Note 7: Supplier management

Supplier segmentation

Our supply base is a vital element of our value chain and a source of competitive advantage to AkzoNobel. We work closely with suppliers to support a secure and sustainable supply of products to our customers. This includes identifying and minimizing supply chain risks, creating value through continuous improvement of existing supply chains and seeking out collaboration and joint development opportunities.

We have identified two supplier segments for particular attention, based on the potential risks and opportunities:

• Critical suppliers are those in emerging markets where we want to build a long-term, mature supply base. Selection may be based on risks associated with labor conditions, environmental performance or business integrity, or security of supply of important materials
• Key suppliers are selected because of their importance to the business – spend or dependency – as well as the potential for partnership, joint innovation and collaboration on long-term sustainability initiatives

Our headline KPI is Critical Product Related (PR) Spend actively managed by our supplier framework processes. This KPI provides a measure of how well AkzoNobel is building the sustainability, capability and capacity of its suppliers in emerging markets around the world.

Spend is considered to be “actively managed” if at least one of the following conditions is met:

• The supplier is part of our Key Supplier Management process
• The supplier is part of our Supplier Support Visits (SSV) program and has been followed up in compliance with program guidelines
• The supplier’s sustainability performance has been assessed via AkzoNobel’s third party supplier assessment and/or audit program, Together for Sustainability (TfS)
• The supplier has signed the Business Partner Code of Conduct, delivers less than €5 million from emerging markets and is not classified as a critical supplier (and therefore not part of the Supplier Support Visits program)

We once again raised our critical PR spend coverage from 87 percent in 2015 to 91 percent, exceeding our 2016 target of 90 percent. After missing our target of 88 percent in 2015, we increased our efforts by setting clear business targets and reviewing our SSV program.

Supplier sustainability framework

We have formalized our Supplier sustainability framework to support continuous improvement of suppliers, to prioritize improvement activities across our supply base and to accelerate delivery of our corporate sustainability goals. The framework is based on AkzoNobel’s Business Partner Code of Conduct, which explains what we stand for as a company, what we value and how we run our business. It brings our core principles of safety, integrity and sustainability to life, and shows what they mean in practice. We demand the highest ethics and integrity in all supplier relationships.

Three formal processes are in place to help AkzoNobel ensure compliance, manage risks and promote/measure supplier development. Our Supplier Support Visits focus on critical suppliers in emerging markets, while our Key Supplier Management program is focused on globally strategic (key) suppliers. Together for Sustainability (TfS) provides standardized, third party assessments and audits to identify and minimize risks and promote continuous improvement. It applies to all supplier segments.

Business Partner Code of Conduct

Both critical suppliers and key suppliers have to confirm their compliance with environmental, social and governance factors.

Agreement with our Business Partner Code of Conduct covers 99 percent of the product related (PR) spend and 86 percent of the non-product related (NPR) spend. In 2016, we increased the target spend coverage, which we successfully achieved.

Supplier Support Visits

Introduced in 2007, Supplier Support Visits (SSV) is an internal program for critical suppliers designed to develop long-term local suppliers in emerging markets. The supportive visits are carried out by teams from Procurement and Health, Safety and Environment (HSE). The program was overhauled in 2016. This involved removing suppliers who have not developed, as well as integrating the improved suppliers who have met internal criteria into our third party Together for Sustainability (TfS) program. This will allow us to focus our resources on suppliers with real development potential.

Together for Sustainability (TfS)

Further acceleration in 2016 has resulted in 60 percent of our total spend being assessed through this program of standardized global sustainability assessments and on-site audits. TfS is an industry initiative to improve sustainability practices within the global supply chains of the chemical industry, building on established global principles such as the United Nations Global Compact and the Responsible Care^® Global Charter. It is now made up of 19 leading global chemical companies and continues to expand.

The results of our TfS assessments, which use the EcoVadis platform, allow us to identify common areas for improvement across our supply base and focus improvement activities. Recent areas include the introduction of a formal reporting system on our suppliers’ sustainable procurement performance and business ethics issues. In 2017, we will focus more effort on human rights and are currently developing relevant KPIs.

The diagram below shows the risk levels of the 1,053 suppliers assessed between 2013 and 2016, with risk levels set by AkzoNobel based on the scores given by EcoVadis. If suppliers achieve a score of less than 25 out of 100, they are classified as “high risk”.

We request high and medium risk suppliers to work on corrective actions with a clear priority on the main areas for improvement as mentioned above. Out of the 572 suppliers that were re-assessed, 408 improved their scores.

As part of the TfS membership criteria, AkzoNobel verifies the quality of its own corporate supplier management activities against industry best practice. The company was granted a Gold recognition level again in 2015 by EcoVadis, putting us among the best performing companies assessed globally in our industry category. An Ecovadis re-assessment is taking place once in early 2017.

Key Supplier Management

As part of our ongoing operational effectiveness program, our Key Supplier Management process helps focus our internal resources on 34 suppliers we have defined as strategic to AkzoNobel, both now and in the future. These suppliers are essential to supporting us in realizing our strategic objectives. With many of these key suppliers, we also have a formal key supplier agreement in place, underpinning the aims of the Key Supplier Management process. Sustainability objectives are now included in new key supplier agreements. The current focus is on carbon footprint improvement, renewable materials and innovation opportunities.

Measurable development and delivery

In addition to the standard supplier segmentation, we have identified a group of suppliers who have a significant impact on our sustainability resource efficiency/carbon footprint objectives. We use our Supplier Sustainability Balanced Scorecard (SSBS) to measure and monitor their performance quarterly.

The SSBS gives an objective measure across both compliance and performance improvement aspects. The result of the SSBS is used to allocate maturity levels. The levels move from compliance and risk management (using data from Process 1: SSV and/or Process 2: TfS), to improvement programs that contribute to other sustainability objectives, including carbon footprint reduction and collaboration with AkzoNobel on innovations.

The Supplier Sustainability Balanced Scorecard (SSBS) is currently in place with 37 suppliers, who represent a high proportion of our raw material carbon footprint. In total, nearly 20 percent of these suppliers demonstrated a lower carbon footprint than the industry average and some have further improvement targets in place.

During 2017, we plan to introduce a program which will further monetize these improvements via an enhanced SSBS for these 37 suppliers. The new SSBS will contain a revised KPI which will measure the cost of additional sustainability elements (such as waste, energy efficiency, share of renewable energy, etc.) with a target to reduce the cost of these elements for these suppliers by 3 percent per year. In addition, a total of 150 suppliers will participate in our basic SSBS program in 2017, which represents approximately 80 percent of our Scope 3 upstream carbon emissions.

In 2016, we also carried out a pilot water risk assessment for two of our main raw material categories. This indicated focus regions for more detailed follow-up.

All of the above helps us to benchmark our suppliers and increase their awareness in sustainability. It opens discussions we did not have previously and helps us to create real partnerships to identify and maximize shared benefits. Challenging year-on-year improvement targets will continue to be defined, committed and delivered.