Management Report & Annexes | Basic Information About the Group

8. Procurement and Production

Supplier management

Bayer’s procurement volume in 2013 was approximately €18.7 billion (2012: €18.1 billion). Goods and services were procured from some 107,000 (2012: some 101,000) suppliers in approximately 138 (2012: 125) countries and recorded in the Group-wide reporting system. To cover specific requirements as efficiently as possible, each subgroup procures direct and production-related materials itself, while indirect and non-production-related goods and services are sourced in each case by the organizational unit that is their major user within the Bayer Group. Our Group-wide procurement strategy and application of the major-user principle enable us to realize synergy potentials in the form of standardization, volume pooling and streamlining of negotiations.

The procurement volume in Germany, the United States and Japan in 2013 accounted for nearly 67% of the expenditures in the countries of the OECD (Organisation for Economic Co-operation and Development), or about 54% of the Bayer Group’s total procurement spend. Brazil, India and China together accounted for about 72% of the expenditures in the non-OECD countries or about 14% of the total spend.

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Number of Suppliers and Procurement Spend by Economic Region [Table 3.8.0-1]
SuppliersSpend
%%
OECD countries7181
Non-OECD countries2919
Procurement Spend in OECD and Non-OECD Countries[Table 3.8.0-2]
% % % %
OECD countries Germany

27.4
United
States
21.3
Japan

5.7
Other

26.3
Non-OECD countries China
9.0
Brazil
2.6
India
2.4
Other
5.3

Sustainability in procurement

Bayer regards adherence to sustainability standards within the supply chain as a crucial factor in the value chain. By acting responsibly in collaboration with our suppliers, we aim to minimize risks and create stable, long-term business relationships with our partners. It is also an important strategic lever for Bayer in safeguarding both its global competitiveness and the supply of materials and services. For this reason, the company applies not just economic standards, but also environmental, social and corporate governance (ESG) standards in choosing new suppliers or continuing its relationships with existing ones. These standards are defined in Bayer’s Supplier Code of Conduct, which generally forms the basis for our collaboration with suppliers. It is legally binding and integrated into electronic ordering systems and contracts throughout the Group. The Supplier Code of Conduct is based on the principles of the U.N. Global Compact and our Human Rights Position.

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To participate in IT-based bidding processes, suppliers must give a binding assurance before submitting an offer in our supplier management system that they acknowledge Bayer’s Supplier Code of Conduct. This creates an important foundation for a business relationship aligned to sustainability principles.

Sustainability assessments and audits of our suppliers

We track our suppliers’ adherence to the Code of Conduct by monitoring their sustainability performance. This is done partly on the basis of on-site audits and partly through online supplier assessments carried out by a leading web-based platform for sustainability performance monitoring (EcoVadis). The assessments are based on a web-based, modular questionnaire completed by the supplier, coupled with accompanying verification documents and 360° screening. Suppliers are selected for these assessments based on a combination of country and material risks and procurement volume.

To leverage synergies in the monitoring of suppliers’ sustainability performance, we participate in two industry initiatives – the “Pharmaceutical Supply Chain Initiative” (PSCI) and “Together for Sustainability” (TFS), an initiative of the chemical industry that was co-founded by Bayer. The focus of these ­initiatives is on standardizing sustainability aspects in the relevant industries. Assessments and audits are also exchanged among the members, giving us access to additional evaluations of suppliers that also work with Bayer.

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In both initiatives, sustainability assessments and audits of suppliers are exchanged through IT platforms. This minimizes the administrative burden for both suppliers and the member companies.

Members of the TfS initiative initiated a total of over 1,850 assessments and successfully completed 150 audits during the one-year pilot phase from July 2012 through June 2013. In the PSCI initiative, the first joint pilot audit program was successfully completed and evaluated in 2013. Both initiatives focus not only on performing audits, but also on providing support and training for suppliers.

Under the Bayer Audit Program, we carry out supplier audits together with an external, independent partner, applying the standard of the respective industry initiatives in which we participate in order to benefit from synergies. We also obtain further audits of Bayer suppliers on an exchange basis as part of our collaboration with the members of the PSCI and TFS initiatives. In addition, Bayer auditors perform inspections focusing on health, safety, environmental protection and sustainability. An overview of the number of supplier assessments and audits:

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Supplier Assessments [Table 3.8.0-3]
Bayer assessments via the EcoVadis platform 278
Assessments* by TfS** members of suppliers that also work for Bayer 107
National assessments by Indian country company 243
* assessments exchanged via the EcoVadis platform as part of TfS initiative
** Together for Sustainability (TfS)
Supplier Audits [Table 3.8.0-4]
Bayer audits with external auditors 41
Audits* by TfS** members of suppliers that also work for Bayer 7
Audits* by PSCI** members of suppliers that also work for Bayer 2
HSE***/sustainability audits by Bayer auditors 97
* audits exchanged as part of TfS and PSCI initiatives
** Together for Sustainability (TfS)/Pharmaceutical Supply Chain Initiative (PSCI)
*** Health, Safety, Environmental Protection

All assessment and audit results are thoroughly analyzed and documented. If deficiencies are found, the company develops action plans together with the respective suppliers to ensure that they observe social, ethical and environmental standards in the future. Where improvement needs have been identified, we work together continuously with our suppliers to achieve these improvements. As a result, we did not have to terminate any supplier relationship in 2013 for reasons related to sustainability performance.

Our assessments and audits accounted for 34% of the total procurement volume in the Bayer Group with regard to sustainability performance and 51% of the procurement volume in high-risk areas, which are defined by a combination of country and material risk.

Sustainability training for purchasers and suppliers

Training for purchasers in the Bayer Group includes attending courses on sustainability aspects of ­procurement and our Code of Conduct. In 2013 we completely revised the training course on our sustainability assessment process via our collaboration platform.

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Our purchasers are thoroughly trained in the EcoVadis assessment process, with 243 purchasers attending the training course in 2013. The subgroups also provide their respective purchasers with supplementary information. For example, HealthCare has initiated a sustainability roadshow for various local purchasing units. The purchasing and quality functions in Brazil, India and China received extensive training in the supplier evaluation process. MaterialScience held both a global and a China-specific procurement meeting to provide information on sustainability.

We also offer training courses for our suppliers. Both the information material and the range of courses were updated and extended in 2013.

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The TfS initiative offers e-learning courses to provide suppliers with general information on the initiative and the audit process. The PSCI initiative likewise promotes continuing supplier development by means of the comprehensive information provided on the PSCI website, and by organizing training events and conferences on subjects such as occupational safety.

As part of the training and information program for suppliers, Bayer’s company in India presents its BayBuy Awards at an annual Supplier Day. The awards for India’s most sustainable suppliers are based on the national sustainability assessments.

The Supplier Days organized by HealthCare and MaterialScience at various locations in China in 2013 focused on sustainability.

Tackling child labor in the supply chain

For Bayer, responsible corporate governance includes recognizing and respecting human rights both internally and within our external sphere of influence. This includes the supply chain. Our Human Rights Position is unequivocal and includes a strict ban on child labor. We obligate our suppliers along our supply chain not to employ children. Particularly when working with suppliers in developing countries or emerging markets, we take care that they are not using child labor – which is still widespread in these regions.

For many years, CropScience has taken systematic action to prevent child labor in the seed supply chain in India through its Child Care Program. Teams from Bayer visit the fields used in cotton seed production at least six times each season in order to determine the age of the workers there. A separate organizational unit is responsible for this. Thanks to this stringent monitoring system, there are now only very few instances of child labor at our contractors, and we are closely tracking these cases. In India we have also carried out systematic field monitoring in vegetable seed production since 2009 and in the production of hybrid rice seed since 2010.

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The table shows how cotton seed production has developed since the main 2009/2010 season, based on the results of field monitoring.

Field Monitoring Results: Production of Cotton Seed in India[Table 3.8.0-5]
  Season*
Kharif
2009/
2010
Rabi
2009/
2010
Kharif
2010/
2011
Rabi
2010/
2011
Kharif
2011/
2012
Rabi
2011/
2012
Kharif
2012/
2013
Rabi
2012/
2013
Kharif****
2013/
2014
Standing
acres**
1,683 172 2,152 335 2,771 542 3,857 389 3,618
Monitored acres*** 10,575 1,052 13,856 2,276 17,427 3,564 24,161 2,433 20,991
Labor details
Total laborers monitored 35,826 3,902 43,150 7,198 52,979 12,128 82,192 9,253 60,422
Proven child labor cases 22 2 14 0 18 0 21 0 18
Adult laborers 35,804 3,900 43,136 7,198 52,961 12,128 82,171 9,253 60,404
Child labor incidence per monitored acre 0.002 0.002 0.001 0 0.001 0 0.001 0 0.001
Child laborers as a percentage of total laborers 0.06% 0.05% 0.03% 0% 0.03% 0% 0.03% 0% 0.03%
* Kharif growing cycle: cultivation in the rainy season (summer) and harvest in the fall/Rabi growing cycle: cultivation in the fall and harvest in winter
** 1 acre = 4,046.86 m²
*** cumulated depiction of the area under cultivation monitored on the basis of control inspections performed (at least 6 per season)
**** as of Dec. 31, 2013

Suppliers who show that they are strictly observing our ban on child labor receive a bonus from Bayer along with training in agricultural efficiency. Graduated sanctions are applied for non-compliance. These range from written warnings to termination of the contract in the case of repeated non-compliance. Once a year, the audit firm Ernst & Young (India) conducts unannounced inspections of randomly selected farms. The two indicators highlighted in the table are used to measure the success of our extensive package of measures.

