Supplier indicators

Philips has a direct business relationship with approximately 10,000 product and component suppliers and 30,000 service providers. Given the size and complexity of our supply chain we need to focus our efforts. Therefore, we developed an approach based on the supplier’s sustainability risk profile related to spend, country of production, business risk and type of supplier relationship. 594 supplier sites have been identified as risk suppliers, including 497 product and component suppliers, and 97 service providers. Different types of service providers are part of our audit program, including labor agencies and transportation companies. All risk suppliers are by definition part of our audit program.

Philips Supplier Sustainability Declaration

The Philips Supplier Sustainability Declaration is based on the EICC code of conduct and we added requirements on Freedom of Association and Collective Bargaining. The topics covered include labor and human rights, worker health and safety, environmental impact, ethics, and management systems. We monitor supplier compliance to the Declaration through a system of regular audits.

In 2012 we updated the Philips Supplier Sustainability Declaration and audit tools, to be in line with the new version of the EICC code of conduct that was recently issued. The updated Declaration includes 4 entirely new provisions, and 14 updates to existing provisions. The new provisions are related to responsible sourcing of minerals, protection of privacy, non-retaliation, and supplier responsibility to monitor code compliance at next tier suppliers. We begin to roll-out the updated Philips Supplier Sustainability Declaration via the purchasing contracts signed with suppliers, and via all trainings and audits conducted.

The Declaration requires suppliers to cascade the EICC Code of Conduct down to their next tier suppliers. This roll-out to deeper tiers in the supply chain is reviewed during the on-site audits. Risk suppliers with who we have a direct business relationship are included in the audit program, and most of these are tier 1 suppliers. However, sometimes Philips also selects and prescribes the tier 2 suppliers, in which case these tier 2 suppliers will also be included in the audit program.

We monitor supplier compliance with the Declaration through a system of regular audits. During these audits, an independent external party visits the supplier’s site for several man-days to hold interviews with workers and management, do a factory tour, and review documentation. Based on purchasing spend, production country and type of business, Philips selects suppliers for inclusion in the audit and supplier development program. 594 suppliers have been identified as risk suppliers and are included in the audit program; the majority of these are in China. During the audits, compliance with all sections of the Declaration is reviewed. In the event of non-compliance we require suppliers to make a corrective action plan, and we monitor its implementation until all major non-compliances are resolved. Full-scope audits are conducted in a 3-year cycle; to date we have audited 90% of all identified risk suppliers.

2012 supplier sustainability audits

In 2012 we audited 159 of our current risk suppliers, including 100 continual conformance audits with suppliers that we already audited in 2009. Risk suppliers from recently acquired companies are also included, and this year we audited 17 suppliers from the acquisitions of Indal, Povos, and Preethi. As in previous years, the majority of the audits were done in China. Also in Brazil and India audits were done, as well as a small number of audits in Mexico, Indonesia, Philippines, Russia, Belarus, Ukraine and the Dominican Republic. With these audits we directly or indirectly impacted over 124,000 workers employed at the production sites that were audited.

On top of the audits with current risk suppliers, we also audited 65 potential suppliers during the supplier selection process. Below we report on the findings at existing suppliers only; findings at potential suppliers are not included in this report since these suppliers are not (yet) part of Philips’ supply base.

To track our progress in improving compliance with risk suppliers we use the key performance indicator ‘compliance rate’, being the percentage of the risk suppliers that was audited in the last 3 years, and has resolved all major non compliances. During 2012 we achieved a compliance rate of 75% (2011: 72%).

  • graph
    Number of initial and continual conformance audits

Audit findings

Below table shows the results of the full scope audits done during 2012. On average we identified 18 major non-compliances per audit, 5 zero tolerance and 13 limited tolerance non-compliances, and we work with each supplier to resolve these non-compliances within 90 days where possible. The limited-tolerance non-compliances include all management systems related issues, accounting for an average of 8 non-compliances per audit. The continual conformance audits showed on average a better result than the initial audits with suppliers that went through the audit cycle for the first time.

When the audit reveals areas of non-compliance we request suppliers to implement corrective actions and we monitor the implementation during resolution audits. During the year a total of 1,375 corrective actions were implemented successfully by our suppliers to resolve major non-compliances. The results of the resolution audits are not shown in below table.

During 2012 for 2 supplier sites the phase-out decision was taken due to, amongst others, a lack of sustainability improvements.

