Supplier Management

As globalization continues to advance and value creation increasingly shifts toward our various sales markets, the Volkswagen Group’s sustainability efforts do not stop at our factory gates. At 39 locations in 23 countries, the Volkswagen Group’s procurement network ensures that our production facilities are supplied with production materials of the requisite quality and in the required quantities – on a sustainable basis and at competitive prices. In the reporting year, our procurement volume totaled €166.5 billion. These figures include the data from our Chinese joint ventures.

Group Procurement Volume

in %

We share the responsibility associated with the globalization of our procurement processes with our suppliers and their subcontractors – responsibility for a successful future, for a fair and just society, and for the environment. Only by working closely with our business partners can we succeed in ensuring compliance with sustainability standards and thereby make a contribution toward achieving the United Nations’ Sustainable Development Goals (SDGs). With these objectives in mind, we rolled out our “Sustainability in Supplier Relations” concept in 2006 and continue to develop it on an ongoing basis. And in 2016, we began integrating the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Area into our supplier management approach. 

In this context, in 2016 we expanded our Code of Conduct for Business Partners to include a passage on our duty to promote responsible supply chains for minerals from countries affected by conflict or classified as high-risk. We also made corresponding revisions to the Volkswagen Guideline on Raw Materials from Conflict Regions.

Sustainability in Supplier Relations

The Sustainability in Supplier Relations concept is based on the “Volkswagen Group requirements regarding sustainability in its relationships with business partners (Code of Conduct for Business Partners)”. The latter formulate the Volkswagen Group’s expectations for our business partners’ conduct with respect to key environmental, social and compliance standards. By including contractual integration of sustainability requirements into the procurement process, we aim to ensure compliance with our sustainability standards along the entire supply chain worldwide. These requirements are based on the principles of the UN Global Compact, the International Chamber of Commerce's Business Charter for Sustainable Development and the relevant conventions of the International Labour Organization. They are supplemented by Volkswagen’s Environmental Policy, the environmental targets and regulations derived from it, the Group’s Quality Policy and the Volkswagen Declaration on Social Rights.

Not only do we include sustainability requirements in our supplier contracts, we also expect our suppliers to acknowledge these sustainability requirements before submitting a quotation. This explicit acknowledgement must be updated every 12 months. These requirements have been integrated into our contracts with all suppliers to General Procurement since November 2013, and into our contracts with all suppliers of production materials since January 2014. They apply to all outsourced goods and services worldwide.

Our Sustainability in Supplier Relations concept rests on three pillars: requirements, monitoring and development. We apply these three benchmarks to the ongoing assessment and improvement of our suppliers’ sustainability performance.

Chart: Three bases

Supplier Requirements

Among other data, the Volkswagen Group uses a country risk analysis to obtain a clearer picture of social, environmental and human-rights risks in regions where potential suppliers operate before entering into negotiations with them. This takes both third-party information and in-house empirical data into account.

To identify current developments as well as long-term structural challenges in each country, we rely on the ongoing dialog between our brands and the regions during the regular meetings and video conferences held by the Sustainability Procurement Network. This network supports the continuous exchange of information between 20+ experts in our Group procurement organizations around the world.

The Volkswagen Group also subjects all potential new business partners and suppliers to an integrity check (Business Partner Check). By examining the social integrity of potential business partners, we aim to reduce the risk of forming relationships that could adversely affect the Group and its business.

In addition, the procurement risk management system constantly monitors and analyzes the financial stability of our suppliers. A suite of different processes is applied to help eliminate supply risks due to supplier failure, but also to minimize the financial impact of crises and insolvencies in the supply chain.

Among other activities, our early-warning systems also screen, for example, press and Internet coverage of relevant sustainability issues. Relevant information is passed on to the appropriate Procurement centers to support internal processes and decision-making.

The Volkswagen Group expects its suppliers to avoid the use of any materials made from the smelted ores of conflict minerals. Minerals are considered conflict minerals if non-governmental armed groups are supported directly or indirectly through their extraction, transportation, trade, handling, processing or export.

Information regarding the facilities used by suppliers or their subcontractors for the smelting or refining of minerals such as tin, tantalum, tungsten or gold must be disclosed to the Volkswagen Group upon request.

