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 and apply these within their own supply chains.
Our approach to sustainable procurement
One of the goals of our supplier management endeavors is compliance with fundamental environmental and social standards, in addition to high-quality, reliable delivery and competitive prices. We have introduced relevant strategies, processes and guidelines that we are continuously improving in order to prevent violations of supply chain standards and improve our sustainability performance.
To achieve our corporate sustainability goals, our Group Procurement team is working closely with our suppliers. We aim to create transparency in all our sourcing regions and fully integrate sustainability into all our value chains.
Therefore, we have set two new key indicators that will measure our journey towards increasing this transparency by evaluating the sustainability performance of our relevant suppliers with valid sustainability assessments. Our definition of valid sustainability assessment includes assessments carried out over the last three years and performed by a reliable, approved source. Relevant suppliers either indicate a specific country and industry risk or contribute to a major part (50% minimum) of our purchase volume. For the risk evaluation, we apply the risk data provided by EcoVadis for almost our complete purchase volume (98%). For the calculation of our purchase volume, we consider sourcing-relevant third parties (excluding expenses such as taxes and customs, as well as fees and memberships). We measure these key indicators using two equally weighted metrics: coverage in terms of purchase volume (2021: 65%) and the number of suppliers (2021: 21%).
We view 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 ensure that all legal requirements are taken into account and that corresponding measures are initiated where necessary. For this purpose, in 2021 we set up an internal working group tasked with ensuring that we are compliant with the German Supply Chain Due Diligence Act.
Supplier Decarbonization Program
Our Supplier Decarbonization Program is a key element contributing to reduce our emissions in line with our decision to join the Science Based Targets initiative. Through the program, we aim to reduce greenhouse gas emissions associated with purchased goods and services as well as capital goods.
We set up a cross-functional Supplier Decarbonization Program team within Group Procurement to define our strategy and drive the execution of a ten-year program plan. We also started to provide training sessions and materials for procurement managers and sourcing teams. We intend to approach our suppliers in waves and contacted the first target group with a letter from our Chief Procurement Officer, information about our aspirations and a questionnaire to assess their current decarbonization status. Our sourcing managers collect relevant supplier data in a global monitoring database.
We are developing an automated carbon accounting tool to manage the large quantities of data on the CO2 emissions of our suppliers. It will be available by end of 2022.
More information on our climate-related targets can be found here.
Risk management process
To ensure supply security, we select our suppliers based on various criteria, such as country risk, material risk and supplier risk, and their strategic importance to the business. This helps our sourcing managers to identify potential mitigation actions with relevant suppliers and support them in making improvements. The approach towards our strategic suppliers, which account for approximately 53% 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 in the event of a risk or production issue arising with any of our suppliers.
- Material Risk Assessments: to determine the risks of relevant materials used in 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 2021, we further developed our supplier risk assessment, focusing on the more relevant risk titles and thus sharpening our approach.
Due diligence process for responsible sourcing of minerals
Merck sources and sells products that contain minerals commonly summarized under the term “3TG” (tin, tungsten, tantalum, gold – collectively also known as conflict minerals). Minerals can be extracted, traded, handled, and exported from conflict-affected and high-risk areas (CAHRAs) associated with the risk that these minerals could originate from mines or smelters controlled by armed militia contributing to human rights violations.
Our overall aim is to source materials in a responsible and conflict-free manner and not to contribute to adverse impacts through our sourcing activities. Therefore, we developed a comprehensive due diligence program and respective practices to address minerals originating from CAHRAs. Our program framework is in alignment with applicable laws and international standards.
Our Responsible Minerals Sourcing Charter forms the basis of our due diligence program. It clearly communicates our company’s expectations regarding responsible sourcing to our suppliers and promotes responsible sourcing of minerals. We are continuously working to improve our due diligence practices and ensure conflict-free sourcing of 3TG.
