Sustainable supply chain
80 percent of Outotec’s manufacturing is outsourced, so sustainability along our supply chain is highly material to us. In the current weak market situation, we have focused on developing a cost-competitive supply base without compromising on product quality, safety and sustainability.
Our supply chain management covers both Outotec’s own operations and those of our suppliers. Our Supply function manages the supplier base through sourcing category management, while also leading and developing sourcing activities for customer deliveries that are executed through locally-based purchasing.
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 sets out guidelines for all people involved in supply-related activities.
Our parallel Supplier Policy imposes strict requirements on Outotec suppliers and defines our principles on ethical conduct, compliance with laws and regulations, environment, health and safety, labor, intellectual property and improper benefits. We expect our suppliers to comply with this policy in their dealings with Outotec, their own employees, their suppliers, and other third parties. 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.
We measure our performance by calculating the percentage of new suppliers screened using labor practices, environmental and human rights criteria.
Since some 80 percent (2014: 85%) of Outotec’s manufacturing is sourced from external suppliers, supplier selection is of key importance in our business.
Outotec gives performance guarantees for the plants and processes we deliver to our customers. We are also naturally responsible for the equipment and materials supplied, as well as the engineering, construction and service work provided by our suppliers and subcontractors.
Our suppliers include distributors, component manufacturers, equipment manufacturers, logistics companies, engineering companies, construction companies and other service providers. In addition, thousands of our direct suppliers’ own suppliers form part of Outotec’s supply chain. The majority of our direct suppliers are either component or equipment manufacturers.
Because Outotec delivers large tailored solutions, the set-ups and combinations of suppliers vary a great deal from one year to the next, which makes it difficult to run joint long-term development programs with them. Outotec had approximately 3,400 active direct suppliers in 2015 (2014: 3,500). Out of 380 potential new suppliers, 70 (18%) were screened using quality, labor practices, environmental and human rights criteria. All the screened companies met our criteria and qualified as new suppliers.
Most of our suppliers are based in Finland, Germany, Australia, Sweden and Brazil. Outotec has also developed best-cost-country sourcing in China, India, Eastern Europe and Mexico, and negotiated new agreements and prices with European suppliers. Our global supply hub concept, which had earlier been planned to consist of three supply hubs – China, India and Mexico – was changed in 2015, leaving China as our only global supply hub. The company has also strengthened its capabilities to handle quality control, expediting and logistics in China and India.
The cost-competitiveness of our products is of crucial importance in the current weak market situation. Improving cost efficiency without compromising on product quality, safety and sustainability was the main challenge for supply chain management in 2015. The allocation of more business to fewer suppliers enables better management and development partnerships, in turn enhancing delivery excellence and cost competitiveness.
43% of spending on local suppliers
We define “local suppliers” as suppliers who we do not manage globally, and who are located in a country other than Finland and Germany, where Outotec’s two global plant delivery hubs are located. Spending on local suppliers contributes to local employment and regional development. Outotec’s supply chains are characterized by logistic complexity, especially those that combine global project deliveries and purchases from local suppliers.
Our spending on local suppliers in 2015 amounted to EUR 270 million, equivalent to 43 percent of our total supply spend. The largest shares by country – each amounting to EUR 10–70 million – were spent in Sweden, Australia, Russia, Chile, USA, China and the United Arab Emirates. The remaining local spend was distributed among 50 countries.
We estimate that 20 percent (2014: 15%) of Outotec’s manufacturing and assembly took place in the company’s own manufacturing workshops and assembly shops. The acquisition of Kempe Engineering in May 2015 brought three new workshops to the company, focusing on service operations and the manufacturing of spare parts close to customer sites in Mozambique, Qatar and the United Arab Emirates; while our acquisition of Sinter Plant Services in December 2015 has brought us a small spare parts manufacturing facility in South Africa. The share of our own manufacturing has increased from previous years. This is mostly due to a reduced order backlog in a weak market situation, the realization of more manufacturing in-house, and new acquisitions of manufacturing capacity.
Outotec’s 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. No notable risks related to the use of child labor or forced or compulsory labor have been identified in Outotec’s own manufacturing units. The due diligence process applied during acquisitions covers labor practices, human rights and environmental criteria.
Mitigating risks along the supply chain
We have nominated Supplier Account Managers to work with our most important global or local suppliers. These persons are responsible for facilitating 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 sustainability-related risks identified in our internal workshops include bribery and kickbacks, occupational safety, protecting information and reporting misconduct. With regard to environmental issues, material toxicity and chemicals were ranked as the greatest risks. In addition, we have identified three countries in our supply chain with potential risks regarding child labor, hazardous work, or rights to exercise freedom of association or collective bargaining. These countries are China, India and Mexico. In 2015, 3 percent of our suppliers were based in China, 2 percent in India, and 2 percent in Mexico. We have dedicated supply persons in each of our Market Area offices, whose task is to perform Supplier Assessment and Approval Processes carefully and make observations during audits and other visits.
During 2015 we updated our project risk assessment process and tool, and also tested them in larger sales cases. The super users and facilitators were trained, and the training of sales and project implementation personnel will continue in 2016. The feedback from project managers and teams has mostly been positive, and risk assessments have provided our management with important information about major risks and planned mitigation actions. In addition, a major training event was organized at Outotec House in Espoo, Finland, to increase awareness of potential risks in supply chain among personnel responsible for procurement.
In 2015, we continued to analyze the footprint of our supply chain in terms of greenhouse gas emissions. Calculations were based on Outotec’s spending and supply chain emission factors defined by the UK Department for Environment, Food and Rural Affairs (DEFRA).
The analysis showed that the biggest sources of CO2 emissions in Outotec’s supply chain were metal products, representing 40 percent of the total. In 2015, the carbon footprint of our supply chain, at 345,000 tonnes of CO2 equivalent (2014: 386,000), was considerably larger than the footprint of Outotec’s own operations, which amounted to 33,584 tonnes of CO2-e (2014: 34,787).