Accelerating Supplier Sustainability

From Compliance to Maturity and Collaboration

November 2013

www.bsr.org

Accelerating Supplier Sustainability:

From Compliance to Maturity and Collaboration

Accelerating Supplier Sustainability 2

About This Report This report about supply chain sustainability was written by BSR and Intel. Intel relates their experience in supplier engagement and development, and BSR presents perspectives based on their work on supply chain issues across a range of industries. Sections about Intel and BSR experience were authored by each organization respectively, and any errors are the responsibility of the authors. For more information about the report, please contact Laura Ediger at BSR (lediger@bsr.org) or Jocelyn Cascio at Intel (Jocelyn.cascio@intel.com). DISCLAIMER BSR publishes occasional papers as a contribution to the understanding of the role of business in society and the trends related to corporate social responsibility and responsible business practices. BSR maintains a policy of not acting as a representative of its membership, nor does it endorse specific policies or standards. The views expressed in this publication are those of its authors and do not reflect those of BSR members. ABOUT BSR BSR works with its global network of more than 250 member companies to build a just and sustainable world. From its offices in Asia, Europe, and North and South America, BSR develops sustainable business strategies and solutions through consulting, research, and cross-sector collaboration. Visit www.bsr.org for more information about BSR’s more than 20 years of leadership in sustainability. ABOUT INTEL In 1968, two scientists, Robert Noyce and Gordon Moore, founded Intel with a vision for semiconductor memory products. By 1971, they had introduced the world’s first microprocessor. Since then, Intel has established a heritage of innovation that continues to expand the reach and promise of computing while advancing the ways people work and live worldwide. The company is headquartered in Santa Clara, California, has about 100,000 employees globally, and had a net revenue of US$53.3 billion in 2012. Visit www.intel.com for additional details. Copyright © 2013 Intel Corporation and BSR. All rights reserved.

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Contents 4 Intel’s Supply Chain Sustainability Program

Setting Expectations of Suppliers

BSR on Supplier Ownership

Creating Supplier Capability-Building Programs

8 Up the Maturity Curve: Going Beyond Compliance

BSR on Beyond Monitoring

12 Sharing Knowledge as a Peer Manufacturer

14 The Need for Collaboration

BSR on Excessive Working Hours in China

BSR on Collaboration

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Intel’s Supply Chain Sustainability Program

Supply chain management approaches have shifted over the years from a focus on audits to a “beyond monitoring” philosophy that incorporates broader engagement and supplier ownership of their own environmental, social, and corporate governance (ESG) management. This report presents Intel’s reflections on their progress along this trajectory, alongside BSR’s perspective gleaned from a broad swath of work on supply chain across industries. It also explores the potential for effective collaboration to address systemic ESG challenges that individual companies are unable to solve alone. Intel designs and manufactures the majority of our products in our own factories around the world. We have a global supply chain comprised of more than 10,000 suppliers in more than 100 countries. Our suppliers provide a myriad of parts, equipment, materials, and services for factories and offices worldwide. Our strategy is to balance the goal of reducing Intel’s supplier-related environmental and social footprint with the need to ensure the most technologically advanced, cost-effective, resilient, and predictable supply chain. One of Intel’s four corporate strategic objectives is to “Care for our people and the planet and inspire the next generation.” Working with suppliers is a natural expansion of that objective to our supply base and builds on the expectations of ethics and employee safety that have been part of supplier management from the beginning. Audits are one of the operational elements of our supply chain program and are based on the EICC standard process (see Figure 1 and sidebar). Figure 1

Intel was a founding member of the Electronic Industry Citizenship Coalition (EICC) in 2004 and remains active on the board and in several work groups today. We believe a collaborative approach is key to helping drive overall industry alignment on ESG issues and setting standards that enable faster progress and more efficient improvements for the entire supply chain.

