the EU. The share of goods and services sourced from suppliers based in non-OECD countries outside the EU increased from 14.8% in 2017 to 15% in 2018.
We primarily use chemical and pharmaceutical raw materials for our manufacturing operations, in addition to operating supplies and packaging materials such as folding boxes, glass bottles and ampules. We utilized 487.6 metric kilotons of material in 2018, a slight increase compared to 2017. We only record the weight of the materials that are directly used in our pharmaceuticals and chemicals.
How we monitor our supply chain
A number of different approaches are used to keep track of our suppliers and ensure adherence to our standards and values. These are generally based on the risk they pose, combining the factors of country risk, product category and sales.
- Under the Together for Sustainability (TfS) initiative launched by companies in the chemical industry, we encourage our suppliers to be assessed either on self-reported information or via audits.
- In selected cases we conduct our own CR audits on suppliers.
- Regarding our mica supply chain, we engage with a global consultancy to conduct audits and the Indian organization IGEP to conduct inspections.
TfS supplier assessments and audits
Under TfS, suppliers are assessed either on information obtained during audits, or on the basis of self-reported and publicly accessible information provided by EcoVadis, an independent rating agency. EcoVadis assesses suppliers from 150 countries and 190 sectors across the four categories of Environment, Social, Ethics, and Sustainable Procurement. The results are shared among TfS member companies in compliance with all restrictions stipulated by competition law. The strategic focus of the TfS activities concentrates strongly on the initiative´s demonstrable improvements of supplier sustainability standards. We've been a member of TfS since 2014.
Via a collaborative platform, we now have access to evaluated supplier self-assessments of more than 10,700 suppliers and audit reports from over 1,000 suppliers, partially initiated by our company and partially by other TfS members. Based on all the audits and assessments conducted since joining the TfS initiative, in 2018 we focused on scorecard improvements of our suppliers rather than additional new assessments and audits.
Conducting our own audits
We continuously conduct own audits in selected cases based on business requirements.
Neither our audits nor those of TfS revealed indications of violations of the right of association, the right to collective bargaining, cases of child labor, forced labor or compulsory labor.
We have no internal guidelines stipulating that preference be given to local vendors in allocating contracts and therefore do not collect this type of data. We generally procure our goods and services globally. In some cases, however, local vendors do have an advantage, as products bought locally may be less expensive, due to a reduction in additional transport costs. Country-specific regulations such as import duties and licenses also help us decide whether to source our goods locally or globally. In some countries local laws require contracts to be awarded to regional suppliers.