Supplier Management

As globalization continues to advance and value creation increasingly shifts toward our various sales markets, the Volkswagen Group’s sustainability efforts do not stop at our factory gates. At 39 locations in 23 countries, the Volkswagen Group’s procurement network ensures that our production facilities are supplied with production materials of the requisite quality and in the required quantities on a sustainable basis and at competitive prices. In the reporting year, our procurement volume totaled €149.1 billion, representing an increase of 2.5%. These figures include the data from our Chinese joint ventures.

The purchasing volume across the six Volkswagen AG sites in Germany totaled €28.0 (27.2) billion in the 2015 financial year; the proportion attributable to German suppliers was 65.9 (67.7) %. Of the total procurement volume, €22.6 billion was spent on production materials and €5.4 billion on capital goods and services.

Volkswagen Group Procurement Volumes by Brand and Market

€ billion 2015 2014 %
Volkswagen Passenger Cars1 87.6 85.5 +2.4
Audi2 27.0 25.7 +4.9
ŠKODA 7.4 7.1 +4.0
SEAT 5.2 4.4 +18.5
Bentley 0.9 0.8 +10.2
Porsche 5.2 5.0 +4.6
Volkswagen Commercial Vehicles 2.7 2.6 +3.3
Scania 6.6 6.5 +2.0
MAN 6.6 7.8 –16.3
Volkswagen Group 149.1 145.5 +2.5
Europe/Other markets 99.5 93.4 +6.5
North America 7.3 6.3 +15.6
South America 4.6 6.7 –31.4
Asia-Pacific1 37.8 39.1 –3.3
   
1 Includes the Chinese joint ventures.
2 Audi includes Lamborghini and Ducati.

We share the responsibility associated with the globalization of our procurement processes with our suppliers and their subcontractors – responsibility for a successful future, for a fair and just society, and for the environment. Only by working closely with our business partners can we succeed in ensuring compliance with sustainability standards and thereby make a contribution towards achieving the United Nations’ Sustainable Development Goals (SDGs). With this objective in mind, we rolled out our “Sustainability in Supplier Relations” (SiSR) concept in 2006 and continue to develop this concept on an ongoing basis.

Sustainability Requirements

The Sustainability in Supplier Relations (SiSR) concept is based on the “Volkswagen Group requirements regarding sustainability in its relationships with business partners (Code of Conduct for Business Partners)”. The latter formulate the Volkswagen Group’s expectations for our business partners’ conduct with respect to key environmental, social and compliance standards. By including contractual integration of sustainability requirements into the procurement process and stipulating that our suppliers pass on these requirements to their own suppliers, we aim to ensure compliance with our sustainability standards along the entire global supply chain. These requirements are based on the principles of the UN Global Compact, the International Chamber of Commerce’s Business Charter for Sustainable Development and the relevant conventions of the International Labour Organization. They are supplemented by Volkswagen’s Environmental Policy, the environmental targets and regulations derived from it, the Group’s Quality Policy, and the Volkswagen Declaration on Social Rights.

Not only do we include sustainability requirements in our supplier contracts, we also expect our suppliers to acknowledge these sustainability requirements before submitting a quotation. This explicit acknowledgement must be updated every 12 months. These requirements have been integrated into our contracts with all suppliers to General Procurement since November 2013, and into our contracts with all suppliers of production materials since 2014. They apply to all outsourced goods and services worldwide.

Our Sustainability in Supplier Relations concept rests on three pillars: requirements, monitoring and development. We apply these three benchmarks to the ongoing assessment and improvement of our suppliers’ sustainability performance.

Chart: Three bases

Risk Analysis and Prevention

The Volkswagen Group uses a country risk analysis to obtain a clearer picture of social, environmental and human-rights risks in the region where potential suppliers operate before entering into negotiations with them. This takes both third-party information and in-house empirical data into account. The analysis has shown that there is an increased risk of non-compliance with our sustainability requirements in a number of countries, including Brazil, India, China, Mexico and Russia. For this reason, we focus on these countries in particular in our supplier development activities. To identify current developments as well as long-term structural challenges in each country, we rely on the ongoing dialog between our brands and regions at the regular meetings and video conferences held by the Sustainability Procurement Network. This network supports the continuous exchange of information between the 20 or so experts in our Group procurement organizations around the world.

The Volkswagen Group also subjects all potential new business partners and suppliers to an integrity check (Business Partner Check). By examining the social integrity of potential business partners, we aim to reduce the risk of forming relationships that could adversely affect the Group and its business.

In addition, the procurement risk management system constantly monitors and analyzes the financial stability of our suppliers. A suite of different measures helps eliminate supply risks due to supplier failure. In addition, suitable measures are taken to minimize the financial impact of crises and insolvencies in the supply chain.