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However, from the time we began implementing our audit program, our goal has been to use the information from supplier audits in a way that goes above and beyond compliance monitoring and resolving audit findings. Even as we have ramped up the number of supply chain audits we conduct (see Figure 2), these audits have taught us how to drive improvements in two critical areas: » Setting and revising expectations of our suppliers

» Creating capability-building programs to support supplier development

Setting Expectations of Suppliers

We first added ESG criteria to our integrated supplier scorecard in 2010, which we use with approximately 250 Top Tier 1 suppliers. In 2011 to 2012, we increased the scorecard expectations, requiring suppliers to define and publicly track progress toward multiyear environmental goals. For 2013, since suppliers already had three years to make improvements, we decided to implement a more comprehensive set of ESG expectations. We analyzed findings from the risk assessments and audits to identify areas where we could make the most significant improvements across our supply base. We wanted to challenge suppliers and focus on the business value they could derive from investing in ESG improvements. This new effort, the Program to Accelerate Supplier Sustainability (PASS), has three areas of expectations: » EICC Code of Conduct compliance: Requires a 90 percent score for on-

site audits

» Transparency: Requires a report based on Global Reporting Initiative criteria or a similar corporate responsibility report with an executive accountability statement

» Capability building: Annual improvement on greenhouse gas emissions and water and waste goals, a human rights metric, and a labor metric that aligns with the supplier’s business

Figure 1.

Figure 2 * Top Tier 1 suppliers are now required to have RA2s.

** Includes on-site third-party audits and third-party audits completed using the EICC

standard process within the previous two years (for which Intel completes a formal review).

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The most significant changes were related to transparency and capability building. Within the area of transparency, we decided to have suppliers publish CSR reports because the reporting process helps them to identify opportunities where they can improve and because public accountability creates focus on both achieving results and realizing value for the business.

In terms of capability building, we learned from audits that suppliers were often lagging in the labor section of code compliance. In response, we chose to encourage improvements in this area by requiring GRI metrics on human rights and labor so that suppliers who had not been tracking their performance could start to make meaningful progress in these critical areas. In 2013, we implemented PASS with around 80 of our most strategic Tier 1 suppliers. While the results are not yet final, the initial analysis shows that the program is indeed driving meaningful ESG improvements. Most suppliers had gaps to close and have worked diligently over the course of the year to meet our expectations. For example, when we established a baseline of supplier performance in the first quarter, only 7 percent of targeted suppliers met all requirements. By the end of the third quarter, this figure had increased to 50 percent of suppliers. The most significant progress has been made in the area of executive accountability statements, which increased from 56 percent to 94 percent of suppliers meeting the criteria to date. We will extend PASS to additional groups of suppliers in 2014 and 2015 and ultimately the program will include all Top Tier 1 suppliers. Creating Supplier Capability-Building Programs

The second area being shaped by what Intel has learned from audit data is capability building, including allocation of additional resources. From our audits, we knew that many suppliers in China were asking for additional resources and training on nearly every area of the EICC Code. We responded by creating the Supplier Sustainability Leadership Summit. We designed its agenda based on trend data and insights so that we could offer suppliers the topics that were most relevant and critical to them, including sessions on overtime, employee health

BSR on Supplier Ownership

The concept of supplier ownership is that suppliers take a proactive approach to determining their own sustainability strategy and objectives, as opposed to passively responding to requests from their customers. How can suppliers do this? » Demonstrate executive commitment: Executive support is critical to

ensuring that suppliers prioritize implementation of sustainable social and environmental practices throughout operations and allocate sufficient resources to these practices.

» Incorporate into strategic planning and evaluation: Suppliers can identify where business objectives and sustainability risks and opportunities coincide and then build these into their strategic plans.

» Capture value from the audit process: Information from audits and assessments can be used to identify areas for improvement, target root causes, and learn from external advice about remediation.

» Proactively communicate challenges and progress: By voluntarily disclosing performance against social and environmental criteria, suppliers can reduce the demand for audits. In addition, suppliers can use this information to engage other external stakeholders, such as regulators, local communities, civil society groups, and potential customers.

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and safety, environmental management, and CSR reporting. The summit has now been held twice in Shanghai. Looking ahead to 2014, we will use the audit findings to shape new capability-building options for suppliers, including live webinars, on-demand content, and third-party resources. We believe that a strategic capability-building program is essential to building the ESG maturity of suppliers.

Up the Maturity Curve: Going Beyond Compliance

Intel’s supply chain responsibility approach has four key areas: » Setting clear expectations with suppliers (as discussed above).

» Holding suppliers accountable: Intel provides tools to measure results and proactively help suppliers improve.

» Recognizing and rewarding performance: Intel provides regular feedback to suppliers on their progress. We have integrated ESG into our supplier awards and Supplier Continuous Quality Improvement Program, and all award winners must meet higher standards on the EICC Risk Assessment to be eligible.

