- SUSTAINABILITY IN THE SUPPLY CHAIN MEANS LOOKING BEYOND CORPORATE BOUNDARIES, STRATEGICALLY AND EFFECTIVELY PROMOTING A SENSE OF SHARED RESPONSIBILITY
CNH Industrial adopts a responsible approach to the management of its supply chain, from small local companies to large multinational organizations, establishing relationships that go beyond commercial transactions, fostering long-lasting and mutually satisfying collaborations with eminently qualified partners that share the Company’s principles.
For CNH Industrial, sustainability in the supply chain means looking beyond corporate boundaries, strategically and effectively promoting a sense of shared responsibility.
Advocating socially and environmentally responsible behavior along the entire supply chain is one of the Company’s primary commitments, along with championing a culture of sustainability among Company employees who work with suppliers every day. This approach goes hand in hand with the other priorities at the heart of supply chain management: quality, price and lead times.
As evidenced by the results of the materiality analysis, one of the most important aspects for CNH Industrial and for its stakeholders is the process of evaluating suppliers on environmental issues, labor practices, management of human rights and the impact on society. Promoting and monitoring high sustainability standards fosters long-term relationships with suppliers, in the interest of both parties, as it reduces potential risks, ensures continuity of supply and improves overall sustainability along the entire supply chain, mitigating reputational risk and any potential damage to the Company’s credibility. Another material aspect for CNH Industrial and for its stakeholders is transparency in supplier relationships and engagement, since relations based on open dialogue and collaboration increase efficiency, improve quality, foster innovation and encourage a shared commitment to reaching sustainability targets, creating undeniable mutual benefits.
Commitments to continuous improvement are realized through targets and actions, which also give an indication of how efficiently the supply chain is being managed. The targets are set annually on a voluntary basis and are included in the Sustainability Plan (see also pages 115-116); their progress is regularly monitored in order to implement any corrective actions deemed necessary. Targets and the results achieved are communicated to all stakeholders through the Sustainability Report and the corporate website. Management effectiveness is measured through periodic benchmarking with the main competitors and the leading sustainability companies, and through rating agency assessments on sustainability issues. The results of these assessments are the starting point for improvement actions.
The Sustainability Guidelines for Suppliers provide the framework for responsible supply chain management.
The Guidelines were issued by Fiat Industrial in 2010, and subsequently adopted by CNH Industrial following approval by the Board of Directors in September 2013. The document, which also applies to subcontractors, is available on the Company website. In addition to compliance with local legislation, the Guidelines call for observance of
- human rights and working conditions:
- rejection of forced or child labor in any form
- recognition of the right to freedom of association in line with applicable laws
- safeguarding of employee health and safety
- guarantee of equal opportunities, fair working conditions and employees’ right to training
- respect for the environment:
- optimization of the use of resources
- responsible waste management
- elimination of potentially hazardous substances from the manufacturing process
- development of low environmental-impact products
- use of an environmentally-sustainable logistics system
- business ethics:
- high standards of integrity, honesty and fairness
- prohibition of corruption and money laundering.
The highest responsibility for CNH Industrial’s supply chain management initiatives lies with the Group Executive Council (GEC). In 2013, supply chain management improvement targets were included in the Performance and Leadership Management system (see also page 46) for most managers of projects included in the Sustainability Plan. The information relating to the sustainable supply chain management model adopted was subjected to a high-level assessment by SGS, an independent certification body, during the assurance audit of the Sustainability Report, which confirmed its compliance with the AA1000 assurance standard.
Fiat Group Purchasing (FGP)manages purchases worth approximately €14.3 billion on behalf of CNH Industrial, and has a direct material supplier base of 6,145 companies. Suppliers are also classified through a formal process according to their importance within the supply chain. In 2013, 13 new suppliers were considered eligible, while there were no significant changes to supply chain structure or additional outsourcing of activities. As of 2014, CNH Industrial will also begin to monitor the relocation of plants from one country to another, through the reassessment of suppliers.
