Supply chain management

A growing number of companies now recognise that to reach their environmental and social goals and to satisfy stakeholders' expectations, they need to look further than their own facilities and ensure that their suppliers are also achieving acceptable social and environmental standards.

Customers and other stakeholders do not always distinguish between a company and its suppliers, and they may hold companies accountable for suppliers' environmental and labour practices. Many companies - and a growing contingent of investors as well - regard social and environmental supply chain management as a potential risk area. Environmental and social issues with the potential to seriously affect company reputation often arise somewhere in the supply chain.

As globalisation increases supply chain complexity, it also raises social awareness and expectations for companies to take responsibility for what they buy, sell and produce and how they go about it. Leading companies recognise that there are many business benefits to supply chain management. In addition to risk management, such programmes or initiatives can reduce costs, enhance quality, and safeguard reputation and brand image.

Human rights violations or poor environmental management among Novo Nordisk’s suppliers could represent a risk to the company if unaddressed. Furthermore, as a responsible company, Novo Nordisk has an obligation to promote social responsibility in its business practices and within its sphere of influence. This includes suppliers and contractors.

In recognition of these committments, in 2002 Novo Nordisk launched the Sustainable Supply Chain Management (SSCM) programme. It is an enactment of Novo Nordisk’s commitment to the United Nations Universal Declaration of Human Rights, the United Nations Global Compact and the International Chamber of Commerce’s (ICC’s) Business Charter for Sustainable Development.

Within this programme, Novo Nordisk is working with suppliers and contractors to support human rights and labour standards as well as sound environmental practices. Although a set of requirements are asked from suppliers, the company’s approach to supply chain management is based on dialogue and engagement rather than sanctions and termination of contracts, although such measures may be necessary in rare cases.

At the same time, the programme reflects an active risk management approach which seeks to identify and reduce potential risk to an acceptable level.

The programme is now reaching out to second-tier suppliers (suppliers to Novo Nordisk’s suppliers) via a website, which makes the programme and tools available to suppliers and others. This way, suppliers can adopt Novo Nordisk’s programme or parts of it to extend requirements to their own suppliers. A downloadable brochure in six languages explaining the requirements and the reasoning behind them is also available.

During 2005, the site had 5,716 visitors, of whom 87% were from outside Denmark.

The sustainable supply chain management programme requires suppliers to complete a self-evaluation questionnaire as part of their contract and to allow Novo Nordisk to perform a social and environmental audit. For production materials, office supplies, laboratory equipment and engineering, social and environmental issues account for one third of the total rating of a supplier or licensee, which also includes quality and commercial aspects.
Novo Nordisk’s suppliers are evaluated with respect to environmental management and basic labour rights:

• Preserving the environment
  Identifying, monitoring and managing environmental impacts, including compliance with regulations, and policies and programmes to improve performance
• Treating people fairly
  This dimension specifically addresses labour standards: wages and benefits, working hours, health and safety, child labour, forced labour, freedom of association and collective bargaining, non-discrimination, disciplinary measures and privacy.

• Value of purchase evaluated as a percentage of total value of purchase
• Geographical distribution of suppliers evaluated
• Performance

Novo Nordisk’s total procurement costs in 2005 amounted to 15 billion Danish kroner, and it has a total of 340 key suppliers which are evaluated annually. Key suppliers are determined based on an analysis of purchase value, impact and risk.  

Due to the company’s expanding global production, over the last two years new suppliers have been introduced to the company and its standards, especially suppliers to the production site in Brazil. The number of unsatisfactory answers increased in 2004 due to the inclusion of these suppliers in the programme, but improved in 2005.

To focus on key impacts, the triviality limit (the minimum purchasing spend for inclusion in the programme) has been raised. During 2005 suppliers accounting for 20.2% of the total value of Novo Nordisk’s purchases were evaluated. Of these, 87% reported a satisfactory performance on social and environmental issues.

All suppliers with an unsatisfactory rating receive a feedback letter from Novo Nordisk, and, when needed, an action plan is agreed upon. In 2005, 8.2% of suppliers received a rating for poor environmental performance, while 5.2% of suppliers received a rating for both poor environmental and social performance.

Some breaches must be improved immediately, whereas others take longer to achieve the best results. Novo Nordisk will always try to raise the standards and amend potential breaches rather than close contracts. However, if a supplier repeatedly demonstrates lack of interest or will to improve standards, Novo Nordisk would withdraw from the relationship. This has not yet been the case.

As of 2005, the programme includes audits of suppliers, following similar processes to Novo Nordisk’s regular quality audits. In 2005, 12 of 340 key suppliers were audited. These are mainly located in countries with high risk of violation of Novo Nordisk’s requirements.

The audits are undertaken by Novo Nordisk auditors who have received special training from external consultants. Having the audits done by the company’s own auditors is a good way of ensuring that the knowledge from the audits stays in the company, which is very helpful for follow-up and further engagement. It is part of Novo Nordisk Quality procedures for purchasers that social (human rights) and environmental considerations must make up one third of the total weighting of the evaluation of a supplier.

In 2005 Novo Nordisk’s sustainable supply chain management programme was extended to also include purchase in R&D, Marketing and Sales. The same requirements are extended to suppliers here and a contract insert is included in the contracts.

Analysing the implications of sustainable supply chain management, there are both financial and non-financial benefits to both parties. A model illustrates potential costs and benefits.

In December 2003 Novo Nordisk asked its suppliers, in an anonymous survey performed by an external consultancy, whether the suppliers found that the programme had had any impact on the way they operate. Results showed that 56% believed that the programme had had a positive impact on internal operations, and of these 39% had been inspired to work with their own suppliers.

In the four years since the sustainable supply chain management programme was launched, it has achieved significant results in terms of reaching key suppliers with requirements on good environmental management and labour standards, and many of these suppliers have turned to their own suppliers with the same requirements as shown above. As of 2005, all significant purchasing in Novo Nordisk, including service companies, has been included in varying forms within the programme.

Having reached some important targets in terms of engaging suppliers, Novo Nordisk is now considering further developing the programme to address issues raised on the international agenda, most importantly how to manage risks and impact suppliers in countries with little or no enforcement of environmental and labour laws. The fact that Novo Nordisk is internationalising its production and establishing suppliers in new countries such as Brazil and China to achieve greater cost benefits underscores the importance of examining this issue more closely. In 2006 a new SSCM strategy will be developed to meet these new challenges.

This page has been assessed by PricewaterhouseCoopers as part of its assessment of Novo Nordisk’s statement that it reports ‘in accordance’ with GRI. Please refer to Audit and assurance for a full description of the nature of assurance offered.