» Building internal skills and capabilities: Through training, tools, and systems, Intel enables employees to further integrate ESG considerations into purchasing decisions and supplier management processes.

The last three concepts are tied together in the sustainability maturity curve model (see Figure 3), which shows the path to performance that goes above and beyond compliance. The framework is based on the safety maturity curve that Intel has had in place for internal operations for many years. It demonstrates the evolution and growth of suppliers beyond awareness and compliance to recognizing the value of ESG to their business and then instinctually integrating it into their operations.

Intel is committed to leadership in supply chain responsibility—from working with our suppliers to achieve higher levels of transparency and performance to collaborating on solutions to complex challenges.

—Brian Krzanich,

CEO of Intel

Figure 3

Intel’s two-day annual supplier summit brings together more than 200 representatives from suppliers, government, academia, NGOs, media, and non-ICT industry leaders. This diverse group of participants openly discusses topics, such as the business case for strong employee engagement and productivity. The summit includes keynotes, panel discussions, interactive small group sessions, and training on critical topics like occupational health and safety. Watch videos from past summits.

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One way our Top Tier 1 suppliers have moved up the maturity curve is through the increased use of environmental metrics (see Figure 4). In 2011, we began requiring suppliers to define greenhouse gas and water and waste metrics.

The bar graph shows how much progress suppliers made in those critical areas, with over a 10 percent increase across all categories in supplier environmental management and performance toward goals. An example of a supplier that has mature ESG practices is Murata Manufacturing Co., Ltd. Murata supplies Intel with multilayer ceramic capacitors, inductors, ferrite beads, and wireless modules. Headquartered in Kyoto, Japan, Murata has more than 37,000 employees and manufacturing operations in nine countries. They have received eight supplier recognition awards from Intel in the past 11 years, reflecting their strong performance on many areas, including ESG. Murata’s factory in Wuxi, China, provides an example of strong labor management systems and employee engagement practices and the business value that comes from those efforts. The Wuxi factory has 6,000 employees, and nearly 80 percent of its operators are migrant workers from the rural areas of nearby provinces. Murata has made understanding employees’ physical and mental needs a priority and created an employee satisfaction program to ensure that they meet these needs. In particular, they are sensitive to typical employee challenges, such as limited educational background, a low sense of job security, and the difficult adjustments of moving to a city. Murata’s goal is that employees “work happily in Murata, live happily in Wuxi.” In addition to implementing the EICC Code at the site, they exceed basic requirements in three key areas:

1. Provide a salary and benefits that are above average compared to other nearby companies.

2. Put health first in these ways: controlling overtime, reducing workload, improving the workshop environment, providing health exams for all workers, supporting sports activities, and focusing specifically on women’s health needs.

Figure 4

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3. Making efforts to prevent discrimination, treat employees fairly, and engage them, including focusing on all workers’ learning and growth by encouraging them to take part in quality and engineering improvement activities and to develop their skill sets.

Other practices at Murata include the use of Mandarin rather than the local Wuxi dialect to help include migrant workers and the mentoring of new recruits by veteran employees. Murata’s Happiness Team also connects migrant workers with assistance both inside the factory and out, helping them integrate more easily into an urban environment. These efforts have delivered business value to Murata in terms of:

1. High levels of employee satisfaction: Employee satisfaction evaluations remain high every year based on external surveys.

2. Low turnover rate: Employee turnover is less than half that of other nearby companies, which means that the factory spends less money and time recruiting and training staff, has increased work efficiency and quality due to having more experienced employees, and has improved its quality and efficiency, as well as reduced its costs. In the past two years, 90 percent of workers have been involved, and almost 1,000 improvement projects have been completed.

