Supplier indicators

Philips has direct relations 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. 634 supplier sites have been identified as risk suppliers, including 552 product and component suppliers, and 82 service providers. Different types of service providers make up our audit program, including labor agencies and transportation companies. All risk suppliers are by definition part of our audit program.

2011 supplier sustainability audits

In 2011, we audited 212 of our current risk suppliers, including 75 continual conformance audits with suppliers that we already audited in 2008. Risk suppliers from all recently acquired companies are also included, and this year we completed the audit program with suppliers from the acquisitions of Saeco, Dixtal, and Apex. As in previous years, the majority of the audits were done in China, representing a substantial part of our supply base.

On top of the audits with current risk suppliers, we also audited 58 potential suppliers as part of 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.

  • graph
    Number of initial and continual conformance audits in 2011

To track our progress in improving compliance with risk suppliers, we introduced the new key performance indicator ‘compliance rate’, being the percentage of the risk suppliers that was recently audited and has resolved all major non-compliances. Major non-compliances include two categories: zero tolerance and limited tolerance non-compliances. By increasing the scope of our KPI to limited tolerance issues, we aim to structurally drive implementation across all categories of the Supplier Sustainability Declaration. During 2011 we achieved a compliance rate of 72%.

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

  • Working hours, wages and benefits: excessive overtime, continual seven-day work 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

Areas where we observe improvements compared to previous years are the payment of overtime premiums, industrial hygiene and workers health checks, as well as hazardous substances management. These improvements are due to an increasing awareness at both worker and management level, and we believe that the Philips program has contributed to this.

Since we updated the audit tool mid-2010 with increased focus on management systems and EICC code roll-out to next tier suppliers, we have observed more non-compliance in these sections. Around 40% of the audited suppliers did not implement an effective process to ensure that their next tier suppliers implement the EICC code. In relation to management systems, the most frequently observed areas of non-compliance are a lack of self-audits and risk assessments, absence of performance objectives and a lack of worker feedback and participation.

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 first 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 2011 audits we identified 138 suppliers with working weeks exceeding 60 hours, and 89 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.

Audit findings

The table below shows the results of the full scope audits conducted during 2011. On average we identified 15 major non-compliances per audit: 4 zero tolerance and 11 limited tolerance non-compliances. The limited-tolerance non-compliances include all management systems related issues, accounting for an average of 8 non-compliances per audit.

When the full-scope 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 2,010 corrective actions were implemented successfully by our suppliers to resolve major non-compliances. The results of the resolution audits are not shown in the table below.

During 2011 the decision was taken to phase-out 15 supplier sites in part to a lack of sustainability improvements.

More information on the Supplier Sustainability Involvement Program, the EICC Code of Conduct and audit approach can be found at www.philips.com/suppliers.

Summary of 2011 initial and continued conformance audit findings per region
suppliers with one or more major non-compliances per category (in %)
 
China
Asia excl. China
LATAM
EMEA
Total
No. of audits 2011
            151
              24
              34
                 3
            212
Initial audits 2011
              92
              16
              26
                 3
            137
Continued conformance audits 2011
              59
                 8
                 8
               -  
              75
Workers employed at sites audited in 2011
    155,099
        8,785
        8,406
            412
    172,702
 
 
 
 
 
 
Labor
 
 
 
 
 
Freely Chosen Employment
<10%
10-25%
10-25%
-
<10%
Child labor avoidance /young worker management
-
-
-
-
-
Working hours
>75%
50-75%
10-25%
-
50-75%
Wages and Benefits
50-75%
25-50%
10-25%
-
25-50%
Humane Treatment
-
-
<10%
-
<10%
Non-discrimination
<10%
-
10-25%
-
<10%
Freedom of association
<10%
10-25%
-
-
<10%
Collective bargaining
-
-
-
-
-
Health & Safety
 
 
 
 
 
Occupational Safety
50-75%
50-75%
25-50%
50-75%
50-75%
Emergency Preparedness
50-75%
50-75%
50-75%
>75%
50-75%
Occupational Injury and Illness
25-50%
25-50%
<10%
50-75%
25-50%
Industrial Hygiene
25-50%
25-50%
<10%
25-50%
25-50%
Physically demanding work
<10%
-
-
-
<10%
Machine safeguarding
<10%
<10%
<10%
25-50%
<10%
Dormitory and canteen
10-25%
10-25%
10-25%
-
10-25%
Environment
 
 
 
 
 
Environmental Permits and Reporting
25-50%
10-25%
25-50%
-
25-50%
Pollution prevention and resource reduction
<10%
25-50%
25-50%
-
10-25%
Hazardous substances
25-50%
25-50%
10-25%
-
25-50%
Waste water and solid waste
<10%
<10%
10-25%
-
<10%
Air emissions
10-25%
10-25%
<10%
-
10-25%
Product content restrictions
25-50%
50-75%
10-25%
-
25-50%
Management systems
 