We call on our suppliers to practice due diligence along the supply chain. This includes the implementation of measures to ensure that the minerals used by the suppliers – in particular tantalum, tin, tungsten and gold – do not directly or indirectly promote or support armed conflicts. 

For this purpose, Volkswagen recommends using the standardized conflict minerals reporting template made available by the conflict-free sourcing initiative (cfsi). Based on the cfsi data, Volkswagen will inform suppliers who have business relationships with non-compliant smelters and/or refiners about alternative options for working with conflict-free smelters and/or refiners.

Supplier Monitoring

In the course of the business process, our business partners are required to complete our sustainability questionnaire and to document their activities relating to selected areas of responsibility. The questionnaire covers the following areas of relevance to Volkswagen AG:

  • cooperation and collaboration (also with subcontractors)
  • environmental responsibility
  • employee rights
  • transparent business relationships 

By the end of the reporting year, 21,067 of our suppliers had submitted responses to our questionnaire. This covers 88% of our total procurement volume.

Status quo “sustainability questionnaire”

  Total in
2012 - 2016 cumulated
Status in 2016, based on procurement expenditure Procurement expenditure-based target for 2016 Procurement expenditure-based target for 2017
Sustainability questionnaire
(self-assessment)
21,067 88% 93% 93%

We are transferring our sustainability questionnaire over to the self-assessment questionnaire developed for use throughout the industry in a joint project with other automotive corporations involved in the European Automotive Working Group on Supply Chain Sustainability organized by CSR Europe. We use the responses to these self-assessments to help identify measures to improve performance, and then communicate the latter to our suppliers. This means we are able to give our suppliers specific, needs-based recommendations for improving their sustainability performance.

Alongside the well-established Volkswagen survey, in the reporting year 1,336 of our suppliers filled out this multi-OEM industry questionnaire, which also includes questions addressing the issue of conflict minerals.

We also expect our suppliers to take active responsibility for themselves. In the field of environmental protection, we require our main suppliers to put in place a certified environmental management system in accordance with ISO 14001 and/or EMAS; to date, 87% of our suppliers have documented such a system. As part of the EMAS and ISO 14001 environmental certification and auditing procedures at Volkswagen AG sites, the contractors and suppliers who work on the site premises and have an environmental impact are also subject to regular audits. In addition, we expect our suppliers to have a certified occupational health and safety management system that complies with OHSAS 18001, SA8000 and/or AA1000.

Procurement volume-based proportion of environmental and social certification at main suppliers

  2016 (in %) 2015 (in %) 2014 (in %) 2013 (in %) 2012 (in %)
Environmental certification (EMAS, ISO 14001)          
Verified 55% 49% 48% 44% 30%
Self-assessed 32% 35% 39% 40% not taken into account
Total 87% 84% 87% 84% not taken into account
Social certification
(OHSAS 18001, SA8000, AA1000)
         
Verified (total) 13% 9% 8% 6% not taken into account

Selected business partners identified by the self-assessments or internal analysis system as being at increased risk of non-compliance with sustainability requirements are subjected to third-party sustainability audits, which cover all aspects of our sustainability requirements and include interviews with employees of the selected suppliers.

Should the audit uncover non-compliance or areas requiring improvement, we work with the supplier to develop a program of measures for improving the situation and assist with its implementation. In the event of serious compliance violations by a supplier, we open an “ad-hoc case”. In 2016, an independent external services provider carried out a total of 45 audits, resulting in 19 ad-hoc cases. This demonstrates the effectiveness of this instrument and helps us to take action in more targeted, efficient ways.

Audits and Ad-hoc cases by continent

Group procurement in total

If there is reason to suspect that tier 1 suppliers or their subcontractors are failing to comply with our sustainability requirements, we ask the party concerned for a written statement using a standardized report (6D Report). Based on the six points we specify in the report, our business partners can describe the status quo and any remedial measures. If the answers prove unsatisfactory, we take further appropriate steps, such as the examination of documents, visits to the supplier’s premises or other customized supplier development activities.