3. No labor disputes in the past 10 years.

4. A stronger reputation with customers and increased recognition as a good business partner.

5. Formal recognition from the government on a national, provincial, and local level.

Murata’s strong performance is an example of how a company with mature ESG practices can deliver meaningful bottom-line results. Another example of a supplier that has moved up the ESG maturity curve is Schneider Electric, a multinational company headquartered in France. They have operations in more than 100 countries, with 140,000 employees and €24 billion in revenue in 2012. Schneider provides “solutions to make energy safe, reliable, efficient, productive, and green from plant to plug.” In 2011, third-party EICC Code of Conduct audits were performed at Schneider’s Wuxi and Beijing facilities at Intel’s request. As a result of findings from those audits and in close collaboration with Intel, Schneider Electric has been continuously improving; they have established a dedicated ESG team that includes specialists in human resources, environment, management systems, and ethics who meet monthly to review performance across all areas of the Code of Conduct. One specific lesson from the audits was that there were differences and gaps in the implementation of corporate policies across various sites, partly because of Schneider’s high number of acquisitions in the last few years. For example, the safety of employees is the top priority across the company, before focusing on productivity, quality or other topics. Having internal audits done on a yearly basis by their corporate Safety and Environment team in China has enabled regular discussion and action plans with a monthly follow-up schedule. The audit process helped identify opportunities to standardize across global factories and improve not only compliance and consistency but efficiency as well.

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A few specific examples demonstrate Schneider’s commitment to improving its ESG practices and this commitment’s business value:

1. Integration of ESG into their Global Supply Chain program: They added ESG content to their overall operational audits, enabling them to self-monitor. This revision has reduced the number of audits that the company needs to perform and freed up resources

2. Broader ESG assessment of the supply base: Other customers are increasingly asking for data about Schneider’s supply chain, as well as its own operations during the bidding process.

3. 166 socially responsible investment (SRI) funds have selected Schneider Electric: This figure represents 4.5 percent of the company’s market capitalization and ranks them as number five among all companies in the world and number one in France, according to a report published in summer 2012 by market intelligence consultancy Ipreo.

Subsequent audits of Schneider facilities have also shown improvements in ESG performance.

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BSR on Beyond Monitoring

In BSR’s work on supply chain management, we have seen the limitations of a compliance approach that relies solely on auditing to identify and correct shortcomings in social and environmental management. From 2007 through 2011, we worked with several member companies in a collaborative Beyond Monitoring initiative to create an alternative organizing framework for companies’ efforts to ensure sustainability in supply chains. The group agreed on these four pillars: » Buyer internal alignment of purchasing practices with

social and environmental objectives, with greater collaboration among business functions, such as ethical sourcing and procurement

» Supplier ownership of good working and environmental conditions in their workplaces

» Empowerment of workers to take a stronger role in asserting and protecting their rights, through an informed and participatory workplace

» Public policy frameworks that ensure wider and more even application of relevant laws

The conceptual framework links closely to Intel’s approach of building on and exceeding a compliance process that relies strictly on auditing, and helps to demonstrate what this might mean in practical terms. The group also developed Partnership Principles for Continuous Improvement as part of a vision of how companies and suppliers can effectively work together to improve sustainability management systems. These include:

» Mutual transparency: Suppliers agree to openly and honestly share information related to their management systems, including commitment, capabilities, and compliance status. Companies agree to clearly communicate their expectations, relevant business procedures, and other information that can impact suppliers’ ability to improve.

» Continuous improvement: Suppliers agree to work toward management excellence in the areas of ethics, labor, health and safety, and environment, while understanding that real and sustained improvements are long term in nature. Companies agree to not terminate business relationships with suppliers that are challenged to meet code of conduct expectations, unless they discover zero-tolerance issues, such as child labor, forced labor, or abuse of workers or unless suppliers repeatedly demonstrate a lack of commitment to improvement.

» Partnership: Both parties commit to maintaining open lines of communication among decision makers. Companies work in partnership with suppliers to clearly define roles and responsibilities and to create and achieve mutually agreed-upon goals. Companies recognize their own role in affecting supplier performance and work to ensure that they have effective internal alignment and that their procurement practices encourage and enable suppliers to improve.

» Mutual business benefit: Both parties agree that continuous improvement of sustainability management should create business benefits for both sides. These benefits may include reduced risk, increased efficiency and productivity, enhanced business continuity, and access to new customers and markets.