Among other activities, our early-warning systems also screen, for example, press and Internet coverage of relevant sustainability issues. Relevant information is passed on to the appropriate Procurement centers to support internal processes and decision-making.

Training of Employees and Suppliers

To anchor this concept firmly throughout the Group, we are making employees aware of and providing them with training in sustainability issues. The concept of “sustainability in the supply chain” is an established part of the skills profile for all Procurement employees. In 2015, more than 1,900 purchasing staff were given training in this subject area.

To facilitate ongoing supplier development, in the course of our business relations we make an electronic learning (e-learning) module on sustainability available to suppliers in all languages of the countries which have been defined as compliance risks. To successfully complete the module, suppliers must pass a final test. We made important progress here in 2015, with 19,598 suppliers – representing 80% of the procurement expenditure – completing the e-learning module by the end of the reporting year. For training purposes, this tool is available both to the supplier’s workforce and to employees of Volkswagen AG Procurement.

Status E-Learning “Sustainability”

  Total in
2015 + 2014 + 2013 + 2012
Status in 2015, based on procurement expenditure Procurement expenditure-based target for 2015 Procurement expenditure-based target for 2016
E-learning 19,598 80% 73% 83%

Alongside the e-learning format, we also conduct topic-specific sustainability training courses and workshops with our suppliers at selected locations. During the reporting period, training events were organized in Brazil, China, India, Mexico and South Africa. In total, 477 of our suppliers’ employees were given training on sustainability issues. The main focus of these events was on the “Social rights of employees”.

Supplier Monitoring

In the course of the business process, our business partners are required to complete our sustainability questionnaire and to document their activities relating to selected areas of responsibility. The questionnaire covers areas of relevance to Volkswagen AG:

  • cooperation and collaboration (also with subcontractors)
  • environmental responsibility
  • employee rights
  • transparent business relationships

By the end of the reporting year, 18,189 of our suppliers had submitted responses to our questionnaire. This covers 91% of our total procurement volume.

Status quo “sustainability questionnaire”

  Total in
2015 + 2014 + 2013 + 2012
Status in 2015, based on procurement expenditure Procurement expenditure-based target for 2015 Procurement expenditure-based target for 2016
Sustainability questionnaire
(self-assessment)
18,189 91% 89% 93%

We are transferring our sustainability questionnaire over to the self-assessment questionnaire developed for use throughout the industry in a joint project with other automotive corporations involved in the European Automotive Working Group on Supply Chain Sustainability organized by CSR Europe. We use the responses to these self-assessments to help identify measures for improving performance, and then communicate the latter to our suppliers. This means we are able to give our suppliers specific, needs-based recommendations for improving their sustainability performance.

We also expect our suppliers to take active responsibility for themselves. For example, we require our main suppliers to put in place a certified environmental management system in accordance with ISO 14001 and/or EMAS; to date, 84% of our suppliers have documented such a system. As part of the EMAS and ISO 14001 environmental certification and auditing procedures at Volkswagen AG sites, the contractors and suppliers who work on plant grounds and have an environmental impact are also subject to regular audits.

Procurement volume-based proportion of environmental and social certification at main suppliers

  2015 2014 2013 2012
Environmental certification (EMAS, ISO 14001)        
Verified1 49% 48% 44% 30%
Self-assessed 35% 39% 40% not taken into account
Total 84% 87% 84% not taken into account
Social certification
(OHSAS 18001, SA8000, AA1000)
       
Verified1 (total) 9% 8% 6% not taken into account
 
1Taking all suppliers into account, 79% have EMAS/ISO 14001 and 9% social certification.

Selected business partners identified by the self-assessments or internal analysis system as being at increased risk of non-compliance with sustainability requirements are subjected to third-party sustainability audits. Should the audit uncover non-compliance or areas requiring improvement, we work with the supplier to develop a program of remedial measures for improving the situation and assist with its implementation. In the event of serious compliance violations by a supplier, we open an “ad-hoc case”. In 2015, an independent external service provider carried out a total of 26 audits, resulting in 14 ad-hoc cases. This demonstrates the effectiveness of this instrument and helps us apply our measures in a more targeted and efficient manner.

Dealing with Compliance Violations

If there is reason to suspect that tier 1 suppliers or their subcontractors are failing to comply with our sustainability requirements, we ask the party concerned for a written statement using a standardized report (6D Report). Based on the six points we specify in the report, our business partners can describe the status quo and any remedial measures. If the answers prove unsatisfactory, we take further appropriate steps, such as the examination of documents, visits to the supplier’s premises or other customized supplier development activities.

