Our company procures many raw and packaging materials, technical products, components, and services from around the world. We aim to promote supply chain stability while providing our customers with high-quality products and services. We expect our suppliers to share our ethical, social and compliance standards, as set out in our Responsible Sourcing Principles, and to apply these within their own supply chains as well.
Our approach to making our supply chains more sustainable
One of the goals of our supplier management endeavors is compliance with fundamental environmental and social standards, alongside high-quality, reliable delivery and competitive prices. To achieve this, we have introduced relevant strategies, processes and guidelines that we are continuously improving to prevent violations of supply chain standards. To ensure supply security, we select our suppliers based on diverse criteria such as country risk, material risk, supplier risk, and business criticality. This helps our sourcing employees to identify potential mitigation actions with relevant suppliers and work on improvements.
The approach towards our strategic suppliers, which account for approximately 43% of our total spend, includes the identification, monitoring and assessment of supply security risks. It comprises four main elements:
- Supplier Risk Assessments: to capture the overarching risks at supplier legal entity level, including multiple risk domains.
- Alert system: to notify our Procurement organization when any of our suppliers faces a potential disruption.
- Material Risk Assessments: to determine the risks of relevant materials that make up our most significant finished products.
- Risk Response Tracker: to create and monitor risk mitigation activities.
We calculate risk factors for suppliers and raw materials by multiplying risk probability and risk impact. For the supplier evaluation, we consider 29 risk titles, including, but not limited to economic freedom, social unrest, unfair business practices, and poor labor practices. We have also included criteria for identifying supplier relationships impacted by key sustainability risks, such as mineral sourcing or animal welfare.
In 2020, we extended this program to include more suppliers. Additionally, we are streamlining the criteria and integrating other relevant topics in order to arrive at a more comprehensive and solid evaluation. We expect to implement this project by the middle of 2021. Amid the Covid-19 pandemic, our Procurement team also successfully secured the supply of raw materials, services and finished goods. It achieved this predominantly through effective supplier relationships.
We have developed a company-wide due diligence process for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, according to OECD guidance, which will integrate and strengthen existing measures used in our business sectors. A working group manages and implements this process. It comprises various business sector and Group function representatives.
We understand our approach to supply chain sustainability as a journey and are continuously working to improve and further develop our policies and processes. While doing so, we make sure that all legal requirements are considered and corresponding measures are initiated where necessary. In this context, we are closely monitoring the developments relating to a potential supply chain law and the resulting requirements.
How we implement sustainability standards in the supply chain
Group Procurement is responsible for integrating sustainability requirements into the relevant stages of our sourcing and supplier management processes. It is a global organization with direct accountability and resources in procurement-relevant local subsidiaries. Our Center of Excellence for Supplier Security coordinates the relevant measures, such as updating our guidelines where necessary, examining processes and coordinating our participation in external initiatives. Sourcing employees responsible for selecting and contracting suppliers are aware of and regularly updated on our guidelines and sustainability requirements through internal communication channels and training.
In 2020, we introduced a TfS training course in Asia. We invited our Procurement employees to participate in various Ecovadis webinars. Part of the training program deals with TfS assessments and audits. In addition, we are in the process of developing a global training program for purchasers and suppliers together with TfS.
Our commitment: Guidelines and standards
We expect all our suppliers and service providers to comply with environmental and social standards, which are primarily derived from the core labor standards of the International Labour Organization (ILO) and the UN Global Compact.
Moreover, we support the Compliance Initiative of the German Association for Supply Chain Management, Procurement and Logistics (BME) and have endorsed the BME Code of Conduct. In particular, this code sets out rules for combating corruption, antitrust violations and child labor, as well as for upholding human rights, protecting the environment and public health and promoting fair working conditions.
We seek to conduct our business activities in compliance with labor, social and environmental standards while also respecting human rights. Additionally, we abide by the standards set out in our Code of Conduct and our Human Rights Charter. We expect our suppliers to comply with the labor, social and environmental standards defined in our Responsible Sourcing Principles and to ensure that their subcontractors do the same.