The top 150 suppliers that produce about 60% of the total value of purchases are considered by CNH Industrial as strategic suppliers, in part because of the length of these relationships.
|Direct and indirect material purchases managed by FGP1 (% of total CNH Industrial purchases by volume)||85%|
|Direct material suppliers managed by FGP (no.)||6,145|
|Value of purchases from direct material suppliers2 managed by FGP (€billion)||12.0|
|Value of purchases from indirect material suppliers3 managed by FGP (€billion)||2.3|
(1) Refers to value of purchases managed by FGP.
(2) Direct materials are preassembled components and systems used in assembly. The value of raw material purchases is considered marginal.
(3) Indirect materials are services, machinery, equipment, etc.
FIAT GROUP PURCHASING WORLDWIDE (€ billion)
PURCHASES BY PRODUCT TYPE
FIAT GROUP PURCHASING WORLDWIDE
The objectives that CNH Industrial sets for itself include developing local skills, by transferring its technical and managerial expertise, and strengthening local entrepreneurship. The creation of ongoing relationships with local suppliers has a positive impact in terms of reducing the risks associated with operational activities and optimizing costs.
The spending on local suppliersis highly significant: in 2013, the contracts signed by CNH Industrial with local suppliers accounted for over 92% of procurement costs; specifically, 92.8% in EMEA and 92.1% in NAFTA, the significant locations of operations for CNH Industrial.
Additionally, CNH Industrial promotes the World Class Manufacturing program (see also page 156) at local supplier plants, with a view to sharing best practices and methodologies.
Although CNH Industrial does not purchase raw materials directly (with the exception of steel used for direct processing), overall consumption and general price trends are constantly monitored.
The principal raw materials used in the semifinished goods purchased by CNH Industrial are steel and cast iron (approx. 2.4 million tons including scrap), plastics and resins (approx. 168 thousand tons) and other miscellaneous materials (approx. 82 thousand tons).
In its policy CNH Industrial aims to promote, encourage and increase the participation of diversity-owned enterprises (such as small business, small disadvantaged business, veteran-owned small business, servicedisabled veteran-owned small business, Hubzone and women-owned small business) in the procurement of its products and services. CNH Industrial actively seeks, identifies and assists these companies to qualify as competitive suppliers, affording them the opportunity to increase their sales and expand their markets.
Adequate information is provided to these potential suppliers in the bidding process and reasonable delivery lead times are established to aid them, where possible, in achieving increased participation in the Company’s procurement activity. The Company offers reasonable technical assistance to diversity-owned enterprises to support them in becoming more competitive and knowledgeable in today’s market place.
The Company provides on-site audits to assist diversity-owned enterprises to identify potential problem areas and help them in implementing an appropriate corrective action.
Purchasing personnel in CNH Industrial conduct regular reviews of material requirements and identify areas of potential participation by diversity-owned enterprises. Methods and procedures for administering these activities are part of buyer training seminars, which are conducted periodically. In 2013, CNH Industrial increased its expenditure with diversity-owned businesses by 1% and outlined a process to begin measuring sub-contracting efforts with certified Minority Business Enterprise suppliers in 2014.
SUSTAINABILITY IN SUPPLIER MANAGEMENT
Environmental and social sustainability standards are fully integrated into CNH Industrial’s supplier management.
Supplier selection is an operational phase of the procurement process and is regulated by specific procedures.
It is based not only on the quality and competitiveness of their products and services, but also on their compliance with CNH Industrial’s social, ethical and environmental principles. The assessment process is built on objective criteria and tools aimed at ensuring fairness and equal opportunities for all parties involved.
The Potential Suppliers Assessment (PSA) process identifies the strengths and weaknesses of a company and its ability to manufacture according to the highest quality standards, so as to assess its potential of becoming a high performing CNH Industrial supplier. The PSA tool is used to assess companies that do not currently provide materials or services, and suppliers that have undergone reorganization, or whose plants have been relocated, or that have introduced new technologies and processes, or that have not supplied products for more than 24 months. PSA must be carried out prior to the procurement phase, to allow potential new suppliers to participate in tenders. This tool assesses the ability of the potential supplier to manufacture quality products using best practice. PSA evaluates systems and company processes directly at supplier plants.