We regard school attendance not only as essential for children’s development but also as a tool to drive the elimination of child labor. As an important part of the child protection program, our “Learning for Life” initiative consists of projects aimed at ensuring that children and young people get a proper education. Between 2005 and the end of June 2013, the “Learning for Life” educational programs benefited more than 5,500 children and young people.

The Child Care Program has received broad public recognition. It is a multi-disciplinary project involving management, specialists from the Child Care Team, and staff from the seed production team and Corporate Communications, who play a key role in raising awareness for this issue.

Material and raw material inputs

As the subgroups’ business activities and therefore the materials they use differ fundamentally, each subgroup organizes the procurement of the materials needed for its own production operations. Sustainability considerations are important when procuring raw materials, an example being the purchase of ­renewables or minerals from conflict areas.

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Renewables so far have played only a secondary role in Bayer’s use of raw materials. We are using them more intensively when it makes technical, economic and ecological sense to do so.

At HealthCare, some hormones are synthesized by way of certain sterols or phytosterols generated as byproducts of the manufacture of vegetable oils from soybeans, canola or sunflowers. Palm oil or palm kernel oil is not used due to its low sterol content. We also purchase various steroids produced from diosgenin, which is mainly derived from yam root grown in China and other countries. In the fermentation process, we also use raw materials such as water, glucose, yeast, soybean starch, castor oil and corn steep water. Extracts of plant leaves (Centella asiatica) are used in some Consumer Care products. This plant is widely found in Asia and is not an endangered species.

MaterialScience is experimenting with the replacement of petroleum-based raw materials as part of its innovation and cooperation projects. For example, the subgroup is testing a biotechnological process that is based on the conversion of biomass by microorganisms and can supply material for the production of plastics. The use of carbon dioxide as a raw material for polyurethanes has already been successfully implemented at the pilot plant level – and the first results of an independent ecological assessment give grounds for optimism.

At the international level, companies are increasingly obligated to disclose the origin of certain raw materials used in their products. “Conflict minerals” from the Congo region are one example. Bayer is currently investigating whether minerals from this region – such as tin, tungsten and tantalum ores or gold – could have found their way into our products through the supply chain. In parallel with these efforts, we are working on a special process for systematically investigating and evaluating potential suppliers of such minerals.

HealthCare

The Product Supply unit of HealthCare steers the subgroup’s entire supply chain, from raw material ­procurement to manufacturing to product shipment, utilizing a global production network consisting of its own sites and those of subcontractors. The manufacturing of pharmaceutical products is subject to extraordinarily stringent quality standards. These standards are known collectively as “Good Manufacturing Practices” (GMP). Compliance with these requirements is regularly audited by internal experts, regulatory authorities and external consultants.

The Pharmaceuticals segment generally procures the starting materials for the active ingredients of its prescription pharmaceuticals from external suppliers. To prevent supply bottlenecks and mitigate major price fluctuations, these starting materials and the intermediates we do not produce ourselves are generally purchased under global contracts and/or from a number of suppliers we have audited and approved.

Our active ingredients are manufactured primarily at the sites in Wuppertal and Bergkamen, Germany, and Berkeley, California, United States. These substances are processed into finished products and packaged worldwide. Our medicines come in a wide range of delivery forms including solids such as tablets, coated tablets or powders; semi-solids such as ointments or creams; and liquid pharmaceuticals such as those used in injections or infusions. Our hormonal contraceptives are supplied as sugar- or film-coated tablets or used in intrauterine systems (coils), for example. Formulating and packaging takes place in Berlin, Leverkusen and Weimar, Germany; Garbagnate, Italy; Beijing, China; São Paulo, Brazil; and Turku, Finland. Our hemophilia drug Kogenate™ is manufactured by a biotechnological process at Berkeley, California, United States. Pharmaceuticals that we do not produce ourselves due to the use of special technologies are generally purchased under global contracts from suppliers we have audited and approved. For example, Betaferon™/Betaseron™ for the treatment of multiple sclerosis is produced by a contract manufacturer.