We recognize that risks of significant adverse impact may be associated with extracting, trading, handling, and exporting minerals from conflict-affected and high-risk areas (“CAHRAs”). We have a responsibility to respect and safeguard human rights and not to contribute to conflicts. That’s why we published our commitment to responsible sourcing of minerals from CAHRAs with our Responsible Minerals Sourcing Charter in 2020. This complements the requirements set out in our Responsible Sourcing Principles. The primary focus of the Responsible Minerals Sourcing Charter is on mined material such as tin, tungsten, tantalum, gold (also known as the “3TGs”), and cobalt sourced from CAHRAs. This Charter is also intended to cover CAHRA-related risks in other supply chains, as identified by our internal risk evaluation processes. This Charter applies to all Merck entities and subsidiaries worldwide, all Merck employees as well as any third party acting on behalf of Merck.
The total value of the goods and services we purchased in 2020 from approximately 60,000 suppliers in almost 160 countries amounted to around € 7.9 billion, compared with approximately € 7.5 billion in 2019, representing an increase of 5%. Of these (including R&D services), we purchased 27% from suppliers based in North America, 49% from suppliers based in Europe, 18% from suppliers based in the Asia-Pacific region, 1% from suppliers based in the Middle East and Africa, and 3% from suppliers based in Latin America.
How we monitor our supply chain
A number of different approaches are used to keep track of our suppliers and ensure compliance with our standards and values. These are generally based on the risk the suppliers pose and combine the factors of country risk, industry risk and impact on business.
- Under the Together for Sustainability (TfS) initiative launched by companies in the chemical industry, we encourage our suppliers to be assessed either on self-reported information or via audits. We have been a member of TfS since 2014.
- In selected cases, we conduct our own sustainability audits of suppliers.
- Regarding our mica supply chain, we engage with a global consultancy to conduct audits and with the Indian organization IGEP to conduct inspections.
TfS supplier assessments and audits
Under TfS, suppliers are assessed either based on information obtained during audits, or based on self-reported and publicly accessible information provided by EcoVadis, an independent rating agency. EcoVadis assesses suppliers from 160 countries and 200 sectors across the four categories of Environment, Labor and Human Rights, Ethics, and Sustainable Procurement. The results are shared among TfS member companies in compliance with all restrictions stipulated by antitrust law. From a strategic perspective, TfS activities focus on achieving demonstrable improvements in supplier sustainability standards. In 2020, we began rolling out a new strategic framework, “Grow & Deliver”, which defines TfS activities for the next five years. Our core objective is to move from measuring and monitoring to delivering a substantial positive impact in the chemical supply chain.
Through the TfS initiative, we have access to more than 1,250 valid scorecards on the assessment of our suppliers, 717 of which took part in a new assessment or re-assessment in 2020. In some cases, these were initiated by us and in other cases by other TfS members.
Conducting our own audits
We continuously conduct our own audits in selected cases based on business requirements. In 2020, none of these revealed indications of violations of the right of association, the right to collective bargaining or cases of child labor, forced labor or compulsory labor.
In the United States, we have a specific supplier diversity program in place to comply with regional legislation. We focused our efforts on enhancing our current supplier locator tool by broadening the rollout among sourcing managers to improve our ability to connect with and potentially award business to diverse vendors. Additionally, we are continuing to work on internal awareness campaigns and training seminars for our sourcing managers and are investing in tools to expand our small and diverse vendor database.
Ambassadors for more sustainable supply chains
Since becoming established on the social network LinkedIn in 2019, the Sustainable Procurement Pledge (a TfS initiative) has evolved to become a knowledge exchange platform for procurement professionals, academics and other stakeholders. The platform has hosted various online best practice exchange events. At Merck, we actively participate in the Sustainable Procurement Pledge.