Other PSA criteria to be met include: potential suppliers must prove they have adopted a program that promotes sustainability, both internally and along the supply chain, a code of conduct (with explicit references to fighting corruption, respect for human rights, etc.), a certified system for managing employee health and safety, and a certified environmental management system.
These documents ensure their efforts to monitor and manage environmental aspects, labor practices, human rights, and the impact on society. All new suppliers are evaluated according to these criteria (13 in 2013).
Furthermore, based on the risk map, some of the new suppliers are included in the evaluation process to monitor their compliance with standards. Suppliers’ sustainability is in fact assessed through indicators included in the self-assessment questionnaire, and subsequently confirmed by audit. This evaluation is one of the determining factors in the final decision on awarding supply contracts.
In addition, through clauses that are being progressively incorporated into new contracts, FGP requests compliance with the CNH Industrial Code of Conduct and the Sustainability Guidelines for Suppliers. Specifically, contractual clauses require that suppliers provide references, and demonstrate their competence, in relation to: fighting corruption, protecting and safeguarding the environment, promoting health and safety at work, ensuring freedom from discrimination, prohibiting forced labor and the economic exploitation of children, and safeguarding freedom of association.
All contracts contain a clause (hereinafter referred to as the Clause) by which suppliers undertake to comply with Legislative Decree No. 231 of 8 June 2001 for Italian suppliers (or, for non-Italian suppliers, the specific regulations applicable to the administrative liability of legal persons), the Code of Conduct and the Sustainability Guidelines for Suppliers. With regard to orders issued, it should be noted that (both for the purchase of direct and indirect materials and for service contracts) they are subject to the General Purchasing Conditions that contain the aforementioned Clause. For direct materials, the unified General Purchasing Conditions of CNH Industrial are being finalized for the Agricultural and Construction Equipment, Trucks and Commercial Vehicles and Powertrain segments, and include the sustainability clause.
If a supplier fails to adhere to these principles, CNH Industrial reserves the right to terminate the commercial relationship or instruct the supplier to implement a corrective action plan, which is then verified through audits.
CNH Industrial places primary importance on the monitoring of obstacles that could potentially hinder the upholding of high product standards, both within the Company and along the supply chain. Furthermore, for corporations like CNH Industrial that operate on a global scale, social and environmental risks are continually rising. In recognition of this, since 2011, CNH Industrial has employed a risk map to identify suppliers whose compliance with sustainability criteria requires assessment. The four risk drivers used to create the risk map are: supplier turnover, risk of country where supplier is located (with particular focus on countries with poor human rights records), supplier financial risk, and the results of the assessment of supplier adherence to sustainability principles (based on self-assessment questionnaires, on-site audits and level of implementation of action plans). The risk map classifies suppliers according to three levels of risk (high, medium and low), based on a weighted average of the four factors. The risk map covered 100% of strategic suppliers over the course of three years.
The results of the risk map identify suppliers that will be subject to monitoring (self-assessment questionnaires and on-site audits), and also consider human rights issues. If areas for improvement emerge from the audits carried out, joint action plans are drawn up together with suppliers to manage and eliminate critical issues identified. Specifically, in 2013, no issues were recorded regarding collective bargaining, or child or forced labor.
Only in one case was there a potential risk relating to freedom of association, which will be dealt with in 2014, by means of an on-site audit.
In addition, a detailed spend analysis is carried out to improve supply performance and maximize operational efficiency. Using a data instrument, known as the Financial Suppliers Sensitivity System (FS 3), supply chain managers have access to the supplier financial assessment. This tool is continually updated based on confidential information provided by the suppliers themselves, and on that contained in any financial reports. The assessment, automatically calculated and checked by an analyst, allows suppliers to be identified according to categories of financial risk. Suppliers in particular difficulty are monitored weekly to prevent any interruptions to the supply chain. The continuous monitoring of economic factors is essential to good supply chain management.
