We require numerous raw materials, packaging materials, technical products, components, and services, which we procure from more than 70,000 suppliers across 130 countries.
Our supplier management aims to maintain fundamental environmental and social standards – as well as high quality, delivery reliability and competitive pricing. To this end, we have introduced strategies, processes and guidelines that we continuously improve to prevent violations of our standards in the supply chain.
We assign our vendors a risk category, taking into account their country risk, product category and the share of their sales that come from Merck KGaA, Darmstadt, Germany. In doing so, we pay particular attention to suppliers from non-OECD countries as we consider vendors in these countries to be at higher risk of disregarding environmental and social standards.
Guidelines establishing supplier requirements
We expect all our suppliers and service providers to uphold our environmental and social standards, which are primarily derived from the core labor standards of the International Labour Organization (ILO) and the UN Global Compact.
As well as these standards, we also support the Compliance Initiative of the German Association for Supply Chain Management, Procurement and Logistics (BME), which is committed to promoting compliant procurement practices. Moreover, we have signed the BME Code of Conduct, which sets out rules for combating corruption, antitrust violations and child labor, as well as for upholding human rights, protecting the environment and promoting fair working conditions.
Our Group Procurement Policy stipulates our expectations of our suppliers and specifies how we monitor compliance with our standards. This policy reflects both internal and external guidelines, such as the Merck KGaA, Darmstadt, Germany Code of Conduct, the Merck KGaA, Darmstadt, Germany Human Rights Charter, our EHS Policy (Environment, Health and Safety Policy), ISO 14001 (an environmental management standard), and the BME Code of Conduct.
In the Merck KGaA, Darmstadt, Germany Responsible Sourcing Principles, we define what we require of our suppliers in terms of corporate responsibility and obligate them to apply these standards to their own vendors. The Merck KGaA, Darmstadt, Germany Responsible Sourcing Principles are integrated Group-wide with our general terms and conditions.
Organization and responsibilities
Our Group function Procurement is responsible for integrating corporate responsibility requirements into each stage of our sourcing and supplier management processes. An office within Group Procurement coordinates all relevant measures, such as regularly updating our guidelines, revising existing processes and coordinating our participation in industrial initiatives. Our Procurement employees in all countries receive training on our guidelines and processes.
If the legal framework is modified, we incorporate these changes and, if necessary, initiate the appropriate measures. A recent example is the UK Modern Slavery Act 2015, which requires all companies with a certain turnover in the United Kingdom to produce a statement detailing the steps they are taking to address slavery and human trafficking in their business. We intend to issue our first such statement in 2017.
Supplier monitoring: TfS membership
In 2014, we joined the Together for Sustainability (TfS) initiative, which provides extensive supplier assessments via its EcoVadis platform. We encourage our vendors to be assessed by EcoVadis and now have access to the assessments of more than 670 of our key suppliers – 400 of which we initiated. Suppliers are assessed either on self-reported and publicly accessible information or via audit. Since joining this initiative, 26 audits that we initiated have been conducted on our vendors. After first implementing the TfS methodology for our raw material suppliers, we have now expanded it to all our procurement activities, including consultancy services, information technology and logistics services. We are currently developing a method to systematically incorporate TfS results when evaluating and choosing vendors.
The TfS initiative was launched in 2011 by companies in the chemical industry and aims to systematically assess and improve sustainability practices within global supply chains, with a focus on ecological and social aspects. The results of the supplier assessments are shared among member companies in compliance with all restrictions stipulated by competition law.
Conducting our own risk-based audits
In addition to the TfS audits, we also conduct our own annual CR audits on select suppliers based on the potential risk they pose. To do so, we assign our vendors a risk category based on their country risk, product category and sales. We generally assign higher risk categories to suppliers from non-OECD countries. Regardless of their OECD status, we also audit vendors who show evidence of non-compliance with our requirements.