Where there is an ad-hoc case or suspected case of non-compliance, the implementation of a series of remedial measures is coordinated by the ad-hoc expert team in Wolfsburg, together with the ad-hoc expert team from the relevant brand or region as appropriate

Ad-hoc Expert Team:

Every brand and every region has set up an ad-hoc expert team. Team members include experts from specialized fields such as occupational safety, occupational health, environment and personnel. This approach helps us to cover all issues which could potentially arise in ad-hoc cases and address them efficiently. By this means we were able to agree specific improvement measures with affected suppliers during the reporting year, resulting in the optimization of their sustainability performance. The ad-hoc expert team in Wolfsburg plays a supporting and coordinating role in this process.

Example of an Ad-hoc Case:

In 2015, an unannounced visit to a supplier uncovered non-compliance with workplace safety requirements. Remedial measures were defined with the supplier on the spot, including the correct installation of emergency exit signs and fire-extinguishing equipment. The successful implementation of these measures by the supplier brought about a sustainable improvement in working conditions for the supplier’s employees.

Ad-hoc cases in 2015

Geographical distribution*    Context   Type of supplier  
Europe 26 cases Social standards 30 cases Direct supplier 38 cases
Asia 14 cases Environmental protection no cases Subcontractor 4 cases
North America 1 case Compliance 3 cases    
Africa 1 case Multiple contexts 9 cases    
 
*In terms of geographical distribution, Russia and Turkey are allocated to Asia.

In addition to these ad-hoc cases, audits uncovered another 42 cases which resulted in measures being taken against suppliers. These cases involved supplier conduct that failed to comply with regulatory or contractual requirements which was either reported by individuals or discovered in the course of regular program audits.

Because of these infringements and the abovementioned ad-hoc cases, 21 business relationships were terminated in 2015. The increase in the number of terminated business relationships is closely related to procedures introduced in response to the results of audits by the Internal Audit function.

The internal and external point of contact for suspected cases of non-compliance with our sustainability requirements – especially where violations of human rights are concerned – is the email address sustainability(at)vwgroupsupply.com.

In addition, both employees and third parties can address possible cases of non-compliance via the Volkswagen Group’s national and international employee representation bodies, as well as national and international trade union federations. The Volkswagen Group’s worldwide ombudsman system can also be used to confidentially report irregularities to two external lawyers appointed by the Group. Since 2014, it has also been possible for information providers to communicate anonymously with the ombudsmen via an online channel.

Dialog

We regularly organize stakeholder dialogs in order to discuss the concept of and structures required to apply our sustainability standards. This informed exchange of ideas with stakeholders – including representatives of political and government organizations, civil society, academic institutions and NGOs, as well as other companies and our suppliers – ensures the continuous improvement of our concept.

Through our involvement in national and international industry and sector associations, we are also working with other automotive manufacturers to create shared communication platforms with the aim of driving forward sustainability in the supply chain. The Volkswagen Group is a member of, for example, the German Association of the Automotive Industry (VDA) and econsense – the Forum for Sustainable Development of German Business. In the European Automotive Working Group on Supply Chain Sustainability, part of the European Business Network for Corporate Social Responsibility (CSR Europe), we are working to develop recognized frames of reference for companies in the automotive industry. In collaboration with other members of this working group, we have developed an industry-wide self-assessment questionnaire on sustainability performance.

The Future Automotive Supply Tracks (FAST) initiative also plays a key role in our supplier development strategy. FAST is Group Procurement’s core initiative for developing the Volkswagen Group and its supply network, both to ensure a strong future and to involve suppliers in key goals earlier and more intensively. In addition to innovation and globalization, FAST also focuses on sustainability issues.

Summary

Throughout all process steps and supplier development measures, the top priority is to maintain a balanced dialog in a fair-minded spirit of partnership. The key objective is ongoing, sustainable collaboration. With this in mind, we work with our suppliers to find even more opportunities to boost resource efficiency and continuously improve working conditions.

The Volkswagen Group reserves the right to verify business partners’ compliance with our sustainability requirements, either by in-house experts or by external audits on suppliers’ premises, as outlined above. In the event of non-compliance with our sustainability requirements, in extreme cases we will terminate the business relationship, particularly if the supplier shows no interest in improvement. However, through dialog based on partnership and the development of our business partners, it is our aim to create a sustainable supply chain by prioritizing proactive compliance with our sustainability requirements.

Outlook for 2016

Our objectives for 2016 include increasing the number of sustainability audits and organizing sustainability training courses for our suppliers in multiple countries. We also intend to step up our involvement in industry-wide working groups and initiatives. In particular, we plan to continue rolling out the self-assessment questionnaire developed by the CSR Europe working group and use its findings to further enhance the processes of the Volkswagen Group procurement network. Furthermore, we fully intend to implement the principles of the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas and incorporate them (Volkswagen Conflict Resources Policy) into our supplier contracts.