Monitoring conformity In order to verify if suppliers meet the sustainability standards set by CNH Industrial and, if necessary, take steps towards improvement and realignment, Fiat Group Purchasing (FGP) has designed and initiated a monitoring process based on two main tools: self-assessment questionnaires on sustainability standards and follow-up audits on site.
Through the self-assessment questionnaires, managed through an IT platform administered by a third party, suppliers are requested to provide information on: environment, working conditions, human rights and impacts on the community.
In the pursuit of continuous process improvement and supplier involvement on a number of issues important to CNH Industrial, two new sections were added to the 2013 questionnaire, relating to water management and logistics providers; these sections will not be assessed for the first year, but will serve for information purposes only. As further evidence of CNH Industrial’s sense of responsibility toward the overall supply chain, the Company monitors how its Tier 1 suppliers manage their own supply chains in terms of sustainability.
In addition to being an assessment tool, the self-assessment questionnaire serves as a gap analysis tool for suppliers, highlighting areas for improvement.
In 2013, the questionnaire was sent out to a total of one hundred suppliers. The 32 suppliers who completed it attained an evaluation confirming that social and environmental issues are properly addressed. The analysis of the results essentially confirmed the previous year’s findings, i.e., the widespread implementation of sustainability initiatives, with a significant number of suppliers adopting their own social and environmental systems, setting specific targets and drafting periodic reports.
ANALYSIS OF SUPPLIERS’ SELF-ASSESSMENT QUESTIONNAIRES
|Aspects||Number of suppliers identified as having significant actual and potential negative impacts||Significant actual and potential negative impacts|
|Impacts on society||4|
(1) One supplier has been identified as having potential negative impacts on freedom of association.
Following the self-assessment process, audits were carried out on a select group of major suppliers. Building on the activities undertaken the previous year, 62 further audits were performed in 2013 in China, India and Europe (46 by Supplier Quality Engineers and 16 by third party auditors), covering 13% of the total purchase value managed by FGP. The audits did not reveal any critical situations; in fact, no contracts were suspended or terminated.
However, corrective action plans for areas in need of improvement were formulated in collaboration with suppliers. In 2013, approximately 158 joint action plans were implemented after the audits, involving 35 suppliers.
ANALYSIS OF CORRECTIVE ACTION PLANS
|Aspects||Percentage of suppliers identified as having significant actual and potential negative impacts, with which improvements were agreed upon1||Number|
of action plans identified
|Main action plan topics|
|Impacts on society||37.1||43|
(1) The percentage is calculated based on the number of suppliers audited (62 in 2013).
The action plans were also developed with the contribution of the Supplier Sustainability Committee, set up within FGP, consisting of the Processes Compliance Manager, the General Counsel and the head of Supplier Quality Engineering. A follow-up between supplier and auditor takes place periodically, in order to monitor these plans. Any non-compliance on the part of the supplier is brought to the attention of the Committee, which determines the actions to be taken against the defaulting supplier (which may lead to contract suspension or termination).
The levels of supplier compliance and respective action plans are documented in the Supplier Quality Performance (SQP) system and the results are available to all employees engaged in supplier management.
Every month, the SQP system develops a supplier Bid List, containing qualitative information including the scores from sustainability assessments. This information, along with each supplier’s financial, technical and logistics data, make up the summary by plan document used for assigning new business.
Promoting the continuous improvement of environmental aspects
CNH Industrial’s commitment to curtail the environmental impact of its activities and to tackle climate change cannot exclude the involvement of its suppliers. In fact, to scale down the impact of manufacturing processes and products on the environment, suppliers must, on the one hand, optimize the use of resources and minimize polluting emissions and greenhouse gases; on the other, they must properly manage waste treatment and disposal and adopt logistics management processes to minimize the environmental impact. For these reasons, an environmental management system certified according to international standards is always strongly advised.
With this in mind, CNH Industrial concentrates its efforts on monitoring and raising awareness among suppliers.
In 2013, the Company continued to map the suppliers that implemented an environmental management system certified by a third party (see also page 161).