Where there is an ad-hoc case or suspected case of non-compliance, the implementation of a series of remedial measures is coordinated by the ad-hoc expert team in Wolfsburg, together with the ad-hoc expert team from the relevant brand or region as appropriate

Ad-hoc Expert Team:

Every brand and every region has set up an ad-hoc expert team. Team members include experts from specialized fields such as occupational safety, occupational health, environment and personnel. This approach helps us to cover all issues which could potentially arise in ad-hoc cases, and to address them efficiently. By this means we were able to agree on specific improvement measures with affected suppliers during the reporting year, resulting in an optimization in their sustainability performance. The ad-hoc expert team in Wolfsburg plays a supporting and coordinating role in this process.

Example of an Ad-hoc Case:

In 2016, we worked with selected suppliers to address challenges involved in complying with sustainability requirements in their management of subcontractors. Due to the complexity of the supply chains involved, we are continuing to work on these issues with these suppliers in 2017.

In another case, a third-party CSR audit documented non-compliance with our working-hours policy. We worked with the supplier to develop an action plan, and the implementation of this plan was monitored by the responsible ad-hoc expert team. Ultimately, this approach succeeded in establishing a process that will ensure this supplier complies with our policy on working hours.

Ad-hoc cases in 2016

Geographical distribution*    Context   Type of supplier  
Europe 18 cases Social standards 30 cases Direct supplier 45 cases
Asia 25 cases Environmental protection 5 cases Subcontractor 8 cases
North America 4 cases Compliance 2 cases    
South America 3 cases Multiple contexts 16 cases    
Africa 3 cases        
Total 53 cases   53 cases   53 cases
 
*In terms of geographical distribution, Russia and Turkey are allocated to Asia.

In addition these 53 ad-hoc cases, the Internal Audit function uncovered an additional 83 cases which resulted in measures being agreed with suppliers. These cases involved supplier conduct that failed to comply with regulatory or contractual requirements which was either reported by individuals or discovered in the course of regular program audits.

Because of these infringements and the above mentioned ad-hoc cases, 39 business relationships were terminated in the reporting period. The increase in terminated business relationships is closely related to procedures initiated in response to the results of audits by the Internal Audit function.

The internal and external point of contact for suspected cases of non-compliance with our sustainability requirements – especially where violations of human rights are concerned – is the email address sustainability(at)vwgroupsupply.com.

In addition, both employees and third parties can address possible cases of non-compliance via the Volkswagen Group’s national and international employee representation bodies, as well as national and international trade union federations. The Volkswagen Group’s worldwide ombudsman system can also be used to confidentially report irregularities to two external lawyers appointed by the Group. Since 2014, it has also been possible for information providers to communicate anonymously with the ombudsmen via an online channel.

Supplier Training

To anchor the Sustainability in Supplier Relations concept more firmly throughout the Group, we are making employees more aware of and providing training in sustainability issues. The concept of “sustainability in the supply chain” is an established part of the skills profile for all Procurement employees. In 2016, more than 950 purchasing staff worldwide were given training in this area.

To facilitate ongoing supplier development, in the course of our business relations we make an electronic learning (e-learning) module on sustainability available in all languages of the countries which have been defined as compliance risks. To successfully complete the module, suppliers must pass a final test. We made further progress here in 2016, with 25,002 suppliers – representing 82% of the procurement volume – completing the e-learning module by the end of the reporting year. For training purposes, this tool is available both to the supplier’s workforce and to employees of Volkswagen AG Procurement.

Status quo e-learning "sustainability questionnaire"

  Total in
2012-2016 cumulated
Status in 2016, based on procurement expenditure Procurement expenditure-based target for 2016 Procurement expenditure-based target for 2017
E-learning 25,002 82% 83% 83%

Alongside the e-learning format, we also conduct topic-specific sustainability training courses and workshops with our suppliers at selected locations. During the reporting period, training events were organized in countries such as Argentina, Brazil, China, South Africa and the U.S. In total, 1,348 employees of more than 800 of our suppliers were given training on sustainability issues. The main focus of these events was on the “Social rights of employees”. Some of these training activities were organized in cooperation with other automotive manufacturers under the auspices of the  European Working Group on Supply Chain Sustainability.

