Getting the big picture
As our supply chain has globalised products are regularly procured from countries with potential governance gaps. That makes it crucial to understand the size of the risk we may face due to the social and environmental performance of our suppliers.
Though a traditional risk management approach has been in place since 2002, we recognised that we were not able to systematically identify and manage the risks that would pose a significant threat to the business.
Our ambition in 2009 was to establish a robust oversight of risk for both product and non-product (services) related spend, measurable through rigorous assessment criteria and segmentation of the supplier base. In addition a bespoke programme of mitigating action is currently being developed that will reinforce the company's commitment to work alongside key suppliers to improve overall social and environmental performance.
We now have a much clearer picture of our risk profile, which will serve as basis for prioritising activities to protect and enhance value to Novo Nordisk and to our suppliers.
Indicators for 2009
Suppliers’ performance
Suppliers are regularly evaluated on their performance. A total of 20 audits were carried out in 2009 resulting in 83 findings. The findings were distribution between labour practices (30%), occupational health & safety (49%), environment (19%) and other (1%).
Screening for risk
Novo Nordisk's supply chain comprises both product and non-product related procurement. Purchasing is carried out across the organisation with varying requirements on price, quality and time alongside a set of requirements in terms of social and environmental responsibility. The nature and length of the relationship with suppliers also varies. Therefore, a tailored approach towards managing social and environmental risk was developed for each sourcing area based on a common set of risk screening principles.
The screening principles took into account critical factors such as country of operation, specific category-related risks, potential impacts on the environment and human rights. These are mapped against the potential impact to the brand and operation of the business, and the leverage that Novo Nordisk has in the relationship with the supplier. To put it simply, high risk suppliers are identified based on a combination of risk likelihood and risk impact on Novo Nordisk.
In the development of country risk indices external stakeholders, including Oxfam and the Ethical Trading Initiative in the UK, have provided valuable feedback on the assessment tool and Novo Nordisk's overall approach.
How we interact with each supplier is determined by where the supplier is placed in the risk grid. A high risk supplier will be subject to audits, follow-up on corrective action and training by Novo Nordisk if necessary, while suppliers posing a moderate risk will only be subject to standards in the contract, random sample audits and training if necessary.
Through this process, we now have a clearer picture of the supply chain. In product-related spend, which includes spend directly related to the manufacturing of products, 9% of suppliers (33 of 381) have been identified as high risk. Within our engineering sourcing supply chain with a supplier base of 651, 66 scored at medium to high, with 1.4% of total suppliers in the category being identified as high risk.
For non-production related spend on products and services, accounting for both the highest spend (DKK 12 billion) and involving the most suppliers worldwide (approx 35,000). We are in the process of identifying the number of suppliers that constitute high risk. So far eight high-risk product categories such as cleaning services, temporary labour and promotion material have been identified and future mitigation actions will be initiated.
A robust process
In 2009, an IT-based management system was designed to maintain robust data on the supply chain for product-related spend. Buyers use the system to assess risk posed by business partners.
Lars Bisgaard, Corporate Vice President of Strategic Sourcing in Product Supply, a key advocate of responsible sourcing, reflects:
"Vital to Novo Nordisk's Triple Bottom Line is that by implementing a new process for calculating and managing the risk for Product relates spend in Product Supply, we are now able to say that we have a clear picture of the risk profile for all material and supplier combinations. Risk profiling is not new to Strategic Sourcing, but by adding a risk profile to each material, Novo Nordisk becomes able to initiate a more focused effort to target and address high-risk suppliers. This is, in my eyes, the core value of the process we have been through in 2009."
With a more complete view of the potential risk, we can now focus on mitigating risk through appropriate engagement with our business partners.