Furthermore, in 2013, specific questions were incorporated in the suppliers’ self-assessment questionnaire to monitor the risks associated with water consumption and discharges along the entire supply chain. The new section specifically focuses on:
- policies, strategies or strategic plans regarding water management and improvements to the quality of waste water management
- specific improvement targets
- data on water withdrawal, reuse and discharge
- bodies of water, wetlands or natural habitats affected by discharge or withdrawal of water
- operations located in water-stressed areas.
Two important initiatives fall within the scope of promotion and engagement efforts. In 2013, a series of activities was put in place in collaboration with a select group of suppliers to monitor water management, particularly at plants located in water-stressed areas, and to advance measures to minimize the risk associated with water use.
Furthermore, for the first year ever, 45 suppliers were selected to fill out the Carbon Disclosure Project (CDP) questionnaire, to get a clear picture of the strategies being implemented against climate change and of current or required initiatives to reduce their own CO2 emissions. The analysis of the results gave rise to many ideas that will come into play when establishing future collaborations with suppliers. The companies involved in the CDP Supply Chain generated 722 million tons of CO2 emissionsto supply CNH Industrial. The activity will continue in 2014, involving a greater number of suppliers.
CDP SUPPLY CHAIN
MAIN RESULTS OF THE ANALYSIS OF 2013
Spreading an internal culture of sustainability
Initiatives targeting employees responsible for supplier relationships have been consolidated over the years, aiming at ensuring satisfactory awareness of sustainability and good governance through an ongoing dialogue with the suppliers in question.
Buyers and Supplier Quality Engineers (SQE), in fact, take part every year in training activities to explore some of the key issues of environmental and social responsibility.
Moreover, the 2013 variable compensation system for SQE Managers and their team members continued to incorporate sustainability criteria for the assessment of their performances.
IMDS: AN ENVIRONMENTAL MANAGEMENT TOOL
To provide support in managing the environmental aspects linked to the production of vehicles and components, CNH Industrial has extended the International Material Data System (IMDS) to its entire production. This system, in use for light vehicles since 2002, is an online platform that enables the input of detailed information on the materials and substances used in purchased components. The system also allows for the input of information regarding the use of recycled materials. In 2013, all of CNH Industrial’s suppliers continued to enforce IMDS data entry to complete the task started in previous years. This allows monitoring of compliance with the REACH regulation, as well as with other aspects that are not mandatory for industrial vehicles (such as Directive 2000/53/EC on heavy metal restrictions or Directive 2005/64/EC on vehicle reuse, recycling and recovery), in response to customer requests relating to green procurement. In 2013, suppliers filled out approximately eight thousand data sheets.
ONGOING DIALOGUE WITH SUPPLIERS
Strongly convinced that suppliers are key partners for its growth, CNH Industrial is committed to engaging them and keeping them informed at all times. The Company continued to strengthen its relationships with suppliers in 2013, as evidenced by the many existing long-standing and mutually beneficial alliances and by the minimal number of disputes.
Numerous events and activities take place to encourage ongoing communication with suppliers.
The primary tool used by CNH Industrial to share information is a dedicated Internet portal providing information on technical requirements, supply scheduling and quality, and the results of compliance tests carried out on new components. Suppliers, in turn, use the portal to provide CNH Industrial with details regarding technical specifications of supply contract bids, the origin of suggested components, updated contact details, and so on.
A dedicated email address was created, providing a further communication channel to request information or report non-compliances within the supply chain.
In line with previous years, several initiatives continued to promote the exchange of ideas and information, including Technology Days (12 events organized in 2013) attended by approximately 1,200 people. During these meetings, suppliers that are industry-leaders in innovation, technology and quality discussed specific topics and shared information on recent technological developments.
The first ever Supplier Advisory Council addressing CNH Industrial’s suppliers in the EMEA Region was organized in July. Its goal is to promote the exchange of information and opinions with leading suppliers that account for a significant percentage of the value of annual purchases in each Region and for each segment.
Suppliers were selected for their economic importance and for their ability to represent market trends and establish a benchmarking network with competitors.
