Building a sustainable supplier base

Our wide product range and a high number of different delivery locations make our supply chain development and management challenging. Standardization, harmonization and focusing on fewer suppliers are key drivers in establishing a sustainable supplier base.

As 90% of Outotec’s manufacturing, based on monetary value, is sourced from external suppliers, sustainable supply chain and supplier selection is important for Outotec. Our Global Supply function manages our supplier base and global sourcing. Operational Supply personnel are involved in day-to-day supplier management during the delivery phase of customer projects. Our management approach is validated in the Executive Board reviews as well as in internal and external audits.

Outotec has two main policies serving as the basis for collaboration with suppliers. Our Supply Policy steers supply activities throughout the company, defines ways to enhance supply quality, and provides guidelines for everyone involved in supply-related activities.

A parallel Supplier Policy imposes strict requirements on Outotec’s suppliers, by clearly setting out our principles on ethical conduct, compliance with laws and regulations, respecting human rights, environmental impacts, health and safety, labor, intellectual property and improper benefits. Suppliers are expected to ensure compliance with Outotec policy, identify any deviations, manage corrective actions, ensure the transparency of these actions, and communicate with us systematically on such issues.

All our 221 key suppliers  were committed to Outotec’s Supplier Policy in 2017 (2016: 100%). We define key suppliers as companies that are categorized as important suppliers in financial, strategic and operational dimension, or in terms of product quality and delivery time. All of potential new direct suppliers are assessed through our Supplier Assessment and Approval Process before getting supplier status.

Our reporting covers our suppliers’ operations, contractors working under Outotec’s supervision and our project sites. We measure our performance by calculating the percentage of new suppliers screened and key suppliers audited using labor practices, environmental and human rights criteria.

Our suppliers

Our manufacturing facilities are relatively small. They all have local quality, health and safety systems in place, and they duly manage, sort and process their wastes. The majority of our direct suppliers are either manufacturing workshops or component/equipment manufacturers. The rest are logistics, engineering and construction companies, and other service providers. In addition, thousands of our direct suppliers’ own suppliers form part of Outotec’s supply chain.

Outotec had approximately 3,000 (2016: 3,300) active direct suppliers in 2017. As product competitiveness was one of Outotec’s strategic development areas in 2017, our work focused on the supply base management with a target of having fewer suppliers and increasing best-cost-country sourcing in China, India, Eastern Europe and Mexico.

Our total spend on customer-related purchasing in 2017 was EUR 462 million (486 million).

Selecting new suppliers

Outotec screened 89 (164) suppliers, equaling 11%, using environmental (GRI 308-1), human rights, and labor practices (GRI 414-1, 414-2) criteria. Screening is a spot check on certain topics, and we select the companies from the high and medium risk category to be screened. All the screened companies qualified as new suppliers, as none of the companies were identified as having significant potential negative human rights, social or environmental impacts. Suppliers that we do not normally screen are for example, one-time indirect suppliers, such as consultants. Some of these non-screened suppliers have, however, signed our Supplier Policy.

In 2017, a student in the Lappeenranta University of Technology made his Master’s Thesis about socially sustainable supplier selection in minerals processing. He studied Outotec’s current status of supplier selection and the approval process for manufactured spare parts in light of what social sustainability criteria are already in place and how they could be further developed. The study showed that social sustainability is viewed as having an important role in our supplier selection and approval process. It was evident that Outotec already utilizes related elements in its current process. However, Outotec could improve the identification of different social risks also in the pre-classification phase.

Auditing approved suppliers

Outotec audits key suppliers on quality, health and safety as well as human rights related issues regularly. Supplier development actions are drawn up according to audit findings. Our target for 2020 is to audit all key suppliers regularly over a period of two years in high-risk countries and every three years in other countries.

We audited 46, equaling 21%, of our key suppliers during 2017. In our supplier audits, none of the audited suppliers were identified as having potential negative environmental impacts (GRI 308-2) and 6 suppliers, equaling 13% of the audited suppliers, as having potential negative health and safety impacts. However, none of those were considered significant (GRI 414-2) and improvement measures were agreed with these suppliers. No relationships have been terminated as a result of our supplier audits. However, some suppliers have been temporarily rejected in China.

Working together with our suppliers

Outotec’s Supplier Account Managers work with our most important global or local suppliers. They facilitate collaboration between Outotec and the suppliers across and above individual projects. This procedure enhances visibility, alignment and the management of supplier-related risks, while also improving overall collaboration between Outotec and individual suppliers.

