Supplier indicators

Given the size and complexity of our supply chain we need to focus our efforts, and developed an approach based on the supplier’s risk profile related to spend, country of production, business risk and type of supplier relationship. 966 supplier sites have been identified as risk suppliers, including 916 product and component suppliers, and 50 service providers. All risk suppliers are by definition part of our audit program. The identified risk suppliers in the audit program cover 98% of Philips’ annual purchasing volume in the risk countries.

2010 supplier sustainability audits

In the 2010 program we audited 113 supplier sites that were already audited in 2007 (continual conformance audits), plus 100 new supplier sites and 60 supplier sites from newly acquired companies. So the total number of audits done in 2010 equals 273. As in previous years, the majority of these audits were done in China.

Accumulative number of initial and continualconformance audits

Audit results and challenges per region

In 2010, Philips audited 273 supplier sites, bringing the total since 2005 to 1,591 full scope audits.

The most frequently identified issues coming out of the 273 initial and continual conformance audits were as follows.

Zero tolerance

• Working hours: excessive overtime, continual seven-day work weeks, record-keeping of standard and overtime working hours
• Emergency preparedness: fire detection and suppression systems, blocked emergency exits, fire drills
• Occupational safety: immediate threat to health and safety
• Hazardous substances: improper disposal of hazardous waste
• Industrial hygiene: appropriate controls for worker exposures to chemical, biological and physical agents

Limited tolerance

• Lack of adequate management systems to safeguard compliance with the EICC code for labor and ethics, health and safety and environment 
• Wages and benefits: payment of overtime premiums

The next table gives a detailed breakdown per non-compliance category and per region of the percentage of audited suppliers where such an issue was found.

During 2010 the majority of the zero tolerance issues were resolved within the agreed deadlines. At the end of 2010 the identified zero tolerance non-compliances were either resolved or within the agreed deadline for resolution. For some zero-tolerance issues that needed more time to resolve due to their complex nature, we agreed on an extended deadline after detailed corrective action plans were reviewed by the auditors. During 2010 for 14 supplier sites the phase-out decision was taken due to, amongst others, a lack of sustainability improvements.

China

In 2010, we conducted 207 full-scope audits in China. The major issues identified during this year’s audits are working hours and wages and benefits, emergency preparedness, occupational safety, hazardous waste handling and management systems.

Working hours

Working hour issues continue to be the number one challenge among suppliers in China due to the socio-economic climate, the economic recovery in combination with labor shortages, especially in the southern part of China.

In 2010 we piloted a program together with 5 Chinese suppliers to better understand the rootcauses behind excessive overtime, ways to structurally address the rootcauses and appropriate performance indicators to monitor the resolution process.

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

'Conflict' minerals: issues further down the chain

Minerals originating in conflict regions can end up in electronics and many other products such as jewelry, airplanes, and automobiles. Greater awareness of these issues on the part of the public and end-use industries has prompted leading companies in the electronics sector to investigate their supply chains to determine the steps to promote responsible sourcing of specific minerals.

The supply chain for the metals of concern consists of many tiers, including mines, traders, smelters, refiners, and component manufacturers, before reaching Philips’ direct suppliers. The combination of a lengthy and regularly changing supply chain and refining process makes it difficult to track and trace the minerals back to the mine of origin.

Philips believes that an industry-wide approach is necessary to address this issue and therefore we participate in the Electronic Industry Citizenship Coalition (EICC) and The Global eSustainability Initiative (GeSI) Extractives Work Group. The EICC and GeSI represent over 65 companies in the Electronics and Information and Communications Technology industries who have come together in the EICC-GeSI Extractives Work Group to positively influence the social and environmental conditions in the metals extractives supply chain.

In 2010 the research commissioned by the Extractives Work Group to map the supply chain for tin, tantalum, and cobalt used in electronics was completed. The research used a tracing method, starting with suppliers from electronics companies, including Philips, and working up the supply chain toward the mine. Companies at each step in the supply chain were contacted (e.g. component manufacturers, refiners, smelters) and were requested to provide contact information of their suppliers and their codes of conduct. In a limited number of instances it was possible to identify a pathway from an electronics product to the mine; however none of the mapped supply chains were traced back to the conflict zones in the Democratic Republic of Congo (DRC).

We requested our relevant suppliers to state that they provide conflict-free minerals to Philips. While all suppliers stated that indeed, to their knowledge, they provided us conflict-free minerals, we continue our efforts to increase transparency and investigate additional ways to determine the origin of the minerals used in cooperation with EICC-GeSI members.

Together with ITRI, the tin trading and smelting sector, the tantalum industry, and downstream users of both tin and tantalum metal, including Philips, we financed a pilot to track minerals and provide verifiable provenance information from individual mine sites in eastern DRC; something that has not been possible up to now.

In December 2010 EICC-GeSI announced the launch of the Conflict-Free Smelter program and completion of the first tantalum smelter assessment, enabling the identification of smelters that can demonstrate through an independent third party assessment that the raw materials they procured did not originate from sources that contribute to conflict in the Democratic Republic of Congo. This due diligence enables different parties in the supply chain to better understand the origin of the materials in their supply chain.

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