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Sharing Knowledge as a Peer Manufacturer Intel’s characteristics create a unique opportunity for us to influence ESG performance in the electronics industry supply chain. We have factory operations in seven countries, including the United States, China, Vietnam, and Malaysia, which gives us the ability to leverage years of firsthand experience in our own factories to help suppliers improve conditions in theirs. We also hold ourselves accountable to meet or exceed the same ESG standards that we set for suppliers. For the past three years, we have completed EICC Risk Assessment (RA2) reviews of our own manufacturing facilities to test and demonstrate the value of the EICC process. And, to underscore our commitment to transparency, we published summary reports on our supplier website. In 2012, we took this process one step further and commissioned a full EICC third-party audit of our assembly and test facility in Chengdu, China, even though the RA2 assessment indicated that all Intel facilities were low risk. The audit confirmed that the Chengdu facility was low risk and identified only eight minor (administrative) nonconformances, all of which were closed promptly. However, the audit gave us insights and data we have used to compare to and contrast with our suppliers’ audit results, and the findings helped us to close minor gaps in our training and procedures across other sites. For example, based on a question raised by auditors on the labor section of the code, we decided to update our acknowledgement letter to employees about the timing of final paychecks, as part of the standard procedure when employees resign. (To learn more, read the summary report of the audit.) We have also built on our other experience from previous work with suppliers on quality-related issues, which has helped us understand how to help suppliers make progress on ESG issues. In terms of quality, some less mature suppliers initially didn’t understand or value improvements and saw those efforts as merely costing their operations more money. Yet over time, even those lagging behind came to appreciate the bottom-line benefits of high-quality performance, and the number of quality excursions (i.e., quality issues that disrupt supply) declined dramatically from 1997 to 2012 (see Figure 5). By following a similar process in how we support suppliers on ESG practices, we hope to see equally strong ESG performance improvements when we look back several years from now.

Figure 5

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One way we have shared our experience in manufacturing to help develop supplier capability in ESG management illustrates this approach’s effectiveness. For one supplier location, we conducted follow-up audits around areas we had identified in an initial audit as needing improvement, including issues related to working hours, labor conditions, safety systems, and management systems. To address some of the system-level issues, Intel senior leaders met with supplier executives and agreed to loan two environmental, health, and safety (EHS) experts from our Chengdu manufacturing facility to assist with analysis and improvement plans for their environmental and safety systems. We also hosted supplier representatives at our Chengdu facility so that they could learn firsthand about our management systems. As a result of these interactions, we saw expedited closure of almost all issues related to EHS at this location, as well as improvements in human resource management systems and communications practices. In addition, we saw evidence of a shift to more integrated instinctual performance on ESG issues. When Judy Wente, Intel’s Director of Supply Chain Environmental, Social, and Governance, revisited the supplier facility, she was encouraged to see that all the managers on the shop floor were wearing steel-reinforced shoes (instead of the flip-flops they wore during her previous visit) when they greeted her. In addition, she saw that some of the managers had painted the tips of their shoes yellow. When she asked why, the management team informed her it was to remind the employees as they walked around why wearing the shoes was important. “While a simple act, it was a great visual reminder to employees of the reason why there is a safety element to the shoes, and equally important, it showed that managers were applying their own ideas about health and safety and embedding it in their day-to-day way of working,” says Wente. The creation of an ESG Field Team in Asia has enabled Intel to support suppliers through our own employees, in this case by providing detailed training to staff based across China and Malaysia and then utilizing that team with high-risk suppliers. A few specific improvements have resulted from Intel employees visiting supplier sites in Asia: » Intel identified an opportunity for a supplier to reuse plastic reels, resulting in

significant cost savings and a reduced waste footprint.

» A supplier was using a waste vendor that was not qualified for the type of waste disposal needed, and so Intel identified a certified vendor.

» Suppliers often do not store chemicals properly, leaving containers stacked on wire shelves above other chemicals and without proper labeling. Intel provided training illustrating how to safely handle and store chemicals utilizing secondary containment.

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The Need for Collaboration Accelerating progress and solving some of the challenging systemic issues of supply chains will require greater collaboration. We believe the conflict minerals model for multistakeholder collaboration (learn more) demonstrates how the participation of different stakeholders can address systemic problems that a single company cannot resolve alone. In another example, excessive overtime in Chinese factories is a widespread problem and difficult to eradicate (see the box below for an overview of the challenges related to working hours). Without collaboration among companies and other stakeholders, any single company will be hard-pressed to reach full compliance on overtime; affecting the system and changing incentives requires a broader approach. Building supplier capability is another area where it is logical to combine resources and create a common approach and tools that can enable a more extensive uptake of improved practices.

