Management Report & Annexes | Fundamental Information About the Group

8. Procurement and Production

Our procurement function ensures the timely, global supply of goods and services at suitable market conditions, in the required quality and in accordance with the Group’s ethical, ecological and social standards. The principles of our procurement policy are defined in a directive that is binding for all employees throughout the Group.

We exert considerable influence on society and the environment in many regions through our procurement volume. In 2014, goods and services were procured from some 112,000 (2013: some 107,000) suppliers in 147 (2013138) countries for approximately €20.3 billion (2013: €18.7 billion) and recorded in the Group-wide reporting system.

The procurement volume in Germany, the United States and Japan in 2014 accounted for nearly 66% of the expenditures in the countries of the oecd (Organisation for Economic Cooperation and Development), or about 52% of the Bayer Group’s total procurement spend. Brazil, India and China together accounted for about 70% of the expenditures in the non-oecd countries or about 14% of the total spend.

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Online annex: 3-8-1

Procurement Spend and Number of Suppliers in
OECD and Non-OECD Countries in 2014  [Table 3.8.0-1]
  Spend Suppliers
  € billion % Number %
OECD countries        
Germany 5.2 25.4 21,687 19.4
United States 4.3 21.3 10,451 9.3
Japan 1.1 5.6 1,881 1.7
Other 5.6 27.4 44,116 39.5
Total 16.2 79.7 78,135 69.9
         
Non-OECD countries        
China 1.9 9.4 3,899 3.5
Brazil 0.5 2.5 2,481 2.2
India 0.5 2.4 3,781 3.4
Other 1.2 6.0 23,463 21.0
Total 4.1 20.3 33,624 30.1

Direct and production-related procurement at Bayer is organized decentrally in the subgroups. 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 activities of the various procurement organizations are coordinated through the Group Procurement Committee, which reports to the Chief Financial Officer.

Important raw materials are procured on the basis of long-term supply agreements and an active supplier management 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. This is the case, for instance, when raw materials are procured, for which sustainability aspects are becoming increasingly important due to legal standards – an example being the purchase of minerals from conflict areas.

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Online annex: 3-8-2

International regulations such as the Dodd-Frank Act in the United States increasingly obligate companies to disclose the origin of certain raw materials used in their products. “Conflict minerals” from the Congo region are one example. Bayer investigated 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. We identified about 100 Bayer suppliers who could potentially be impacted by this issue. One-third of these suppliers were questioned about the use of conflict minerals in 2014, including all identified suppliers of CropScience and MaterialScience. HealthCare intends to have finished questioning all potentially impacted suppliers by the end of 2015. Suppliers who have already been questioned provided written confirmation that they do not procure potential conflict minerals from the Congo region.

Sustainability in supplier management

Bayer regards adherence to sustainability standards within its 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. This is also an important strategic lever for Bayer in safeguarding both its global competitiveness and the supply of materials and services. For this reason, we apply not just economic standards, but also environmental, social and corporate governance (esg) standards in choosing new suppliers or continuing our relationships with existing ones. These standards are defined in Bayer’s Supplier Code of Conduct, which is based on the principles of the u.n. Global Compact and our Human Rights Position. The Code forms the general basis for our collaboration. It is legally binding and integrated into electronic ordering systems and contracts throughout the Group.

In order to continuously drive and measure sustainability in supplier management, we have set ambitious targets. By 2017, we plan to evaluate all our strategic suppliers with respect to sustainability-relevant aspects. By 2020, we also aim to evaluate all those suppliers with significant Bayer spend that are regarded as potential high-risk suppliers. Another objective is the development and establishment of a new sustainability standard for our supply base by 2020. This is to be driven forward in tandem with relevant industry initiatives. So far we have evaluated the sustainability performance of 66% of the Bayer Group’s strategic suppliers and 61% of potential high-risk suppliers with significant spend.

For the development and introduction of new sustainability standards for our suppliers, we collaborate with the Pharmaceutical Supply Chain Initiative (psci) as well as with Together for Sustainability (TfS), an initiative co-founded by Bayer that is being established as an association under Belgian law. Bayer is engaged in these initiatives to successfully address the diverse challenges of a sustainable supply chain and to leverage synergies together with other companies.