The most frequently observed areas of major non-compliance are:

  • Working hours, wages and benefits: excessive overtime, continual seven-day working weeks, insufficient record keeping of standard and overtime working hours, no payment of overtime premiums
  • Emergency preparedness: inadequate fire detection and suppression systems, blocked or insufficient emergency exits
  • Occupational safety: worker exposure to safety hazards, e.g. electrical shocks
  • Lack of adequate management systems to safeguard compliance to the EICC code for labor and ethics, health and safety and environment

Compared to 2011 we note on average per audit 8% more non-compliances for wages and benefits, and in particular full payment of all overtime premiums is an issue. Suppliers reported difficulties in implementing the yearly legal wage increases in China, especially in the current weak economic environment. For industrial hygiene and occupational safety non-compliances we observe a 9% and 7% increase respectively, which is mainly due to the application of new and stricter legislation in China.

Areas where we observe improvements compared to previous year are mainly related to environmental impact, especially for environmental permits and reporting, pollution prevention and resource reduction, and product content restrictions. These improvements are the result of increased enforcement and management awareness, and we believe that the Philips programs have contributed to this.

Excessive working hours

In China, there is a wide gap between legislated working hours and reality. Especially in regions with high shares of migrant workers a 72 hour working week is not uncommon. While this issue is not unique to Philips, we have decided to take a step-wise approach by working with our suppliers to reduce to a maximum of 60 work hours per week and at least one day off per week, except in emergency or unusual circumstances.

During the 2012 audits we identified 119 suppliers with working weeks exceeding 60 hours, and 88 cases where workers were not provided with one day off per week. In these cases we require suppliers to submit a corrective action plan taking into account factors like employee turnover, seasonality, workforce size, shift structure, productivity, demand planning, etc.

Management systems

There may be areas where our audits reveal compliance in actual practice, but the related underlying management systems to safeguard continued compliance may not be sufficient. Therefore, also management systems are reviewed during the audits. We see this area as a continued weak area at suppliers where further capacity building is necessary. Related to management systems the most frequently observed areas of non-compliance are insufficient risk assessment and self-audits, absence of performance objectives, and a lack of worker feedback and communication.

More information on the Supplier Sustainability Involvement Program, the Philips Supplier Sustainability Declaration and audit approach can be found at www.philips.com/suppliers.

Summary of 2012 initial and continued conformance audit findings per region
suppliers with one or more major non-compliances per category (in % of suppliers audited in 2012)
 
China
Asia excl. China
LATAM
EMEA
Total
No. of audits
110
30
16
3
159
Initial audits
37
12
9
1
59
Continued conformance audits
73
18
7
2
100
Average number of non-compliance per audit
19
16
16
7
18
Workers employed at sites audited
102,494
12,789
6,163
2,788
124,234
 
 
 
 
 
 
Labor
 
 
 
 
 
Freely Chosen Employment1)
<10%
25-50%
10-25%
10-25%
Child labor avoidance /young worker management2)
<10%
<10%
Working hours
>75%
50-75%
25-50%
>75%
Wages and Benefits
50-75%
25-50%
10-25%
50-75%
Humane Treatment
Non-discrimination
10-25%
10-25%
<10%
Freedom of association
10-25%
<10%
Collective bargaining
Health & Safety
 
 
 
 
 
Occupational Safety
50-75%
25-50%
50-75%
50-75%
50-75%
Emergency Preparedness
50-75%
50-75%
50-75%
>75%
50-75%
Occupational Injury and Illness
25-50%
25-50%
<10%
25-50%
25-50%
Industrial Hygiene
50-75%
25-50%
10-25%
25-50%
Physically demanding work
<10%
10-25%
<10%
Machine safeguarding
10-25%
<10%
10-25%
10-25%
Dormitory and canteen
10-25%
10-25%
10-25%
10-25%
Environment
 
 
 
 
 
Environmental Permits and Reporting
25-50%
10-25%
10-25%
10-25%
Pollution prevention and resource reduction
<10%
10-25%
10-25%
<10%
Hazardous substances
25-50%
10-25%
10-25%
25-50%
Waste water and solid waste
<10%
10-25%
10-25%
<10%
Air emissions
<10%
10-25%
<10%
<10%
Product content restrictions
25-50%
25-50%
25-50%
25-50%
Management systems
 
 
 
 
 
