Bringing Sustainability to the Supply Chain
As an important business partner, Alcoa’s suppliers play an integral role in helping us achieve our sustainability goals.
Sustainability within our procurement function means selecting materials and services that consider the environmental, social, and economic impact in evaluating total cost. It is building relationships with suppliers who behave in a responsible and sustainable manner and ensuring that our interactions with suppliers are carried out with the highest standard of integrity and in compliance with all relevant laws and regulations.
To drive sustainability within our supply chain, we have invested resources in our global and regional supplier sustainability programs, human rights policies and disclosures, and anti-corruption monitoring and due diligence processes.
Global Supplier Sustainability Program
The objectives of our Global Supplier Sustainability Program are aligned with the overall sustainability goals of Alcoa and intended to drive the corporate sustainability initiatives into our supply base.
Our program focuses on our key suppliers that pose the greatest sustainability opportunities and risks to Alcoa. Some of the sustainability opportunities and risks that we consider include: suppliers of commodities that contribute most to Alcoa’s carbon footprint; suppliers with preferred status; sole sources of supply; suppliers located in emerging or high-risk countries; and suppliers providing regulated commodities.
Our supplier sustainability program consists of four components:
- Communicate expectations;
- Assess suppliers;
- Develop and educate; and
Alcoa Global Supplier Sustainability Program
Communicating our expectations to all of our suppliers is a critical component of the program. We clearly define sustainability expectations in our supplier sourcing, qualification, and management activities. Our commitment to sustainability is also shared throughout discussions with suppliers on opportunities, investigation of sustainable product options for our business customers, and formal negotiations. While sourcing decisions are not made on a single criterion, a supplier with similar commitment to sustainability is generally preferred in extending our business.
Formally, we share our view in our Supplier Standards document. These standards set forth our expectations of suppliers, contractors, and others with whom we conduct business with respect to sound and responsible environmental, social, economic, and ethical business practices. As part of our continuing commitment to sustainable business practices and anti-corruption regulations, we expect those that we conduct business with to adhere to these standards. We also expect our suppliers to have their own guiding sets of principles and policies and to hold their own supply chains accountable for responsible environmental, social, economic, and ethical business practices.
We recognize that there are different legal and cultural environments in which suppliers operate throughout the world. Our Supplier Standards set forth the minimum requirements that suppliers must meet to do business with us. Compliance with local law and our Supplier Standards is not optional.
Our standard terms and conditions contain a contractual clause with a link to our Supplier Standards to ensure that suppliers understand the requirements and expectations.
We conduct assessments of our key suppliers to evaluate the maturity of their sustainability programs and to determine where improvements are needed. Our assessment process evaluates how well suppliers:
- Develop sustainability programs that include environmental, social, and economic aspects and require similar programs from their supply chains;
- Integrate sustainability into their business strategy and support it through their values and culture; and
- Establish quantifiable environmental goals and measure performance.
Within each of these areas, we evaluate suppliers’ positions and performance on the following topics.
Supplier Sustainability Focus Areas
|Suppliers develop and implement a sustainability program that includes environmental, social, and economic aspects; such program publicly published; suppliers cascade same to their supply base
- Labor practices
- Health and safety programs
- Business ethics policies
- Community commitment programs
- Risk management
- Financial management
- Security of supply
- Publicly disclosed policies and procedures
- Cascade principles and policies to supply base
|Suppliers integrate sustainability into their business strategy and support it through their values and culture
- Value systems
- Participation in sustainability indexes or reporting frameworks
- Incorporation of sustainability into market strategy
- Life cycle advantages/disadvantages of key products
|Suppliers measure performance and establish quantifiable environmental goals; progress on environmental goals publicly disclosed
- Environmental goals and metrics
- Recycling programs
- Measurement systems
- Public disclosure/third-party assurance
Suppliers are provided with one of four possible ratings based on the results of their assessments:
- Leading—Program is in place with public reporting;
- Active—Program is in place;
- Emerging—Has the beginning of a sustainability program but no history; and
- Lagging—No formal program.
Individually, we share with each supplier our perspective of the results and discuss opportunities for improvement. For suppliers that attain leading or active ratings, we will conduct reassessments every three years to confirm their continued focus on sustainability. Suppliers that receive emerging or lagging ratings are moved into the “Develop and Educate” and “Monitor” phases of the program.
We take an additional level of precaution with suppliers that present a risk to our businesses, considering materiality of spend, product service criticality, business needs, country of operation, or other regional criteria. In general, suppliers included in high-risk categories are subject to one or more qualification processes, including:
- Onsite inspection or audit;
- Material inspection;
- Production acceptance tests;
- Safety prequalification; and
- Customer qualification requirements.
