Note 6: Supply chain

Working with our suppliers in order to create a sustainable supply base and deliver customer benefits, as well as improving resource efficiency, is a fundamental requirement of our strategy. This means that we have to work together effectively. We have supplier management programs in place that support both performance improvement and opportunities for joint developments.

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

  • Critical suppliers are those in high growth countries 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 and joint innovation

Supplier management

In 2013, we reviewed our supplier sustainability initiatives. In order to improve the alignment between our initiatives for critical as well as key suppliers, we have enhanced and formalized our sustainable supply framework, as reflected below:

Supplier management (graphic)

Supplier management

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ambition

 

Ambition

 

Ambition

 

 

2010

 

2011

 

2012

 

2013

 

2013

 

2014

 

2015

1

PR = Product related (raw materials and packaging).

2

NPR = Non-product related.

3

SSV program targets are included in the new Critical PR spend coverage KPI.

Critical PR1 spend covered by supplier management framework (% of spend)

 

 

 

69

 

80

 

80

 

85

 

90

Product related suppliers signed Vendor Policy (% of spend)

 

91

 

95

 

97

 

96

 

96

 

96

 

96

NPR2 suppliers signed Vendor Policy (% of spend)

 

 

77

 

80

 

83

 

80

 

80

 

80

Suppliers on SSV program since 20073

 

266

 

304

 

373

 

392

 

 

 

Third party online sustainability assessments

 

 

 

 

 

 

200

 

400

Third party on-site sustainability audits

 

 

 

 

 

 

20

 

40

Four supplier management processes are now in place to support continuous improvement of suppliers, to prioritize improvement activities across our supply base and to accelerate delivery of our corporate sustainability goals.

In 2012, we announced a new KPI we would report from 2013: the critical PR (Product related) spend covered by the supplier management framework. This KPI gives a better view of the spend impact of the capability and capacity building efforts with our suppliers. We have reached our ambition to cover 80 percent of our critical PR spend in 2013.

We have defined critical spend as all PR spend (raw materials and packaging) from high growth countries. Spend is considered to be covered by this metric if one of the following conditions is met:

  1. The supplier is part of our key supplier process.
  2. The supplier is part of our Supplier Support Visits program and has been followed up according to the program guidelines.
  3. The supplier has a signed Vendor Policy, delivers less than €5 million from high growth countries and is not classified as a critical supplier (and therefore part of the Supplier Support Visits program).

In 2014 we will also have the assessments and audits from the Together for Sustainability initiative to further secure our critical spend coverage. Each of these processes is further explained below.

Vendor Policy

Covers 96 percent of the product related (PR) spend and 83 percent of the non-product related (NPR) spend, including all critical suppliers and key suppliers. Our aim is to have all our suppliers comply with the AkzoNobel Vendor Policy, which includes our Code of Conduct, confirming their compliance with environmental, social and governance factors.

Supplier Support Visits

The SSV program is designed to develop long-term local suppliers by raising their capability and performance. It includes all critical suppliers and represents 24 percent of our PR spend in high growth countries. Introduced in 2007, the visits focus on critical suppliers and are carried out by teams from Procurement and HSE. The SSV program remains highly successful, with 392 supplier sites visited to date. Of all SSV, 47 percent have resulted in a developmental score, which means actions have been formulated and discussed with the supplier. Follow-up visits are arranged to verify implementation and progress.

Key supplier management

Covers 45 percent of our global PR spend. In 2013, as part of our operational effectiveness program, we further developed our key supplier management process. The previous process focused primarily on suppliers of value today. In the updated process, we have defined and identified 51 suppliers that are critical to AkzoNobel both now and in the future and manage them in a differential way. 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 process.

Together for Sustainability (TfS)

We joined this global initiative in the fourth quarter of 2013. Implementation of the program will impact all supplier segments, including product related and non-product related suppliers. TfS is an industry initiative made up of seven leading European chemical companies, and will expand further. It aims 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. With TfS, our aim is to implement effective, leading edge practices across the industry. We are implementing standardized global assessments and on-site audits to monitor and improve sustainability practices in our supply chains.

Global implementation of Together for Sustainability will provide the following benefits:

  • Supplements our existing SSV program by ensuring continued development of critical suppliers in high growth markets
  • Confirms compliance to our Vendor Policy standards and Code of Conduct across a selected global supplier portfolio
  • Strengthens our risk identification and mitigation processes
  • Further integrates auditable corrective action planning into the supplier development process
  • Provides third party verification of AkzoNobel activities against industry best practices

As part of the annual TfS assessment, the quality of our corporate supplier management activities is verified against industry best practice. Our 2013 Supplier Management score puts us among the best performing companies assessed by EcoVadis globally in our industry category.

Our Supplier Sustainability Framework provides an overall approach to quantifying supplier progression and delivery against key performance elements in both high growth and mature markets.

Collaborative initiatives

We are a founding member of the International Supply Chain Management Congress in Amsterdam. In 2013, we were again part of the leadership for the organization, sponsorship and support of the congress, which is recognized as a valuable contributor to the development of sustainability thinking and supply chain processes.