Company Commitment
25-50%
25-50%
25-50%
25-50%
25-50%
Management Accountability and responsibility
50-75%
25-50%
50-75%
25-50%
50-75%
Legal and Customer Requirements
25-50%
25-50%
50-75%
50-75%
25-50%
Risk Assessment and Risk Management
50-75%
50-75%
50-75%
25-50%
50-75%
Performance Objectives
50-75%
50-75%
50-75%
25-50%
50-75%
Training
50-75%
25-50%
50-75%
50-75%
Communication
50-75%
25-50%
25-50%
25-50%
50-75%
Worker feedback and participation
50-75%
50-75%
50-75%
25-50%
50-75%
Audits and assessments
50-75%
50-75%
50-75%
25-50%
50-75%
Corrective action process
50-75%
25-50%
50-75%
50-75%
50-75%
Documentation and records
50-75%
25-50%
25-50%
25-50%
Ethics
 
 
 
 
 
Business Integrity
<10%
10-25%
<10%
No Improper Advantage
<10%
10-25%
<10%
<10%
Disclosure of information
Protection of Intellectual Property
<10%
10-25%
<10%
Fair business, advertising and competition
<10%
10-25%
10-25%
<10%
Protection of identity
10-25%
10-25%
10-25%
10-25%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General
 
 
 
 
 
EICC Code
25-50%
>75%
10-25%
25-50%
25-50%
Compliance with law
1) Freely chosen employment: these cases are related to 1) workers having to pay a deposit for uniforms, safety equipment, and/or tools. We requested suppliers to return these deposits to the workers and provide these items without demanding a deposit, and 2) in some cases no labor contract was signed. We requested suppliers to take corrective actions and verified that contracts were in place for all workers.
2) Child labor avoidance/young worker management: this is related to one case of historic child labor, where a supplier hired 2 workers prior to reaching the legal age, but they were no longer underage at the time of the audit. We requested the supplier to strengthen its management system and age verification procedure, and ensured that the workers were enrolled in the young worker management program.

Supplier training and capability building

Based on many years of experience with the audit program, we know that a combination of audits, capacity building, consequence management and structural attention from management is crucial to realize structural and lasting changes at supplier production sites. During 2012 we extended capacity building initiatives which are offered to help suppliers improve their practices. We organize classroom training sessions, Philips sustainability experts regularly visit suppliers to provide on-site consultancy and training, and we invite suppliers to participate trainings provided by the EICC. In China and India we held dedicated training sessions about the EICC code of conduct, trainings about fire safety, electrical and machine safety, chemical management, and industry hygiene, which were attended by more than 380 supplier representatives for active and potential suppliers, including suppliers for recent acquisitions. In Shenzhen, China we also hosted a Health and Safety Training that was developed in joint effort by the EICC and GeSI.

In India, in a project initiated with the Dutch Ministry suppliers were coached by local consultants in the development and implementation of a sustainability strategy for their company, integrated in their business strategy. Three suppliers participated in this bottom-up approach, which helped suppliers to set their own objectives, based on their own priorities and values as responsible corporate citizens.

Sustainable Trade Initiative IDH

Philips is one of the initiators of the IDH Electronics Program, an innovative multi-stakeholder initiative sponsored by the Sustainable Trade Initiative (IDH) together with Dell, HP, Philips and civil society organizations. The program will work with over 100 electronics suppliers in China to support innovative workforce management practices, sustainability and better business performance. The goal is to improve working conditions of more than 500,000 employees in the electronics sector.

The program was formally kicked off end 2011 when the first suppliers entered the program, and in 2012 we continued the implementation phase in China’s Pearl River Delta. A total of 8 Philips suppliers are now involved in the program. Suppliers receive a so-called Entry Point Assessment to identify challenges common to factory management and workers such as worker-management communication, occupational health and safety, production, performance management and environmental issues. Based on this a tailor made action plan is developed with each supplier on the basis of improved dialogue between management and workers. Suppliers receive support over a period of up to 24 months, and the costs of the program are shared between the supplier, Philips, and the IDH.