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Online annex: 3-8-3

In both initiatives, we focus on the standardization of sustainability aspects in the relevant industries in order to establish corresponding social, ethical and environmental practices among our suppliers. We have already developed uniform criteria that the member companies take into account in sustainability assessments and audits. The exchange of supplier assessments and audits among member companies enables access to additional sustainability assessments of suppliers who also work for Bayer. In both initiatives, assessments and audits are exchanged through it platforms.

The TfS initiative consists of the six founding members as well as six new members. psci had 18 member companies at the end of 2014.

Evaluating the sustainability performance of our suppliers

The sustainability performance of our suppliers is monitored through online supplier assessments and on-site audits.

The assessments are carried out on our behalf by a leading web-based service platform for sustainability performance monitoring (EcoVadis). They are based on a web-supported, 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 as well as strategic importance in accordance with our Group targets.

We conduct the on-site audits with external, independent auditors. Here, too, we apply the standard of the respective industry initiatives in which we participate in order to benefit from synergies. In addition, internal auditors perform inspections focusing on health, safety, environmental protection and sustainability.

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Online annex: 3-8-4

Supplier Assessments and Audits for 2014 [Table 3.8.0-2]
Sustainability assessments1 via the EcoVadis platform 692
Sustainability audits2 by external auditors 44
Follow-up sustainability audits by external auditors 12
HSE3/sustainability audits by Bayer auditors 94

1 supplier assessments initiated by Bayer as well as assessments of suppliers working for Bayer exchanged as part of the TfS initiative

2 supplier audits initiated by Bayer as well as audits of suppliers working for Bayer exchanged as part of the TfS and PSCI initiatives

3 Health, Safety, Environment

Within the TfS initiative, a total of 2,605 suppliers were assessed using EcoVadis and 93 audits conducted in the course of 2014. The TfS audit program was executed in China and in additional countries (such as India and Brazil). In psci, the member companies carried out seven joint audits in four countries (including India, Saudi Arabia and the United States) in 2014.

All assessment and audit results are thoroughly analyzed and documented. Wherever the results are unsatisfactory, we develop improvement measures together with our suppliers to ensure that they observe social, ethical and environmental standards in the future. During the reporting period 5% of the assessments had a critical result. In each of these cases, we initiated measures ranging from action plans through the improvement of defined weaknesses to the reduction of the procurement volume. In 2014, Bayer was not prompted to end a supplier relationship due solely to sustainability performance.

Interaction and communication on the subject of sustainability

Procurement of products and services in differentiated markets and locations represents a particular challenge for our procurement organization. Dialogue with our suppliers is essential to ensure smooth production routines and to build up reliable relations. In particular, our goal is to make the principles of our procurement policy and our sustainability requirements clear to our suppliers. In return, we would like to know more about the suppliers’ situation in order to be able to identify and remove obstacles in our collaboration at an early stage. Our procurement staff plays an important intermediary role here. We therefore offer both our procurement colleagues and suppliers a wide range of training and exchange opportunities.

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Online annex: 3-8-5

We offer training activities to help procurement staff worldwide create awareness of sustainability and possible risks in dialogue with our suppliers. Training for employees in procurement in the Bayer Group includes attending courses on sustainability in supplier management. In 2014 we continued the Group-wide training program on our sustainability assessment process via our collaboration platform EcoVadis. A further 337 employees received comprehensive training. In addition, the subgroups organized specific training events in 2014, such as courses for selected procurement employees on the issue of sustainability audits or sustainability roadshows for different procurement categories and local procurement organizations at HealthCare.

In 2014 we organized the second Group-wide Bayer Supplier Day in Leverkusen with 300 participants, including representatives of 90 strategically important suppliers from all over the world. Suppliers were honored at the event for successful partnerships in areas such as sustainability and contractor safety. Our subgroups and country companies also organized local Supplier Days such as the events held by HealthCare in Turkey or by our Indian country company in connection with the annual BayBuy Award.

