Supplier indicators

Philips Supplier Sustainability ... Record number of audits conducted ... Most audits conducted by third parties Audit results

Increased speed in resolving ... Global operating structure Auditing Philips sites

Philips Supplier Sustainability Involvement Program

Philips is a member of the Electronic Industry Citizenship Coalition (EICC) and applies the EICC Code of Conduct. The Philips Supplier Sustainability Involvement Program is meant both to enhance the supplier’s understanding of the company’s sustainability standards and ensure compliance.

Understanding of our compliance requirements is enhanced by a system of quick scans conducted prior to formal audits to identify and correct critical issues. This is particularly valuable for new supply bases that have not been exposed to the EICC Code. In 2009 we paid special attention to suppliers of recently acquired companies, including PCL and Respironics.

Record number of audits conducted in 2009

A record total of 858 audits of Bill of Material and non-product related (NPR) identified risk suppliers were carried out in 2009, some 286 audits more than the previous year. The audits included:

• 249 initial audits of potential suppliers, new suppliers including those from acquisitions, new sites or spend exceeding EUR 100,000,
• 111 continual conformance audits at suppliers audited in 2006, and
• 498 resolution audits focusing on zero-tolerance issues (for example: continual seven-day work weeks, immediate life threatening situations, hazardous waste handling).

The majority (72%) of initial and continual conformance audits were conducted in China.

Since we started the program in 2005, we have conducted a total of 2,212 supplier audits.

Most audits conducted by third parties

For reasons of independence, professionalism and capacity, we have implemented a policy that requires third parties to conduct initial and continual conformance audits. As a result 90% of these audits were performed by external auditing bodies, a significant increase over 60% in 2008.

Audit results

As of 2009 all risk suppliers from acquisitions are included in our supplier audit program. As a result the number of identified risk suppliers and indentified non-compliances has increased substantially. During initial audits, for example, many suppliers failed to meet the requirement for management systems, which are thoroughly evaluated according to the EICC checklist.

The average number of non-compliances per audit in the risk countries (selection based on the Maplecroft Human Rights Risk Indexes) varies between 22 in India down to 3 in Thailand and Indonesia.

The most frequently identified issues coming out of the 360 initial and continual conformance audits were as follows:

• Zero-tolerance – hazardous substances (improper disposal of hazardous waste); lack of environmental permits; working hours (continual seven-day work weeks); and occupational safety (immediate threat to health and safety) and emergency preparedness (blocked fire exits).
• Limited-tolerance – lack of adequate management systems to meet the legal requirements for labor, health and safety, and environmental standards (improper handling/processing of chemical substances).

Increased speed in resolving zero-tolerance issues

In 2009 most zero-tolerance issues were solved within 90 days after identification, with the exception of working hours and government permit issues, which take longer to resolve due to their complex nature. Only 7% of zero-tolerances were granted deadline extensions after detailed corrective action plans were reviewed by auditors.

Where no improvement could be established, 12 suppliers were phased out.

Global operating structure

2009 saw the embedding of the Philips Supplier Sustainability Involvement Program as a One Philips approach with a single set of standards, processes, training, certifications, resources and one database across sectors. As the majority of risk suppliers continue to be in China, the Global Supplier Sustainability Office is now headquartered in Shanghai.

Auditing Philips sites

Mirroring our supplier approach, external auditors carried out audits at 12 of our internal sites in risk countries using the EICC checklist. This will continue in 2010.