Conflict minerals

Philips is concerned about the situation in the east of the Democratic Republic of the Congo (DRC) where proceeds from the extractives sector are used to finance rebel conflicts in the region. These minerals may end up in many different products such as cars, planes, chemicals, packaging, and electronics equipment. Philips is committed to address this issue, even though it does not directly source minerals from the DRC. The supply chain for the metals of concern consists of many tiers, including mines, traders, exporters, smelters, refiners, alloy producers and component manufacturers, before reaching Philips’ direct suppliers. Philips is working towards the following goals:

  • Minimize trade in conflict minerals that benefit armed groups in the DRC or an adjoining country
  • Enable legitimate minerals from the region to enter global supply chains, thereby supporting the Congolese economy and the local communities that depend on these exports.

What are conflict minerals?

Conflict minerals are defined in the US Dodd-Frank Act as tin, tantalum, tungsten and gold. They can come from many sources around the world, including mines in the DRC which are estimated to provide approximately 18% of global tantalum production, 4% of tin, 3% of tungsten, and 2% of gold. Some of the mines in the DRC are controlled by militias responsible for atrocities committed in the Congolese civil war.

Collaboration with different stakeholders

We believe that industry collaboration and stakeholder dialogue are key to creating impact at these deeper levels of our supply chain. Since 2008 Philips is actively contributing to the Extractives Work Group, a joint effort of the electronic and mobile phone industry organizations EICC and GeSI, to positively influence the social and environmental conditions in the metals extractives supply chain. See also http://www.eicc.info/extractives.htm.

As we have been doing for years, we continued our engagement with relevant stakeholders including the European Parliament, other industry organizations and local as well as international NGOs in Europe and the US to see how we can resolve the issue. To demonstrate our commitment we signed on to the multi-stakeholder statement from the Responsible Sourcing Network, urging stakeholders to continue the momentum on removing conflict minerals from the supply chain.

In September 2012, the Conflict Free Tin Initiative was launched, introducing a tightly controlled conflict-free supply chain of tin from a mine in Congo all the way down to an end-product. Philips is one of the industry partners brought together by the Dutch government that initiated this conflict-free sourcing program in eastern DRC. Although this region has a rich supply of minerals, its economy has collapsed due to decades of ongoing conflict. In an effort to prevent minerals from financing war, many companies worldwide have shielded away from purchasing minerals from the DRC, creating a de facto embargo and a collapse of the local economy. To overcome this issue and promote cooperation and economic growth in the region outside the control of the rebels, we launched the Conflict Free Tin initiative. In October 2012 an important milestone was reached when the first bags of tagged minerals left the mine. The first end-user products containing this conflict-free tin are expected mid 2013.

Supply chain due diligence

To assist in developing a due diligence standard for conflict minerals, we participated in the multi-stakeholder OECD-hosted pilot for the implementation of the ‘OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas’.

During 2012 we worked with 347 priority suppliers to raise awareness and start supply chain investigations into the country of origin for the metals. These suppliers cover more than 80% of the relevant purchasing spend. Using the EICC-GeSI Conflict Minerals Template we requested our suppliers to report back their progress and to disclose which smelters are used in their supply chains to produce the metals. For all four metals together we identified 127 smelters in our supply chain, of which the majority is located in Asia. By having published this smelter list on our internet we created transparency at deeper levels in our supply chain of those actors that we believe hold the key towards effectively addressing the concerns around conflict minerals.

  • graph
    Number of identified smelters per region
  • graph
    Number of identified smelters per metal

Conflict-free smelter program

The smelter is at a key point in the supply chain to enforce responsible sourcing because at that stage minerals from many sources are processed to produce a refined metal. The EICC-GeSI Conflict-Free Smelter (CFS) program makes it possible to identify smelters that can demonstrate through an independent third party assessment that the minerals they procure did not originate from sources that contribute to conflict in the DRC. After having identified smelters in our supply chain, Philips started to invite these smelters to participate in the CFS program.

A list of CFS compliant smelters for tantalum and gold has been published, and audits for tin and tungsten smelters are under way. As sufficient conflict-free smelters for all four metals become available, Philips plans to direct its supply chain towards these smelters. See www.conflictfreesmelter.org for more details.

For more details, see www.philips.com/suppliers and the published Philips position paper on Conflict Minerals.

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This is an interactive electronic version of the Philips Annual Report 2012 and also contains certain information in summarized form. The contents of this version are qualified in their entirety by reference to the printed version of the full Philips Annual Report 2012. This printed version is available as a PDF file on this website. Information about: forward-looking statements, third-party market share data, fair value information, IFRS basis of presentation, use of non-GAAP information, statutory financial statements and management report, reclassifications and analysis of 2011 compared to 2010.
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