The continuous development of suppliers in terms of sustainability is also a key objective of the industry initiatives TfS and psci. A joint supplier day of the TfS member companies was held for the first time in Shanghai, China, in 2014. The TfS initiative also offers online sustainability training courses on its website. psci additionally provides comprehensive information at its website, as well as training and information events. Webinars were offered in 2014 on the topic of sustainability in the supply chain, and a capability building conference was organized in Suzhou, China, for Chinese suppliers of active ingredients.

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 to refrain from employing children. Particularly when working with suppliers in developing countries or emerging markets, we take care that they do not engage in 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. For example, teams from Bayer visit the fields used in cotton, rice and vegetable seed production throughout the season in order to raise awareness of the issue and the Bayer requirements and to determine the age of the workers there. Thanks to this stringent monitoring system, there are now only very few instances of child labor among our contractors, and we are closely tracking these cases. The system has now also been introduced in those countries in Asia in which CropScience seed is produced, such as Bangladesh and the Philippines (both rice seed).

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Online annex: 3-8-6

The tables show how cotton and vegetable seed production has developed based on the results of field monitoring.

Field Monitoring Results: Production of Cotton Seed in India           [Table 3.8.0-3]
  Growing season1
 

Kharif

2010/

2011

Rabi

2010/

2011

Kharif

2011/

2012

Rabi

2011/

2012

Kharif

2012/

2013

Rabi

2012/

2013

Kharif

2013/

2014

Rabi

2013/

2014

Kharif4

2014/

2015

Standing acres2 2,152 335 2,771 542 3,857 389 3,609 28 4,022
Monitored acres3 13,856 2,276 17,427 3,564 24,161 2,433 22,579 187 24,053
Labor details                  
Total laborers monitored 43,150 7,198 52,979 12,128 82,192 9,253 66,061 811 70,561
Proven child labor cases 14 0 18 0 21 0 18 0 10
Adult laborers 43,136 7,198 52,961 12,128 82,171 9,253 66,043 811 70,551
Child labor incidence per monitored acre 0.0010 0 0.0010 0 0.0009 0 0.0008 0 0.0004
Child laborers as a percentage of total laborers 0.032% 0% 0.034% 0% 0.026% 0% 0.027% 0% 0.014%

1 Kharif growing cycle: cultivation during rainy season (summer) and harvest in fall/Rabi growing cycle: cultivation in fall and harvest in winter

2 1 acre = 4,046.86 m2

3 cumulated depiction of the area under cultivation monitored on the basis of control inspections performed (at least 6 per season)

4 as of Dec. 31, 2014

Field Monitoring Results: Production of Vegetable Seed in India   [Table 3.8.0-4]
  Growing season1
 
Summer
2012

Rainy
2012
Post
rainy
2012/2013

Summer
2013

Rainy
2013
Post
rainy
2013/2014

Summer4
2014

Rainy5
2014
Standing acres2 110 2,164 649 22 1,814 634 2,482
Monitored acres3 467 7,590 2,849 90 6,398 2,270 8,215
Labor details                
Total laborers monitored 1,625 58,987 26,337 302 40,724 23,272 41,118
Proven child labor cases 0 11 9 0 6 3 1
Adult laborers 1,625 58,976 26,328 302 40,718 23,269 41,117
Child labor incidence per monitored acre 0 0.0014 0.0032 0 0.0009 0.0013 0.0001
Child laborers as a percentage of total laborers 0% 0.019% 0.034% 0% 0.015% 0.013% 0.002%

For vegetables, standing and monitored acres refer to a combination of various different seed types. Each type of seed has its own monitoring intensity. The figures given vary according to seed combination for each season.

1 Summer: Jan. – Apr.; rainy season: June – Oct.; post rainy: Oct. – Feb.
2 1 acre = 4,046.86 m2 3 cumulated depiction of the area under cultivation monitored on the basis of control inspections performed (at least 3 per season)

4 no sowing in summer (= sowing) season 2014 due to remaining seed inventory from previous season

5 as of Dec. 31, 2014

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. We therefore also visit the parents of children we find working in the fields to convince them of the importance of school education. 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 and covers everything from reintegrating children into the regular school system to vocational training measures. Between 2005 and the end of 2014, the “Learning for Life” educational programs benefited more than 5,800 children and young people.