 
 
 
 
Company Commitment
25-50%
25-50%
25-50%
-
25-50%
Management Accountability and responsibility
25-50%
25-50%
25-50%
-
25-50%
Legal and Customer Requirements
25-50%
25-50%
25-50%
-
25-50%
Risk Assessment and Risk Management
50-75%
50-75%
25-50%
25-50%
25-50%
Performance Objectives
50-75%
50-75%
50-75%
50-75%
50-75%
Training
25-50%
25-50%
25-50%
-
25-50%
Communication
25-50%
25-50%
25-50%
-
25-50%
Worker feedback and participation
50-75%
25-50%
25-50%
-
25-50%
Audits and assessments
50-75%
50-75%
50-75%
-
50-75%
Corrective action process
25-50%
25-50%
25-50%
25-50%
25-50%
Documentation and records
25-50%
25-50%
25-50%
25-50%
25-50%
Ethics
 
 
 
 
 
Business Integrity
<10%
10-25%
10-25%
25-50%
<10%
No Improper Advantage
<10%
10-25%
10-25%
50-75%
10-25%
Disclosure of information
-
-
-
-
-
Protection of Intellectual Property
<10%
10-25%
-
25-50%
<10%
Fair business, advertising and competition
10-25%
25-50%
25-50%
50-75%
10-25%
Protection of identity
<10%
<10%
10-25%
-
<10%
General
 
 
 
 
 
EICC Code
25-50%
50-75%
25-50%
25-50%
25-50%
Compliance with law
-
-
<10%
-
<10%

Supplier training and capability building

During 2011 we continued our training programs to support suppliers in risk countries. We organized classroom training sessions in China, Brazil and India for suppliers included in the audit program. Over 400 supplier representatives attended the training sessions. In November we hosted the EICC Worker Management Communication Training in Shenzhen, China. This was developed in a joint effort by the EICC and the Fair Labor Association.

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 the working conditions of more than 500,000 employees in the electronics sector.

The program formally kicked off in October in Shenzhen, China, bringing together more than 200 participants from 60 suppliers, the regional government, the Dutch government and a large number of NGOs and labor unions. The kickoff event galvanized commitment to the program on the part of all stakeholders, including our suppliers and the regional government.

The first phase of the program started in November 2011, with four Philips suppliers joining the program. Suppliers received 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. Each supplier receives support over a period of up to 24 months on the basis of improved dialogue between management and workers. The costs of the program are shared between the supplier, Philips and the IDH. 

‘Conflict’ minerals

Conflict minerals can come from many sources around the world including mines in the Democratic Republic of the Congo (DRC). Philips is concerned about the situation in the east of the DRC where proceeds from the extractives sector are used to finance rebel conflicts in the region. These minerals may end up in 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. Mines are typically seven or more tiers removed in the supply chain from our 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 that have been committed in the Congolese civil war.

Collaboration with different stakeholders

Philips is actively contributing to the Extractives Work Group, a joint effort of the EICC and GeSI to positively influence the social and environmental conditions in the metals extractives supply chain. In 2011 Philips helped organizing the first European session of the EICC-GeSI Conflict Minerals Workshop in Brussels, which convened over 150 stakeholders from different industries, governments and civil society organizations. See also http://www.eicc.info/extractives.htm.

Philips engaged with the Dutch government and the European Parliament to see how we can resolve the issue. We also joined the multi-stakeholder OECD-hosted pilot to test the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. Furthermore, we continued our engagement on this topic with relevant Congolese organizations as well as NGOs in Europe and the US.

Due diligence of the Philips supply chain

We worked with 100 priority suppliers to raise awareness and start supply chain investigations. Using the EICC-GeSI Due Diligence survey tool we requested our suppliers to report back their progress and to disclose which smelters are used in their supply chains. For all four metals together we identified over 100 smelters in our supply chain.

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.

Having identified more than 100 smelters in our supply chain as a result of the due diligence, Philips started to invite these smelters to participate in the CFS program. We also visited a number of smelters to encourage them to enter the CFS audit program. 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 2011 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 2011. 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 2010 compared to 2009.
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Philips uses Productivity internally and as mentioned in this annual report as a non-financial indicator of efficiency that relates the added value, being income from operations adjusted for certain items such as restructuring and acquisition-related charges etc. plus salaries and wages (including pension costs and other social security and similar charges), depreciation of property, plant and equipment, and amortization of intangibles, to the average number of employees over the past 12 months.