The main challenge for our supply chain management concerns the need to improve cost efficiency without compromising on product quality, safety and sustainability. The allocation of more business to fewer suppliers enables better management and development partnerships, in turn enhancing delivery excellence and cost competitiveness.

During 2017 we reviewed our Supplier Policy and a revision will be published and taken into use in 2018. We took our project risk assessment process and tool into use and trained 133 persons to use it. The risk assessments have provided our management with important information about major risks and planned mitigation actions.

Spending on local suppliers

Outotec’s supply chains often combine global project deliveries and purchases from local suppliers. Our most significant operations, based on the number of employees, are in Finland, Germany, Australia, South Africa, Chile, Sweden and Brazil. We report ‘local supply’ as the percentage of our supply spend in these countries of the total procurement spend of Outotec. The calculation method was changed in 2017 to fulfil the reporting requirements. In our large delivery projects, we prefer to use suppliers in the target country. Normally we buy steel structures and detail engineering, for example, in the target country. The amount of such supply in the country of the project site can be significant. This, in turn, creates local employment and benefits local businesses.

Our spending on suppliers that are local to our major operations in 2017 amounted to EUR 287 million, equivalent to 62% of our total supply spend (GRI 204-1). The remaining supply spend was distributed among 47 countries.

The largest shares by country – each amounting to EUR 10–50 million – were spent in Australia, Brazil, Canada, Switzerland, Chile, China, Mexico, the USA and South Africa. The remaining spend was distributed among 38 countries.

Our largest suppliers in terms of spend in 2017 and in alphabetical order were Airmech Company W.L.L., Siempelkamp Giesserei GmbH and Swiss Tower Mills Minerals Ltd.

Actual and potential negative impacts in the supply chain

According to our human rights self-assessment made in 2017, no notable risks related to the use of child labor (GRI 408-1) or forced or compulsory labor (GRI 409-1) have been identified in Outotec’s own manufacturing units.

The main sustainability-related risks in the supply chain, identified in our internal workshop consisting of our global supply team, include bribery and kickbacks, occupational safety, protecting information and reporting misconduct. Forced or compulsory labor has not been identified as a potential risk in Outotec supply chain (GRI 409-1).

We have identified three countries in our supply chain, namely China, India and Mexico, with potential risks regarding child labor (GRI 408-1), hazardous work, or rights to exercise freedom of association or collective bargaining (GRI 407-1). In 2017, 5% of our suppliers were based in China, 3% in India, and 3% in Mexico. To mitigate these risks, our dedicated supply personnel in each of our Market Area offices assess suppliers according to our approval process and make observations during audits and other visits. However, the human rights risks and impacts of suppliers may not be fully identified.

With regard to environmental issues, material toxicity and chemicals were ranked as the greatest risks (GRI 308-2, 414-2). If not appropriately manufactured, used, or maintained, Outotec’s products have the potential to harm the environment. To mitigate product quality related risks, we provide training to our suppliers and audit them.

The carbon footprint of our supply chain (GRI 308-2)

The sustainability of our supply chain also has an impact on climate change. The methodology of calculating supply chain emissions was changed in 2017 due to the discontinuation of the supply chain emission factors, defined by the UK Department for Environment, Food and Rural Affairs (DEFRA). New calculations are based on Outotec’s spending and carried out using a scope 3 screening tool developed by GHG Protocol and Quantis. The emissions were recalculated for years 2015 and 2016 according to the new methodology to guarantee comparability over the years. To be able to use the scope 3 screening tool, Outotec’s spend on supply was converted from EUR into USD. In 2017, the EUR to USD annual average exchange rate was 1.129 (1.107 in 2016 and 1.110 in 2015, source: http://x-rates.com).

The carbon footprint of our supply chain, at 508,400 (2016: 516,470, 2015: 559,850) tonnes of CO2 equivalent), was considerably larger than the footprint of Outotec’s own operations, which amounted to 27,202 tonnes of CO2e. The biggest sources of CO2e emissions in Outotec’s supply chain were basic metals and fabricated metal, representing 43%  of the total. In 2017, the carbon footprint of our supply chain decreased by 1.6%.

Grievance mechanisms

Outotec’s compliance helpline and an external feedback channel on the company website are available for anyone to raise concerns related to corruption, human rights or any unethical behavior in Outotec’s business activities. In 2017, no issues were raised through these grievance mechanisms regarding our suppliers or supply practices.

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