The CropScience 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.

Procurement and production in the subgroups

Both procurement and production are decentrally organized in the Bayer Group and are aligned to the individual requirements of the respective subgroups’ businesses.

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 and medical products is subject to extraordinarily stringent quality requirements that are based on internationally recognized standards. Compliance with these requirements at Bayer is regularly audited by internal experts, regulatory authorities and external consultants.

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Online annex: 3-8-BHC-1

Quality standards are developed according to regulatory requirements, approvals and authorizations, relevant standards of non-governmental organizations and industry associations, and requirements resulting from customer expectations. These requirements are evaluated by HealthCare and integrated into an internal quality management (qm) system that is based on international standards of the iso (e.g. iso 9001 and iso 13485) and the ich (International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use), as well as on rules for “good working practice” (GxP) in the development and manufacture of pharmaceuticals (e.g. Good Manufacturing Practices (gmp), Good Distribution Practices (gdp) and Good Clinical Practices (gcp)). With the help of our qm system, we effectively and transparently implement and manage the quality processes and responsibilities according to established, documented and binding processes and methods. The goal is to ensure the quality of our products throughout their entire life cycle and safeguard the value chain over the long term.

The Pharmaceuticals segment generally procures the starting materials for the active ingredients of its prescription pharmaceuticals from external suppliers.

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. Among the sites where formulating and packaging take place are Berlin, Leverkusen and Weimar, Germany; Garbagnate, Italy; Beijing, China; São Paulo, Brazil; and Turku, Finland. Our hemophilia drug KogenateTM is manufactured by a biotechnological process at Berkeley, California, United States.

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 include naproxen, citric acid, ascorbic acid, other vitamins and paracetamol. Among the division’s production sites are the facilities in Myerstown, Pennsylvania, United States; Cimanggis, Indonesia; Lerma, Mexico; Bitterfeld-Wolfen, Darmstadt and Grenzach-Wyhlen, Germany; Madrid, Spain; and Segrate, Italy. Our production network has expanded through the acquisitions of the consumer care business of Merck & Co., Inc. and Dihon Pharmaceutical Group Co. Ltd.

The Diabetes Care products (such as blood glucose meters) of our Medical Care Division are mainly procured from original equipment manufacturers. 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 sterile consumable articles are manufactured primarily at the u.s. sites near Pittsburgh, Pennsylvania. Most of the materials and components needed to manufacture our medical devices are procured from external suppliers.

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. Unitary management is also intended to help us steadily improve our cost structures, increase our flexibility, ensure a swifter response to market volatility and meet our high quality and safety standards.

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.

Crop Protection and Environmental Science products are mainly manufactured at our own production sites and formulation 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.

We invest continuously in our global production network 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. We intend to invest approximately €2.4 billion in property, plant and equipment between 2013 and 2016.

Our CropScience products are manufactured according to high quality standards based on din iso 9001. 80% of CropScience production sites are certified to this standard, and the compliance of the production processes and registered product specifications is regularly monitored by external auditors.

MaterialScience

Procurement at MaterialScience is centrally steered and managed by the Procurement & Trading unit so as to leverage synergies globally.

MaterialScience applies very high standards for the quality of the raw materials it uses and their further processing into high-tech plastics and polymer precursors. A quality management system was implemented for this purpose that is certified to the international standard iso 9001. In terms of total energy consumption, over 99% of the reporting MaterialScience sites worldwide are certified. This is regularly monitored by internal and external auditors. Certification takes place not just in Procurement and Production but also in most other organizational units.

Key raw materials for our MaterialScience products are petrochemical feedstocks such as benzene, toluene and phenol. 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 close-to-market price indexing, 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: February 26, 2015  Copyright © Bayer AG
http://www.annualreport2014.bayer.com