Our company procures many raw and packaging materials, technical products, components and services from across the world. We aim to promote supply chain stability while providing our customers with high-quality products and services. We expect our suppliers to share our ethical, social and compliance standards, as set out in our Responsible Sourcing Principles and to apply these within their own supply chains as well.
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 have 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, which helps our sourcing employees to identify required mitigation actions with relevant suppliers and work on improvements.
The approach for our strategic suppliers, which account for approximately 43% of our total spend, includes the identification, monitoring and assessment of supply security risks with four main elements:
- Supplier Risk Assessments: to capture the overarching risks at supplier legal entity level, including multiple risk domains. In 2019, we enhanced the data scoping and quality, adding NGOs and new financial information providers to our pool of data sources.
- Alert system: to notify our Procurement unit when any of our suppliers faces a potential disruption.
- Material Risk Assessments: to capture the risks of relevant materials that make up our most significant finished products.
- Risk Response Tracker: to create and monitor risk mitigation activities. They will be applied after testing in 2020.
We calculate risk factors for suppliers and raw materials by multiplying risk probability and risk impact. We consider 29 risk titles such as Economic freedom, Social unrest, Unfair business practices, and Poor labor practices.
Additionally, for suppliers that are above a certain spend threshold, we have expanded our risk assessment methodology by integrating further factors such as country, industry and supplier risks as well as the impact on our business. We have also included criteria to identify supplier relationships impacted by key sustainability risks such as mineral sourcing or animal welfare.
In 2019, we consolidated the Risk Management approach described above and our sustainability activities into a single supply security program in order to gain a more holistic view of our supply chain. In this way, we aim to further strengthen corporate responsibility (CR) within our standard procurement process.
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 Security coordinates the relevant measures, such as updating our guidelines where necessary, examining processes and coordinating our participation in external initiatives. Sourcing employees responsible for selecting and contracting suppliers are aware and regularly updated on our guidelines and CR requirements through internal communications and training.
Also in 2019, our training activities (such as our Procurement Training Academy) for Group Procurement employees included sessions on sustainability.
Integration of Versum Materials and Intermolecular
The acquisition of Versum Materials and Intermolecular resulted in a change to our supplier portfolio. The procurement processes described in this report do not yet fully apply to Versum Materials and Intermolecular. We are currently reviewing their existing processes and will align them as needed.
Until the integration is complete, Versum Materials will continue to apply its existing policies and processes. Versum Materials issues a conflict mineral report pursuant to Rule 13p-1 under the Securities Exchange Act of 1934 and has a conflict minerals policy and the respective due diligence processes in place.
We are currently in the middle of developing a company-wide due diligence process for Responsible Minerals Sourcing according to OECD guidance, which will incorporate and further develop measures already implemented in our business sectors. In the second half of 2019, we established a working group with representatives from business sectors and Group functions that also includes a representative from Versum Materials. At the end of 2019, elements of a conflict minerals management system were drafted and will be further defined in 2020.
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.
We seek to conduct our business activities in compliance with labor, social and environmental standards while also respecting human rights. Additionally, we abide by the standards set out in our Code of Conduct and our Human Rights Charter. We expect our suppliers to comply with the labor, social and environmental standards defined in our Responsible Sourcing Principles and to ensure that their subcontractors do likewise.
All modifications to legal frameworks are incorporated and appropriate measures are initiated where necessary. In 2019, we reviewed our Supplier Management Procedure, which came into effect at the end of 2019. We now take the suppliers’ Corporate Responsibility programs into consideration when selecting key vendors and review their Corporate Responsibility progress as part of supplier performance evaluations.
In total, the goods and services we purchased in 2019 from more than 55,000 suppliers in almost 150 countries amounted to around € 7.5 billion, versus approximately € 7.4 billion in 2018, representing an increase of 2%. Of these (including R&D services), we purchased 23% from suppliers based in North America, 53% from suppliers based in Europe, 16% from suppliers based in the Asia-Pacific region, 1% from suppliers based in the Middle East and Africa, and 4% from suppliers based in Latin America.
Ambassadors for more sustainable supply chains
In October 2019, the Together for Sustainability (TfS) initiative published The Sustainable Procurement Pledge on the social network LinkedIn. This platform addresses all procurement professionals, academics and students who want to become a sustainability ambassador and drive a responsible procurement agenda through personal engagement. As a member of TfS, many of our Procurement employees have already signed the pledge.
How we monitor our supply chain
A number of different approaches are used to keep track of our suppliers and ensure compliance with our standards and values. These are generally based on the risk the suppliers pose and combine the factors of country risk, industry risk and impact on business.
- 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. We have been a member of TfS since 2014.
- 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.
In 2019, we decided to expand the scope of accepted CR certifications and audits. We now also accept audits conducted in line with the Pharmaceutical Supply Chain Initiative (PSCI) and in line with the Sedex Members Ethical Trade Audit (SMETA).
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 155 countries and 198 sectors across the four categories of Environment, Labor and Human Rights, Ethics, and Sustainable Procurement. The results are shared among TfS member companies in compliance with all restrictions stipulated by competition law. Strategically speaking, TfS activities focus heavily on achieving demonstrable improvements in supplier sustainability standards. In 2019, TfS changed its KPI portfolio to measure member activities with a stronger focus on progress and improvement rather than the quantity of assessments and audits.
We conducted several internal webinars and invited suppliers to join a TfS training session in Shanghai (China).
Through the TfS initiative, we have access to more than 1,600 assessments from our suppliers. In 2020, we will intensify our analysis of assessment results and implement comprehensive mitigation activities.
Conducting our own audits
We continuously conduct our own audits in select cases based on business requirements. In 2019, none of these revealed indications of violations of the right of association, the right to collective bargaining, or 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.
In the United States, we have a specific supplier diversity program in place that has grown significantly. Within the Small Business Program, the spend with small businesses grew by 146% in 2019 versus 2018, with growth of 294% in small women-owned companies. We focused our efforts on different internal awareness campaigns, supplier diversity days, training seminars for our sourcing managers, and investment in tools to increase our small and diverse vendor database.