We are a global provider of energy-efficient technology solutions and make sure our suppliers share our values and commitment to sustainability. We have high expectations regarding customer and business standards and processes that ensure our suppliers align with those standards.
In 2019, our combined annual spend was $10.2 billion for direct and indirect commodities. We have more than 20,000 suppliers from across the globe. It is our responsibility to partner and assist our suppliers in their efforts to achieve sustainability goals — an effort that ultimately benefits our customers and the environment.
Our supply chain is guided by a set of standard business tools and strategies that define not only what we do but how we do it. This helps us ensure we apply the most effective strategies to eliminate waste, improve efficiency and enhance agility in execution. We are committed to operational excellence reflected in the sustainability standards we set for ourselves and for those we work with. We apply a region of use philosophy that localizes manufacturing and the supply chain to help us increase spend to market and implement local product preferences. In turn, we cultivate a sustainable, innovative supply chain that fosters diversity, minimizes environmental impact and meets customer needs.
Maintaining the highest ethical standards has never been more important than in today’s competitive and rapidly changing global business climate. To ensure alignment to a common set of expectations, we include our Business Partner Code of Conduct (BPCoC) in our standard terms and conditions and require new suppliers agree to our BPCoC as a part of our onboarding Standard Work.
Our BPCoC outlines expectations that our suppliers do not violate basic human rights of life, liberty and security. No form of harsh or inhumane treatment will be tolerated, such as sexual harassment, sexual abuse, corporal punishment, mental or physical coercion or verbal abuse of workers. Suppliers must have an effective environmental policy and conduct their operations in a way that protects the environment. Suppliers must also obtain and keep current all required environmental permits and meet all applicable environmental rules, regulations and laws in the countries where they do business.
Through our supplier onboarding standard work, all new suppliers are required to accept and agree to our BPCoC whenever entering into a contract or accepting a purchase order. We not only expect they operate in full compliance but also that they too hold their suppliers to the same standards.
In January 2019, we introduced our new Supplier Sustainability Expectations and development plan for furthering our suppliers’ sustainability. Our suppliers:
A core tenant of our sustainability strategy is partnering with our suppliers to minimize the environmental impact of our supply chain. In early 2019, we implemented a supply chain sustainability reporting platform to report annual energy, waste, water and safety data. By the end of 2019, we had 90% of preferred supplier spend enrolled.
For two years in a row, we have exceeded our 2020 target to assess 90% of our direct material spend for risk quarterly. In 2019, we reached 100% of our direct material spend. Through this process, we gain an understanding of our suppliers’ environmental and social performance, which enables us to manage risk and collaborate with those proven best-in-class. For more information about risk factors associated with our supply chain, see our Form 10-K.
Our Preferred Supplier Program is a key initiative to identify and engage world-class suppliers. This program is for our most strategic partners and provides them with growth opportunities while helping us build a supply base that aligns with our core values. They are requested to report annually on sustainability metrics.
At the end of 2019, 42% of direct spend was with preferred suppliers.
We leverage our product development process — the IRPDP — to use preferred suppliers and are on track to meet our goal of completing 80% of Early Sourcing Work Plan in phase 1 of the IRPDP. Additionally, taking an “in region, for region” philosophy allows us to deliver products to market quickly, implement local preferences, reduce freight costs and improve our quality and reliability by being near our supplier partners.
We use a seven-step Strategic Sourcing process with a Supplier Decision Matrix, which weights factors including sustainability. Additionally, sustainability and business continuity risks are evaluated through On-Site Assessment (OSA) audits. This process covers about 1,500 suppliers over a three-year period and, in 2019, about 86% of our direct material spend. Our goal is to have all new suppliers assessed by the OSA process.
OSAs include social and environmental criteria to evaluate all our new direct material suppliers. For example, the assessment asks if suppliers have a program for tracking and managing energy usage and hazardous waste and if they are in high-risk water areas. The assessment screens for human rights and labor practices criteria by asking, for example, if the supplier’s hiring and compensation practices meet or exceed local legal requirements and if the supplier refrains from the use of prison or forced labor.
In 2019, this social and environmental screening process for new suppliers resulted in 87% of our controllable spend suppliers agreeing to our Business Partner Code of Conduct.
The OSA process, which is led by a team of 40 engineers who report to the vice president in Procurement, addresses several categories including: environmental protection; human rights and labor relations; product compliance; EHS and compliance and sub-supplier management. We complete the process on a regular basis, including reviews of audit results and follow-up monitoring of findings.
Suppliers are required to achieve a minimum score of 80% to do business with us. We work with suppliers to understand their score and put together action plans for improvement. In 2019, 501 suppliers were assessed for environmental impacts and none were identified as having significant actual or potential negative environmental impacts. Additionally, more than $1.9 billion of our spend participated in supplier sustainability development activities, including webinars on sustainability topics, toolkit sharing, desktop coaching sessions and supplier on-site meetings.
We weight suppliers’ ESG performance when assessing them through:
In addition to our strategic sourcing process and OSAs, we assess our supply chain for risk in our Enterprise Risk Management process on an ongoing basis. Combined with our category risk assessment process, we use data from D&B, Amber Road (critical listing and sanctions) and assess for risks on quality and supplier dependency. We meet with our suppliers regularly as part of our Supplier Relationship Malmanagement process for review and consideration for our Preferred Supplier Program.
We expect suppliers to source minerals responsibly through due diligence, compliance policies and reporting. Currently, we use the standard EICC/GeSI template to survey suppliers, and we encourage our suppliers to do the same. We will seek to responsibly source materials from the covered countries and avoid supporting the armed groups causing human rights violations.
We conducted a reasonable country of origin inquiry (RCOI) about the minerals specified by Rule 13p-1 of the Securities Exchange Act of 1934, as amended (the “conflict minerals”) that were necessary to the functionality or production of products manufactured by the company in 2019. Through due diligence, we identified the source and chain of custody of conflict minerals using the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (the “OECD Framework”). Read more about our approach to conflict minerals.
|Supply Chain Assessments||2019||2018||2017|
|Direct material spend subject to on-site assessments||86%||82%||N/A|
|Direct material spend assessed on a quarterly basis for risk||100%||95%||87%|
In 2019, we launched our Global Procurement Sustainability and Supplier Diversity Council. With membership from each procurement category, direct procurement, indirect procurement, each region and each strategic business unit, the Council is dedicated to finding sustainable solutions. They meet monthly to discuss current initiatives and projects, track data from our supplier dashboards and drive awareness within global procurement. These efforts improve communication and help us innovate and improve our world and our supply chain.