BSR on Excessive Working Hours in China

Excessive overtime for factory workers remains an ongoing issue in China, despite more than 20 years of efforts to rectify the situation, including the introduction of extensive Chinese laws on overtime and wages. Unlike other social standards violations at the workplace, which are often the unintended outcomes of outdated business practices, many work-hour-related noncompliances in China occur under specific orders from management, usually to recover lost production time or to accommodate sudden orders or changes from buyers. Numerous drivers have led to the emergence of this issue in China, including: » Global buyers: The common practice of issuing last-minute orders and changes, as well as the

persistent pressure placed on factories to provide products at low prices, puts pressure on factory managers who have few options at their disposal.

» Factory managers: The intense competition among factories to win and retain business from global buyers leads factory managers to place high demands on their workers. High worker turnover further increases the pressure placed on the remaining trained workers to maintain factory output at the required level.

» Factory workers: The demographics of workers in China are changing; wages are increasing, while the middle class is growing. Yet factory worker wages remain low in general, and an abundance of these workers are migrants from the poorer regions of the country. In this context, workers are willing (and often asked) to work an excessive number of hours to be able to send part of their income back home to their families. Worker turnover is sometimes caused by a factory’s inability to provide workers with the amount of overtime they desire.

» Government: Although the issue of working hours is covered within the regulatory framework, enforcement of the laws has been limited. Worker representation is not independent from government and has generally been ineffective.

A multiparty approach is needed to solve this complex issue. Improvements in buyer practices and accountability, higher factory worker wage rates, and strengthened enforcement of existing labor laws will all need to be part of a systemic solution that ultimately benefits factory workers in China.

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In recent years, there has been a proliferation of different initiatives to address supply chain problems, and Intel participates in several of them. However, we are always interested in ideas that will work across industries and stakeholder groups to make better progress faster.

BSR on Collaboration

Many of the sustainability challenges faced in supply chain management are systemic, industry-wide issues that are difficult or even impossible for a single company to tackle alone. In these cases, it makes sense for companies to join forces (each bringing their own resources and expertise to the table) and work together to maximize impact. BSR has created and facilitated several different working groups over the last 20 years, both within a single industry (such as the EICC) and across multiple industries (such as the Clean Cargo Working Group). The ways in which companies work together vary in terms of overall objectives and types of approach. Collaborative efforts can range from one-off cooperation (where multiple companies align short-term strategy on a specific issue) to standardization approaches (where companies attempt to align more structural or long-term operations to address an industry need) to more multi-stakeholder, governed alignment (in which companies commit to align practices, subject to oversight by a third party). While collaborative efforts undoubtedly take more time and effort than going it alone, we have seen significant benefits from joint approaches. In addition to harnessing a wider array of resources and expertise, the benefits of collaboration include: » Level-setting: Sometimes ESG issues are exacerbated by a race to the bottom as companies see

competitive advantage from cutting corners or as suppliers compete by offering lower prices that are only possible through cost-cutting measures, such as lowered compensation for workers or less investment in EHS. Company agreement on a consistent set of expectations can help create a level playing field for suppliers and buyers.

» Increased efficiency: Agreement on assessment protocols, audit standards, and environmental requirements among different companies helps to ensure that each one does not have to create its own independent standard, and that suppliers have only one set of requirements to follow rather than multiple contradictory codes of conduct. BSR’s Sustainable Water Group was formed by apparel companies who saw value in creating a set of guidelines for wastewater discharge quality indicators, which each company then used with their suppliers. Groups like AIM-Progress and the Global Social Compliance Program have similar aims: to create common tools and standards that will reduce inefficiency and redundancy in the audit process for shared suppliers.

» Informed decision-making: Some groups focus on the creation of shared data sets and knowledge banks, which then inform their decision-making, based on a more comprehensive understanding of a problem. For example, the Maritime Anti-Corruption Network collects data for instances where member companies have been asked for bribes, which enables the group to assess patterns and identify potential areas to focus on and solutions.

» Enhanced policy influence: In cases where ESG issues are systemic in a particular country due to a weakness in legislation or enforcement, a joint call for change from several companies is much more effective than the influence of a single company. Exertion of collective influence has been seen in the efforts of some industry groups, such as the companies brought together through the International Labour Organization’s (ILO) Better Work program for the garment and textile industry.