Any deviations from the Merck KGaA, Darmstadt, Germany Responsible Sourcing Principles or from national statutory requirements identified during an audit are classified as critical, major or minor. We provide suppliers with a report detailing the audit results, and the audit team additionally sets a timeline for follow-up audits.
When an audit reveals non-conformances, we require the vendor to present a corrective action plan that describes the steps needed to address these issues. Regarding defects classified as critical or major, we also check whether the corresponding corrective action has been taken. If the problems are not sufficiently rectified, we consider terminating the business relationship.
Critical defects: Any defect rated as critical must be rectified or mitigated as soon as possible. The supplier must submit a corrective action plan to Merck KGaA, Darmstadt, Germany within one week of receiving the audit report.
Major defects: For major defects, the supplier must respond and submit a corrective action plan within one month of receiving the audit report.
Minor defects: Minor defects do not require a formal corrective action plan, nor do we monitor implementation of the corresponding corrective actions.
Giving preference to local suppliers for certain products
We have no internal guidelines stipulating that preference be given to local suppliers in allocating contracts. We generally procure our goods and services globally, depending on availability and price. For instance, the availability of production technology across production sites plays a role and means that not all products are equally available in each country.
However, in some cases local vendors do have an advantage. Products bought locally may be less expensive as additional transport costs are eliminated. This is often the case with packaging materials. Country-specific regulations such as import duties and licenses also help us decide whether to source our goods locally or globally. Furthermore, in some countries statutory provisions require contracts to be awarded to regional suppliers, which especially applies in the pharmaceutical industry.
All goods and services purchased in 2015 totaled around € 5.2 billion, with € 6.5 billion in 2016 (including Sigma-Aldrich). Of the goods and services (including R&D services) procured in 2016, we purchased 48% from suppliers based in EU countries and 37% from vendors in OECD countries outside the EU. The share of goods and services sourced from non-OECD countries outside the EU decreased from 15% in 2015 to 14% in 2016.
Recent audit results
In addition to TfS audits, we also conducted four risk-based CR audits in 2015 and three in 2016, in which we assessed our suppliers according to environmental and social criteria. The non-conformances identified as having an environmental impact were related to exceeding emissions limits and the disposal of waste. In terms of social aspects, in one case there was no clear evidence to prove that minimum wages had been paid. To address these findings, we worked with the relevant suppliers to define a course of action and checked whether the corresponding improvements had been made. Owing to the identified defects, we had to sever our relationships with two suppliers. Our audits found no indication of infringements of freedom of association or collective agreements, nor any form of child, forced or compulsory labor.
In conducting TfS supplier assessments in 2015 and 2016, we focused our efforts on the CR performance of key existing suppliers, identifying possible adverse impacts for 45 vendors. In 20 cases, the issues pertained to environmental impacts, in 38 to labor practices and human rights, and in 14 to impacts on local communities and society as a whole. Some suppliers had multiple issues. In 2017 we’re implementing measures to address the negative impacts identified. We have not yet performed these assessments on new suppliers.
Supplier workshops on CR standards
We aim to build long-term relationships with our suppliers and endeavor to support them in adhering to our standards. In line with this ethos, in 2016 we ran a workshop for our vendors in China that covered topics such as quality requirements as well as our CR and EHS standards. Moreover, we also take part in local and regional supplier workshops organized by the TfS initiative. One such workshop was held in Brazil in 2015, while another took place in India in 2016.
Good EcoVadis rating
As a member of the TfS industry initiative, we encourage our suppliers to be assessed by the independent rating agency EcoVadis. We too have been evaluated by EcoVadis and in 2016 were awarded a gold medal for our sustainability performance. At 75 out of 100 points, we are among the top 5% of all companies rated. EcoVadis assesses suppliers from 101 countries and 150 sectors across the four categories of Environment, Labor Practices, Fair Business Practices, and Sustainable Procurement. Our holistic environmental management system and clear guidelines on human rights earned especially high marks. This excellent score also benefits our business, as customers who value corporate responsibility are increasingly inquiring after such assessments.