Helping suppliers develop their skills and knowledge can boost their sustainability performance. Leaders at HP and Philips describe the approach.
Industry efforts to develop more sustainable supply chains began with companies rolling out Key Performance Indicators (KPIs) and following up with auditing.
More recently, industry associations have advanced a common set of KPIs and a common auditing framework. The goal is to increase effectiveness and encourage standardization. In the technology industry, the Responsible Business Alliance has led these efforts.
Now, large buyers such as technology companies HP and Philips are building on these tools to take supply chain sustainability further. These companies are not just auditing suppliers but working with them to help them improve. This approach is “supplier development” — and it promises a new way to accelerate supply chain sustainability.
In this podcast, sustainability leaders at HP and Phillips describe how they are implementing supplier development and what it will take to adopt this approach more broadly.
The podcast features Annukka Dickens, HP’s Director of Human Rights and Supply Chain Sustainability; and Marco Baren, Philips’ Senior Head of Supplier Development, Supplier Sustainability and Operational Excellence. Dr. Jury Gualandris, professor of Operations Management and Sustainability at Ivey Business School, hosts the conversation.
Listen to the conversation
Highlights below (edited and adapted)
Supplier development builds on assessment and auditing
Annukka Dickens: HP relies on a very large supply chain that consists of thousands of suppliers. Our sustainable supply chain strategy has four modules, each of which represents a different engagement style.
Expectation setting: The first module sets the expectations with the suppliers, focusing on our Supply Chain Code of Conduct, which is in contracts with all of our direct suppliers. It captures labor, health and safety, and environment factors.
Risk assessment: We assign a risk level to our suppliers based on factors including their geographic locations, spend, and the type of manufacturing. Suppliers complete a self-assessment and may have additional auditing, by HP or a third party. This part of our program covers more than 95% of our supply chain spend at any given year.
Supplier development: We work with suppliers to improve their performance. We provide them training and resources; we want to equip them to maintain continuous improvement in their sustainability practices. In any given year, we have close to 100 of these types of engagements.
Partnerships: We go beyond the code expectations, partnering with suppliers to focus on worker wellbeing and worker training. Since 2015, more than 255,000 workers have received training.
Marco Baren: Like Annukka, we at Philips saw that improvement from the traditional audits was not strong enough. So now my team goes on site ourselves and we help the suppliers on their improvement journey.
We apply performance improvement tools, such as lean, which you typically do not apply in a sustainability arena. This approach led to a 47 per cent improvement in sustainability performance where we went on site, on average. And 95 per cent of the things that we’re doing do not cost money. It’s just mindset change.
The development focus depends on supplier maturity
Annukka: We work with suppliers at different level of maturity. We have some suppliers who need hands-on training and capability building to meet their basic code of conduct expectations. And there are other suppliers that we’ve partnered with for many years, who are able to go beyond the code into the work of wellbeing programs. These are programs like our Women in Factories program, where we partnered with our suppliers to train female workers on health and financial literacy, to combat some of the discrimination that women face (e.g. around wages and development).
Marco: One-size-fits all doesn’t work. With our suppliers, we start with seven questions and if there’s a “no,” we don’t move to the next set of questions.
Jury: So your first set of questions covers basic elements of sustainability, where later questions cover more advanced practices. Their answers let Philips position the supplier at a specific point on this maturity scale (or sustainability trajectory), which in turn determines what type of development the supplier needs.
Marco: Yes, it is a maturity-based assessment. In the end, if they answer all of those questions, we will get a pretty detailed picture.
With these data, we are now predicting how a supplier can grow over time based on the initial maturity and we can now predict where that supplier will land in the end. And then we also know what is a typical growth curve and with that typical growth curve, we can also predict what kind of medicine the supplier needs. We focus first on what a supplier can absorb, and where they have the biggest “backlog,” but only if the supplier does not have a Zero Tolerance  issue. If they do, we first repair this in a permanent way —then focus on the improvement scheme.
Getting suppliers to participate requires incentives
Annukka: Our supplier sustainability scorecard ties in both the audit performance of the supplier and any work that they do beyond audits. Here’s how the scorecard works: At any given time, companies like HP have multiple suppliers supplying one commodity or a product. We rate supplier performance based on multiple factors: cost, quality, delivery, sustainability, etc.
Usually, in rating suppliers, companies attach a per cent to each of these factors and the sustainability per cent is usually pretty low. But HP’s approach is different: the supplier’s total score actually gets multiplied by sustainability score. So if the supplier has strong sustainability performance, their total business score is multiplied; if they perform poorly, their total score will be negatively impacted.
This approach provides the incentives internally for HP procurement teams and also our suppliers externally. When we first implemented this with our commodity suppliers, their performance improved by an average of 32 per cent.
Jury: HP procurement prioritizes suppliers based on that score, so there are real benefits for suppliers.
Annukka: Yes, and suppliers benefit from sustainability action in other ways. The investment and better supply chain transparency can really provide cost reduction and product quality improvements in the short-term, and also boost worker loyalty. And, sustainability can work as a competitive differentiator for the supplier in the eye of potential customer or investors. Long-term, I think that these practices can improve supplier resilience overall.