Strategies going forward

The procurement strategy for the next few years is to move further beyond availability-price-synergy towards cross-functional sourcing, integration and value chain orientation. Buying on price will move towards total cost of ownership, while selected supplier relationships will move towards cooperation and partnering. We see this as a way to leverage the size and scope of our global business, our position with suppliers and to drive competitive advantage.

A cross-functional approach with our key suppliers is now set as the standard in our updated key supplier management process. This enables us to structure the cooperation regarding joint sustainability and innovation topics with our key suppliers.

During the year, we continued the development and implementation of our raw material strategies. These included elements such as material resource planning, capacity and supply cover, supplier selection and sourcing plans per region, “make” versus “buy” and renewable materials. They are also an instrumental tool in reducing the footprint of our global value chains. We continuously review these strategies in an integrated cross-functional Project Management Office, run monthly, to embed the overall process and strategy. This process also ensures that we have taken into account interdependencies with a forward-looking perspective, including sustainability.

Complexity reduction

So-called slates of raw materials in key areas of spend are being developed. These slates define a core list of preferred materials/suppliers. Health and sustainability aspects, such as product safety and environmental concerns, are key criteria applied. The objective is to migrate our materials/suppliers over time on to these core materials, making our value chain less complex and more sustainable. The slate approach gives clear information on potential business opportunities to improve our value chains – lower cost, improved sustainability and reduced risk.

Renewable raw materials

Renewable raw materials are an important component of our sustainability strategy, as a considerable share of AkzoNobel’s environmental footprint is embodied in the raw materials we buy. Over the next few years, we expect to see the first commercial scale production facilities of new renewable raw materials come online. In order to lead the deployment of these materials in our markets, we are setting up partnerships across the supply chain. This supports the emergence of a new bio-based industry, and at the same time enables AkzoNobel to tap into alternative feedstock sources, to be able to offer more sustainable products, and to reduce the cradle-to-grave carbon footprints.

In 2013, we announced partnerships for several of our key raw materials:

  • Bio-based solvents in Latin America: This partnership with Solvay-Rhodia targets volumes of up to 10 kilotons per year of bio-based solvents by 2017
  • Algae-derived fatty acids: Together with biotech company Solazyme, we are investigating options for new sources of tailored fatty acids. We are also considering a supply agreement for “drop-in” matches to conventional oleochemicals as of 2014 in Brazil, for use in surfactants and decorative paint applications
  • Bio-based epichlorohydrin: In partnership with Solvay, we plan to increase the use of bio-based epichlorohydrin to 20 percent of AkzoNobel’s global indirect use by 2016 (see case studies)
  • Cellulosic-based acetic acid: Together with biorefinery developer ZeaChem, we are exploring the potential for a large-scale facility in Europe producing acetic acid (and derivatives) from cellulosic sugars (e.g. from forestry waste)

Total volume of raw materials per source

Total volume of raw materials per source (pie chart)

In addition to these announced partnerships, we have a number of projects in the pipeline to further improve the sustainability of our supply chain. In order to monitor progress on the increasing use of renewable raw materials, we have also introduced a new KPI. In 2013, 13 percent of all our organic raw materials came from renewable (bio-based) sources (2012: 13 percent). This is 5 percent of total volume of raw materials purchased, i.e. including other raw materials such as salt, minerals and clays.

Logistics, distribution and car lease

As part of our performance improvement program, we have started to manage warehousing and logistics at a regional AkzoNobel level. This will result in a reduction of warehouses and combined transport solutions. It will also have a positive effect on our footprint.

We are involved with Smartway in the US and Green Freight Europe in the EU, focusing on CO2 reduction.

The carbon emission ambition for our own passenger car fleet is 130 g/km. In Europe, we reduced from 143 g/km in 2011 to 136 g/km in 2012 and 132 g/km in 2013.

Operations management

Excellence in supply chain management and manufacturing operations remains a key focus area for AkzoNobel. The 2013 program delivered a number of operational improvements in the full supply chain. For example, standardized processes and production systems based on Lean Six Sigma methodologies are being implemented globally. We will continue rolling out the program to all the company’s manufacturing facilities.

Highlights of recent improvements include:

  • More than 75 manufacturing sites have started to embed continuous improvement processes and have implemented Lean Six Sigma projects
  • Sales and operations planning processes have been standardized to deliver the required customer service and working capital improvements
  • The AkzoNobel Academy now offers a full Lean Six Sigma curriculum for the supply chain, operations and other functions in the company

Safety, inventory levels and eco-efficiency have improved throughout the company. The sustainability agenda has also been updated, with more focus on material efficiency throughout the full value chain. Continuous reduction of both energy usage and carbon footprint remains an integral part of our strategy going forward, including the implementation of renewable energy. In addition, pilot sites have been selected for a detailed assessment of solar energy.

Investment decisions

All our major investment proposals (more than €5 million) require a sustainability evaluation alongside the financial case. This includes assessments at different stages in the project development. At the point of application for capital, the requirements include an eco-efficiency assessment, as well as a full review of health and safety, process and product safety, natural resource/raw material requirements and environmental impacts. The proposals are reviewed by subject matter experts, who give input to the Executive Committee, to provide a strong basis for the investment decision.