Engagement – The UK Pilot Case Study
The responsible sourcing approach across non-product related spend was validated through a pilot conducted in the UK that commenced in February 2009. The category of promotional items was selected for the pilot due to the close link to the Novo Nordisk brand and a fragmented supplier base typically located in inherently high risk countries like India and China. This category also highlighted the importance of a having a balanced, tailored approach, where ambitious cost savings targets could potentially result in sourcing practices that does not reflect the values of the Triple Bottom Line.
With a high spend on promotional items, the UK was chosen as a key market to pilot the approach. A large volume of different items was being purchased with little alignment or communication between brand managers. An annual engagement cycle has now been established, with supplier workshops set up every three months to co-ordinate procurement and highlight the importance of responsible sourcing. This allows for both the purchasers and business partners to learn about potential risks within the supply chain. Through the pilot, Novo Nordisk engaged with its first-tier suppliers (agents) in understanding their needs, requirements and constraints in monitoring their own supply chain and opportunities for engagement.
Through the pilot it became clear that managing risk would involve consolidating sourcing down to two key suppliers who met Novo Nordisk's standards, thereby not only reducing risk but achieving significant cost savings. Those suppliers who have not been able to meet the standard are given detailed feedback and will be invited to tender for future contracts. The two remaining suppliers have been engaged in a dialogue to discuss how best they could drive improvements in their own supply chain, using the Novo Nordisk tools and approach. They recognise that there are opportunities for attracting new customers by adhering to social and environmental principles.
The UK pilot has helped refine our approach for high-risk categories in non-product related spend.
The success of the pilot has not simply been from achieving the objectives of responsible sourcing and financial targets within the category. "The process has created tangible value - not only as savings, but in the time spent ordering in our brand teams and by ensuring that our suppliers are compliant. I can easily see the structured methodology being applied in other areas as well" says John Dawber, UK Diabetes Access and Marketing.
Challenges ahead
We recognise that given the dynamic nature of supply chains, responsible sourcing will remain a challenge, involving a continuous cycle of improvement and maintenance of the relationship with business partners, and addressing new frontiers emerging on the horizon. With the initial risk impact established, each procurement area can now focus on implementing mitigating actions and embedding this into regular business activities. Our future activities will focus on increasing inclusion of responsible sourcing standards in existing contracts, obtaining updated data from suppliers, outlining a pragmatic approach to manage our large non-product supplier base and finding innovative ways of engaging suppliers beyond audits. Dedicated responsible sourcing employees have been assigned to each procurement area to drive the successful implementation. Continuously refining the approach based on learning from stakeholders and leveraging where the business can have the most impact will be essential to successful implementation.
Stakeholder engagement
In the past, Novo Nordisk has focussed on strengthening our risk management approach, driving ownership in the sourcing organisations and demonstrating that ethics as an integral part of the goals of the business delivers value for both the company and our suppliers.
Country risk indices were developed with the help of external stakeholders, such as Oxfam and the Ethical Trading Initiative in the UK, who provided valuable feedback on the country assessment tool and Novo Nordisk's overall approach.
Besides engaging with business partners, we are also engaged in various industry initiatives and networks where we learn share knowledge and experience:
- For a number of years we have been a part of BSR's Beyond Monitoring initiative, where a number of large companies are working together to develop more sustainable supply chains.
- Novo Nordisk is also an active member of the Pharmaceutical Supply Chain Initiative (PSCI), a group of major pharmaceutical companies who share a vision of better social, economic and environmental outcomes for all those involved in the pharmaceutical supply chain. This includes improved conditions for workers, economic development and a cleaner environment for local communities.
- With CSR Asia we learn about local trends and implementation of local laws, especially in relation to labour and environmental practices, in the Asia-Pacific region.
- As our responsible sourcing programme works to ensure that human rights standards are systematically integrated into purchasing decisions, we have been involved in Business Leadership Initiative on Human Rights (BLIHR) since 2002. The group was closed in 2009, and a group of companies working actively with human rights in the supply chain formed the Global Business Initiative on Human Rights.
Read more about our work with human rights.