Note 17: Supply chain

Raw material strategies

We are working to “future-proof” our supply chains in order to:

• Ensure we will continue to be able to obtain the raw materials that we need to be successful with our products
• Contribute to footprint reduction, which will require appropriate raw material and intermediates supply

In 2011, we developed a strategy for the sourcing of resins, TiO₂ and solvents. Sustainability was integral to the development of the strategy. We identified a number of opportunities to reduce footprint through complexity reduction, raw material substitution and supplier selection. Implementation is part of the performance improvement program launched in 2011.

We have discussed this with a number of major suppliers to identify improvement opportunities. Examples include:

• An analysis of one of our key raw materials showed a factor three difference in carbon footprint between the best and the worst supply site. This can make a major contribution to decreasing the cradle-to-gate carbon footprint of our products
• Solvents’ cradle-to-gate carbon footprint is a considerable part of our total footprint. However, the footprint after leaving AkzoNobel (gate-to-grave) is many times higher. By redefining our solvent supply, we will reduce complexity and costs, as well as improve health impact, environmental hazards and greenhouse gas footprint

Renewable raw materials

We are also developing a renewable chemicals and white biotech, or chemicals from biomass, strategy. We already have an advantage in this area as we use more than average volumes of renewable chemicals, i.e. 9 percent of our raw materials have a renewable element, versus approximately 3 percent for the chemical industry as a whole. We intend to further boost this percentage by increasing the use of renewable raw materials in our resins and latex supply chain. Further targets for innovation and procurement are under development.

An example is one of the raw materials for resins. By switching from using ECH (epichlorohydrin) produced from fossil sources to using epicerol produced from vegetable oil, an overall carbon footprint reduction of more than a third can be achieved. We are also at the forefront in renewable energy (see “Renewable energy”).

Transport

Car lease

Although our emissions from transport are low compared with raw materials and our operations, this is an area where many employees can contribute to emission reductions. The CO₂ reduction policy for passenger cars was introduced in 2009, with a ambition of 130 grams of CO₂ emission per kilometer by 2013. In Europe, we have set emission caps, which are reduced each year following developments in engine technology. In 2011, the CO₂ average for new cars was 131 CO₂ g/km. The figure for all cars is now 143 g/km in Europe (down from 159 g/km).

Logistics

Sustainability is one of the five major criteria of the supplier selection process. A questionnaire on sustainability has also been included in the tender process, resulting in a clear sustainability picture of around 50 carriers. This will be used during carrier selection and sustainability targets will be included in the service level agreement.

Supplier management

Our main objective is to create a sustainable supplier base, supporting our license to operate.

Vendor Policy

Our Vendor Policy clearly states that we want to do business with trading partners who endorse our ethical values and our social and environmental standards. We therefore require suppliers to sign our Vendor Policy Declaration, which is based on the AkzoNobel Code of Conduct. In a gradual process of enhancing assurance that our business partners comply with our Vendor Policy, the socially responsible performance of our business partners will be verified to create a sustainable supplier base, supporting our license to operate.

• Our Vendor Policy is continuously verified. Currently, 95 percent of product-related spend is from suppliers who adhere and nearly 77 percent for non-product related (NPR) spend
• We will target further improvement in 2012, aiming for 96 percent product-related supplier compliance and 80 percent non-product related compliance

Supplier support visits

Our supplier support visits (SSV) program was established to verify that the business principles and practices of our critical suppliers in high growth markets comply with our Vendor Policy. It also helps suppliers to improve their health, safety and environmental standards. The purchasing community, together with HSE officials, identify critical suppliers in each region and visit them on a regular basis. The frequency is defined by the performance rating provided by the SSV teams. These teams agree specific and continuous improvement programs with each supplier as appropriate and monitor progress through routine revisits. Those suppliers either unwilling or incapable of positive progress are de-listed.

In 2011, we exceeded the targeted number of 300 supplier support visits since 2007, which demonstrates both a growth in the number of suppliers participating in the program and a deepening awareness and maturing commitment of local and regional suppliers to employee health, safety and environmental sustainability in emerging markets.

In 2012, we will continue to institutionalize the SSV program through the development and implementation of enhanced metrics, which will further enhance the effectiveness of the program and promote the growth of a more sustainable supplier base in high growth markets. The continuing maturation of the program will be measured by the following KPIs:

• Number of suppliers participating in the SSV program: Current metric
• Critical supplier coverage: The measurement of spend with suppliers participating in the SSV program versus the total spend with defined critical suppliers in the emerging market
• Total program coverage: The measurement of spend from suppliers covered by the Vendor Policy and SSV program versus total purchase spend of AkzoNobel in high growth markets

Key supplier managment

To ensure in-depth cooperation with our key suppliers on value creation, innovation and sustainability, we have further developed our key supplier management program. We have incorporated our sustainability ambition (reduce our cradle-to-gate carbon footprint by 10 percent by 2015) with selected key suppliers.

On average, we organize high level meetings twice a year with these suppliers to specifically focus on projects linked to our value creation, innovation ambitions and sustainability ambition.