We also organize stakeholder dialogs in order to discuss the concept of and structures required to apply our sustainability standards. This informed exchange of ideas with representatives of political and governmental organizations, civil society, research institutions and NGOs, as well as other companies and our suppliers, ensures the continuous development of our concept. One such discussion of issues surrounding sustainability in supplier relations took place on March 1 of the reporting year.

Through our involvement in national and international industry and sector associations, we are also working with other automotive manufacturers to create shared communication platforms with the aim of driving forward sustainability in the supply chain. Volkswagen Group is a member of, for example, the German Association of the Automotive Industry (VDA) and econsense – the Forum for Sustainable Development of German Business, and is also part of the Automotive Industry Action Group (AIAG). Audi AG is also involved in the Aluminium Stewardship Initiative.

In the European Automotive Working Group on Supply Chain Sustainability, part of the European Business Network for Corporate Social Responsibility (CSR Europe), (new link) we are working to develop recognized frames of reference for companies in the automotive industry. In collaboration with other members of this working group, we have developed an industry-wide self-assessment questionnaire on sustainability performance, and offered related training courses to suppliers.

In the context of our VDA activities, the VDA issued a “Recommendation for guiding principles in the automotive industry for improving sustainability in the supply chain" for the first time in 2016. These guiding principles not only advocate more sustainability in the supply chain, but also recommend the use of the standardized self-assessment questionnaire developed by the European Working Group on Supply Chain Sustainability. We hope that this will also encourage our direct suppliers to make greater use of this questionnaire for their subcontractors.

In the reporting year, as part of our implementation of the OECD’s Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, the Volkswagen Group of America became a member of the Conflict-Free Sourcing Initiative.

As part of our efforts to work with our suppliers to minimize the negative environmental impacts of our vehicles, Volkswagen joined the CDP Supply Chain Program in 2015. We foster direct contact with our suppliers by organizing specialist workshops in which we discuss and develop joint, innovative approaches for the environmental optimization of certain components.

The Future Automotive Supply Tracks (FAST) initiative also plays a key role in our supplier development strategy. FAST is Group Procurement’s core initiative for developing the Volkswagen Group and its supply network, both to ensure a strong future and to involve suppliers in key goals earlier and more intensively. In addition to innovation and globalization, the FAST dialogs also focus on sustainability issues.

Summary

Throughout all process steps and supplier development measures, our top priority is to maintain a balanced dialog in a fair-minded spirit of partnership. Keeping this key objective of ongoing, sustainable collaboration firmly in mind, we work with our suppliers to find even more opportunities to improve sustainability, such as boosting resource efficiency and continuously improving working conditions.

The Volkswagen Group reserves the right to verify business partners’ compliance with our sustainability requirements, either by in-house experts or by external audits on suppliers’ premises, as outlined above. In the event of non-compliance with our sustainability requirements, in extreme cases we will terminate the business relationship, especially if the supplier shows no interest in improvement. Our top priority, however, is to create a sustainable supply chain by encouraging proactive compliance with our sustainability requirements through dialog with and the ongoing development of our business partners.

Outlook for 2017

In 2017, we plan to perform the same number of sustainability audits as in 2016, supplemented by a pilot process for on-site assessment of compliance with our sustainability requirements.

Moreover, our objectives for 2017 include the provision of training that aims to continuously build our suppliers’ and employees’ awareness of and capacity to engage with sustainability issues.

We also intend to step up our engagement in industry-wide working groups and initiatives. In particular, we plan to continue rolling out the self-assessment questionnaire developed by the CSR Europe working group and use its findings to further enhance the processes of the Volkswagen Group procurement network. Furthermore, with respect to certain selected raw materials, we intend to work with the relevant business partners to identify ways of creating greater transparency along the supply chain.

With respect to reducing CO2 emissions, we are intending to implement a project for closed-loop aluminium scrap recycling. In addition to conserving resources, this project will also lower the carbon footprint associated with the use of aluminium sheeting.

And in the area of collaborative initiatives, in 2017 we will be lead partner in the DRIVE Sustainability initiative.