For the Consumer Care Division of the Consumer Health segment, we produce certain active substances, such as acetylsalicylic acid and clotrimazole, in La Felguera, Spain. The principal raw materials we purchase from third parties are naproxen, citric acid, ascorbic acid, other vitamins and paracetamol. To minimize business risks, we diversify our raw material procurement sources worldwide and conclude long-term supply agreements. Among the division’s production sites are the facilities in Myerstown, Pennsylvania, United States; Cimanggis, Indonesia; Lerma, Mexico; Bitterfeld-Wolfen and Grenzach-­Wyhlen, Germany; Madrid, Spain; and Segrate, Italy.

The Diabetes Care products (such as blood glucose meters) of our Medical Care Division are mainly procured from original equipment manufacturers. Material prices and availability are covered in most cases by long-term contracts. We hold strategic reserves of certain materials and finished products so that we can supply our customers consistently and reliably. The contrast agents for diagnostic imaging procedures are produced mainly in Berlin, Germany. Medical devices such as contrast agent injectors and mechanical systems for treating constricted or blocked blood vessels are manufactured at the U.S. sites near Pittsburgh, Pennsylvania, and in Minneapolis, Minnesota. Most of the materials and components needed to manufacture our medical devices are procured from external suppliers. The availability, quality and price stability of the materials are ensured by way of long-term agreements, careful choice of suppliers and active supplier management.

The Animal Health Division procures the pharmaceutical active ingredients for its veterinary medicines both from within the Bayer Group and from external suppliers throughout the world. Our animal health products are manufactured mainly at the sites in Kiel, Germany, and Shawnee, Kansas, United States, and marketed worldwide.

CropScience

CropScience, too, manages procurement and production as a single organizational unit. This enables an integrated supply chain from raw material purchase through end-product manufacture to warehousing, followed by a two- or three-step distribution system depending on local market conditions.

Our principal procurement countries, representing the bulk of our procurement volume, are centrally managed. This enables us to operate efficiently in procurement markets and optimize our cost position. We mainly procure supplies of important raw materials on the basis of long-term supply agreements to minimize procurement risks such as supply shortages or substantial price fluctuations. Regular sustainability and quality audits of our suppliers ensure compliance with internal and external standards.

Crop Protection and Environmental Science products are mainly manufactured at our own production sites and formulating facilities. Among the largest are the facilities in Dormagen, Knapsack and Frankfurt am Main, Germany; Kansas City, Missouri, United States; and Vapi, India. Our network of decentralized formulation and filling sites enables us to respond rapidly to local market needs. At these sites the active ingredients are processed into herbicides, fungicides, insecticides, seed treatment products and Environmental Science products according to local requirements and application areas. Packaging of the products also takes place in these facilities.

Production in the Seeds business unit takes place at locations close to our customers in Europe, Asia, and North and South America at our own farms or under contract.

Investment in our global production network is continuing in order to create capacities for new products and technologies and to improve manufacturing processes. We plan to significantly increase our capital investment to meet the steadily rising demand in a competitive and timely manner. In September 2013, we therefore announced an increase in our capital expenditure budget. We now intend to invest some €2.4 billion in property, plant and equipment between 2013 and 2016.

MaterialScience

Procurement at MaterialScience is globally steered by the Procurement & Trading unit. Worldwide procurement and trading processes are centrally managed to leverage synergies within MaterialScience.

Key raw materials for our MaterialScience products are petrochemical feedstocks such as benzene, toluene and phenol. We purchase these materials on the procurement markets, mainly under supply agreements. The operation of our production facilities also requires large amounts of energy, mostly in the form of electricity or steam. In steam and electricity generation, we aim for a balanced diversification of fuels and a mix of external procurement and captive production to minimize the price fluctuation risk.

The principal production facilities of MaterialScience are at Dormagen, Krefeld and Leverkusen, ­Germany; Shanghai, China; and Baytown, Texas, United States. These supply all the subgroup’s business units and are centrally managed by the Industrial Operations unit. Further major production sites are located at Antwerp, Belgium; Brunsbüttel, Germany; Map Ta Phut, Thailand; and Tarragona, Spain. Each of these sites is managed by the respective business unit.

In the field of commodities, we endeavor to reduce costs by operating high-capacity production facilities that enable us to supply our markets on an international basis. We maintain a relatively large number of production facilities in selected countries to serve our differentiated businesses. These facilities include systems houses, where we formulate and supply customized polyurethane systems, and plants where we compound polycarbonate granules to meet specific customer requirements or manufacture semi-finished products (polycarbonate sheets). We also operate regional production facilities for functional films made of polycarbonate or thermoplastic polyurethane.

Last updated: July 29, 2014  Copyright © Bayer AG
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