Marco: Do suppliers like working with us more closely? They were a little afraid in the beginning. Our first meeting was me sitting in a room telling the suppliers, “I’ve had enough of this, because really what you’re showing me is not reality. Show me the reality. There’s no punishment. I will not keep you awake at night if you don’t have this or that or this compliancy. Just show me the real records and from there we can start.” And that worked. It helped everybody because it began transparency at full scale.
Challenges include changing company views and making the business case
Change inside the organization
Marco: in the beginning, I worked to get the C-Suite behind what I was doing. There were a lot of eyebrows that went in all kind of directions: “Marco, are you serious about this? Why don’t you stay with the industry standard?”
I also have to help my team make the shift. Annukka and I have great teams. But it’s not easy to keep your team up to the latest technology. For example, it took me two years to have my Chinese team, which was focused on auditing, adopt this new way of working.
Annukka: Our teams have to change from the traditional approach, they are going from auditing to supplier capability building. This requires change management within every company.
Annukka: We want to make sure our actions are recognized by our customers. We know from our customers that supply chain responsibility is a material issue for them. Last year alone, we got about $2.8 billion worth of new or existing business that was associated with ethical supply chain practices.
My team needs to continually articulate and refresh that business case — in order to win customers, but also to get internal partners and suppliers coming along with us.
Broader change requires collaboration and action by many sectors
Marco: We need an industry standard. I would like RBA, our industry association, to have a standard which is auditing and beyond. Then Annukka, I, and others can work across companies as a team to advance this.
Annukka: We do definitely need help from others. When we go on site and work individually with our suppliers to help them improve their performance, those engagements are deep. They take a lot of time and resources and effort. We do need help to get this scaled.
Jury: Most suppliers are shared between giants such as Philips and HP. Because suppliers operate simultaneously in multiple supply chains, buyers need to collaborate, align their ‘asks’ and avoid duplication of efforts.
Marco: I also want to work with other buyers to get deeper, faster into the supply chain. The dirt and the real pain is not in my first tier of suppliers. The real severe cases are far deeper.
As a way to help scale action, we at Philips have built an IT system which we will be sharing Q1 2020. This is the predictive analytics tool that lets us predict what different suppliers will need so that we can focus our attention. It reflects everything we’re doing. Now, others outside of the Phillips orbit can use it – suppliers, owners. So if, for example, Annukka wants to have the same system, then she just pays for the number of suppliers she gets on the system and they can compare themselves
It’s a publicly available system that works for everyone. Will others embrace it? Not all the companies are as crazy, or maybe as courageous, as HP and Phillips. Some really hold on to a compliance focus.
Annukka: In terms of getting other companies on board, two levels of incentives usually work. Regulation can help to generate a level playing field. The other level is customer expectations. I would like customers to put their money where their mouth is in terms of choosing the suppliers that are demonstrating strong ethical supply chain practices.
Marco: We need the real, big, big breakthroughs. We are now fixing what we have done wrong in the past so that it doesn’t reoccur. But to really bring it further, you need more energy and you need also help from others.
Jury: I think this is a big problem. We put on lenses that allow us to see reality in a familiar way but those lenses don’t allow us to see the big breakthroughs that are there for us to capture.
About the Participants
Annukka Dickens leads HP’s Human Rights and Supply Chain Responsibility team. She is responsible for driving the overall vision and strategy of the company’s human rights and supply chain social responsibility program, including cross-company human rights risk assessment, supplier environmental performance and fair and ethical treatment of workers. She manages end-to-end supplier assessments, auditing, continuous improvement processes and capability-building programs. HP’s supply chain responsibility program is built on principles of respecting human rights, empowering workers and improving supplier environmental performance across one of the largest supply chains in the IT industry. HP is ranked by Know the Chain and the Corporate Human Rights Benchmark as a leader in supply chain and human rights work.
Marco Baren is head of Supplier Development, Supplier Sustainability and Operational Excellence at Royal Philips. Marco has 25 years of working experience in different markets, from components to automotive, different functions (purchasing/quality/production/plant mgt) and different regions around the globe. He holds a degree in Physics and Business Administration. He is a lean master and always looking for improvements.
He writes: “At Philips we are constantly working on improving our performance. As leader in the field of sustainability we are seen and rewarded for our constant drive to improve people lives. This also means teaming up with suppliers helping them to become more sustainable but also more cost effective. Our strategic process to come to the right topics to deal with, did lead five core programs very future-oriented that build on the status quo. One of them is our Sustainable Performance program, where we stepped out of our comfort zone (auditing) and are now successfully implementing a new approach based upon joining forces without penalties. The next step is using the (real) data for our predictive analysis. This is a groundbreaking and next move towards full transparency. All based on some simple lean principles, applied in a rigid way!”
Dr. Jury Gualandris is assistant professor, Operations Management & Sustainability, at the Ivey Business School. Jury’s research has considered how sustainability can develop and diffuse across firms through sustainable procurement.
Currently, Jury studies the institutional, operational and economic challenges associated with the development and functioning of circular supply chains. Circular supply chains consist of multiple companies that go beyond recycling and reusing to collectively prioritize the reduction of products and materials in order to minimize the proportion of waste that goes to landfills. He focuses on the role of business leaders and NGOs in transformational change.
 Philips has defined six Zero Tolerances (ZT), which disqualify a supplier. These are: Fake or falsified records; Child and/or forced labor; Immediate threat to the environment, violations of regulatory requirements; Immediate threat to workers; Failure to comply with regulatory and/or Philips requirements; Workers’ monthly income