Moreover, World Class Manufacturing activities carried out at suppliers’ plants were given an extra boost in 2013 compared to previous years, partly thanks to a much closer collaboration between WCM Purchasing teams, FGP functions and the main WCM team. This joint effort has led to the achievement of the target stated in the Sustainability Plan for 2013, i.e., the involvement of 98 supplier plants in the WCM program. Activities were developed in two distinct but equally important phases, providing suppliers with the necessary knowledge to apply the intrinsic concepts of Lean Production. Firstly, various training sessions led by CNH Industrial’s WCM program specialists took place at the premises of suppliers. Secondly, supplier WCM teams were given the opportunity to visit some selected CNH Industrial plants, to share the Company’s best practices.
This dual activity has allowed some of the most active suppliers to achieve good results during the year, especially in the so-called model area (i.e., the first area of a plant where WCM methodologies and tools are applied rigorously). These suppliers were also audited by certified auditors, achieving good ratings.
The analysis of the KPIs monitored at supplier plants revealed some significant improvements. At the best plant in the chemical sector, for example, there were zero accidents, and, in terms of engaging people on the issue of quality, an average of five improvement proposals were collected per operator. The best plant in the electricity sector saw a 40% reduction in activities with low added value, and a 25% increase in overall equipment effectiveness1. The best plant in the mechanical sector reported: a 40% abatement in set-up time through specific projects (Single Minute Exchange of Die1); the elimination of mechanical failure caused by the lack of basic conditions; and, in terms of environmental protection, a substantial reduction in fuel consumption of the electromotive force (-46%) and waste (-34%). These results demonstrate how plants are making better use of resources and equipment, in favor of increased long-term competitiveness.
A SUSTAINABILITY AWARD
In 2013, CNH Industrial’s first ever Sustainability Supplier of the Year award was assigned to one of the Company’s suppliers in the EMEA Region, in recognition of the excellent results regarding its activities in favor of sustainability. With this initiative, CNH Industrial is aiming at encouraging good stewardship practices within its supply chain. The initiative will also continue in 2014, extending to all suppliers worldwide.
CNH Industrial also continues to promote numerous initiatives to encourage innovation among suppliers; in particular, the Supplier Performance (Su.Per) program advocates a proactive attitude to business, and allows sharing the economic benefits arising from the introduction of the innovative methods and technologies suggested. In 2013, six suppliers benefited from the program and six proposals were actually realized; the economic benefits generated during the year in favor of suppliers were estimated at €400 thousand. One example of a joint project developed by CNH Industrial and suppliers is the modified structure of the F1A engine oil cooler, manufactured at the Foggia plant (Italy), which cut costs by €1.4 per unit.
Moreover, a training course was organized in October for small and medium-sized suppliers in the EMEA Region, to illustrate sustainability issues and their implications within the supply chain, with a view to shared responsibility. The course was attended by 13 very enthusiastic suppliers, who learnt how their activities could contribute to the sustainability of CNH Industrial. In addition, the CO2 emissions generated by participants traveling to the event were offset by the purchase of 15 credits in favor of the reforestation project of the Veneto Regional Park in the Po Delta (Italy)2.
Respect for human rights and working conditions along the entire supply chain is another major issue that CNH Industrial is focused on. In 2012, an online training course developed with the Automotive Industry Action Group (AIAG ) was provided to educate and raise awareness among suppliers on responsible working conditions in various countries, tackling topics such as child labor, forced labor, freedom of association, discrimination, health and safety, wages and working hours. In 2013 the training included several suppliers that do not have a direct contractual relationship with CNH Industrial (Tier-2 suppliers).
SUPPORTING SUPPLIERS IN DIFFICULTY
The global financial meltdown and the continued economic crisis in Europe have demanded the close monitoring and management of the critical situations arising along the supply chain. CNH Industrial has strengthened the structures and mechanisms in place to manage suppliers in financial difficulty, focusing on promptly identifying high-risk situations and stabilizing them through appropriate measures to ensure supply continuity. These actions are carried out, when possible, in partnership with other manufacturers, and offer support to restructuring projects and temporary financial aid, while also attempting to safeguard jobs.