Our company operates in global and complex supply chains, in many cases with several tiers of suppliers between us and the original sources of the minerals used in our products. In order to address this complexity, we are a member of the Responsible Minerals Initiative (RMI). RMI provides us with tools and resources to make sourcing decisions that improve regulatory compliance and support responsible sourcing of minerals from CAHRAs. RMI uses third-party auditors to audit smelters and refiners and to investigate working conditions as well as environmental, health and safety issues. In the event that sufficient RMI-based information is not obtained, we conduct further research to determine whether an appropriate level of due diligence is ensured.
Roles and responsibilities
Group Procurement is responsible for integrating sustainability requirements into the relevant stages of our sourcing and supplier management processes. Our Center of Excellence for Supply Security coordinates the relevant measures, such as updating our guidelines where necessary, examining processes and coordinating our participation in external initiatives. Sourcing managers responsible for selecting and contracting suppliers are made aware of and regularly updated on our guidelines and sustainability requirements through internal communication channels and training.
Our commitment: Guidelines and standards
We expect all our suppliers and service providers to comply with our environmental and social standards, which are primarily derived from the core labor standards of the International Labour Organization (ILO) and the UN Global Compact. These are defined in our Responsible Sourcing Principles. We expect our suppliers to ensure that their subcontractors respect the same rules.
Our Responsible Minerals Sourcing Charter demonstrates our commitment to responsible sourcing of minerals from conflict-affected and high-risk areas. It applies to all our legal entities and subsidiaries worldwide, all our employees as well as any third party acting on our behalf. The charter complements the requirements set out in our Responsible Sourcing Principles.
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, upholding human rights, protecting the environment and public health, and promoting fair working conditions.
To ensure that we work based on industry standards and can rely on comparable data analytics and expert analysis, we collaborate with our peer companies in industry initiatives. We are a member of both Together for Sustainability (TfS) and the Pharma Supply Chain Initiative (PSCI).
We invite our suppliers to let us or trusted partners conduct assessments or audits to increase our supply chain transparency and identify fields of activity in order to improve sustainability performance or mitigate infringement risks. Regarding our mica supply chain, we engage with a global consultancy to conduct audits and with the Indian organization IGEP to conduct inspections. Further information can be found in the corresponding chapter.
Further information on assessments and audits conducted in the reporting year can be found here.
Supply chain assessments and audits
Together for Sustainability supplier assessments and audits
Through the TfS initiative, 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 more than 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.
Through the TfS initiative, we have access to more than 1,460 valid scorecards on the assessment of our suppliers, 882 of which completed a new assessment or re-assessment in 2021. In some cases, these were initiated by us and in other cases by other TfS members.
In the context of “Grow & Deliver”, the strategic framework set by TfS for the period 2020-2025, we collaborated closely with member companies to drive capacity building within our supply chain. In 2021, we thus conducted several webinars on sustainability assessments and audits and on how to improve supply chain transparency and sustainability performance. These webinars were prepared and hosted in collaboration with TfS and EcoVadis and offered to our sourcing managers and suppliers in all regions. We also contributed to the new best practice sharing session series “TfS Talks”. As part of our contribution as a TfS member, we supported the development of a capability-building concept and implemented a training platform for sustainability knowledge and related skills. This platform will be available in several languages and for all our sourcing managers and suppliers of the 33 TfS member companies from 2022 onwards.
The total value of the goods and services we purchased in 2021 from approximately 57,000 suppliers in more than 140 countries amounted to around € 8.6 billion, compared with approximately € 7.9 billion in 2020, representing an increase of 8.9%. Of these (including R&D services), we purchased 28% from suppliers based in North America, 46% from suppliers based in Europe, 21% from suppliers based in the Asia-Pacific region, 1% from suppliers in the Middle East and Africa, and 2% from suppliers in Latin America.
In the United States, we have specific supplier diversity programs in place to comply with local legislation. We are focusing our efforts in the United States 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 a wide range of 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 database of small and diverse vendors.
Ambassadors for sustainable procurement
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. We actively participate in the Sustainable Procurement Pledge.