Develop and Educate
For suppliers that fall into the emerging or lagging areas, we educate them regarding our sustainability expectations and provide them with access to tools to develop and improve their programs. We require suppliers in these categories to submit action plans and demonstrate improvements in the development of their sustainability programs.
The suppliers in the emerging and lagging categories are reassessed on an annual basis so that program progress can be measured and monitored. Suppliers that do not demonstrate annual improvements face the risk of losing our business.
We initiated our Global Supplier Sustainability Program in 2011. The assessments completed in the first year provided us with a baseline of the maturity of our key suppliers’ sustainability programs. From the initial supplier assessments, we were able to conclude that 68% of our key suppliers were rated as either leading or active.
In 2012, we evaluated additional key suppliers and worked with those that received 2011 maturity ratings of lagging or emerging to develop and improve their programs. Our key suppliers’ ratings improved as a result of our efforts, with 74% rated as either leading or active in 2012.
Supplier Assessment Results
Percent of Key Suppliers
Regional Supplier Sustainability Initiatives
In addition to our Global Supplier Sustainability Program, we have specific supplier sustainability and development initiatives in several regions. These programs are closely aligned with the global program and aim to embed our sustainability values within our regional supply bases.
The Alcoa Canada Global Primary Products program is focused on local Québec suppliers as a means to help them develop sustainability programs that align with our corporate sustainability initiatives.
In 2010, we completed a pilot project to assess more than 80 Québec suppliers in four areas of sustainability: governance, environment, social aspects, and proximity. Suppliers were scored on the assessment and were provided with recommendations for improvement.
That initiative led to our tight integration with BNQ 21000, a project supported by the Quebec government to implement a standard for sustainable development in various industries. In 2010, 12 of our Canadian suppliers were selected for one of four BNQ 21000 pilot projects, which ended in 2012 and were partly funded by Alcoa. A new pilot project was launched in January 2013 to develop specific sustainability tools for small and medium enterprises. We are again co-funding the project, in which five of our suppliers will participate.
Alcoa Canada Global Primary Products is also one of the founding members of Espace de concertation Québecois sur les pratiques d’approvisionnement responsable (ECPAR). Launched in 2008, this initiative brings together 15 public and private organizations in Québec with the goal of optimizing their efforts and sharing best practices to promote sustainability in supply chains.
In Brazil, the program is focused on finding the balance between low cost and high social and environmental commitment from our suppliers located in that country.
As we continue to grow and develop our business in Brazil, we want to ensure that our suppliers uphold our values while we reduce risk for the company. We require transparency in the supply chain and demand visibility into our suppliers’ social and environmental practices through our supplier relationship management processes.
Following the completion of a supplier sustainability pilot program in 2010, we began to systematically incorporate sustainability into our supplier evaluation processes based upon risk. We evaluate all new and existing suppliers that supply one of 16 commodities determined to be critical to sustainability. Each category contains differing supplier requirements regarding qualification and evaluation processes.
In 2012, we met all targets established for our supplier sustainability program in Brazil. We assessed 74 suppliers through the evaluation process, and we completed onsite audits with 28 suppliers to assess site conditions. We also conducted a workshop with local suppliers at our Juruti Mine to reinforce our supplier sustainability program.
During the year, we registered 2,565 suppliers in the online system that evaluates supplier compliance with a range of social and environmental dimensions. Since the system’s inception in 2010, more than 4,800 suppliers have been registered.
Our program in China is focused on the evaluation and development of suppliers located in China with the fundamental goal of achieving sustainable sourcing within the region.
New supplier assessments can include business reviews, technical assessments, and onsite audits. A typical evaluation reviews the following topics:
- Environment, health, and safety;
- Human rights and social responsibility;
- Business history, infrastructure, and financial stability;
- Production process capability and experience;
- Technical capability;
- Quality management system; and
- Logistics and transportation.
We conduct production capability and technical assessments in partnership with procurement and technical subject matter experts from the businesses. The results of the overall assessments are analyzed, and recommendations are provided for entering into business with a supplier.
We also conduct assessments of established suppliers in relation to ongoing activities. They include:
- Supplier performance management;
- Production quality monitoring, including process data tracking and statistical analysis;
- Onsite product quality validation;
- Process capability studies to identify any process deficiencies; and
- Periodic onsite audits to reconfirm the original evaluation.
In addition, we identify development opportunities for suppliers and work to help drive improvement in their quality systems, procedures and policies, and technical capabilities through root-cause analysis and corrective action plans. In 2012, we were actively engaged in evaluation and development activities with 12 suppliers that provide strategic raw materials and alloying materials.
As an additional layer of awareness, we actively monitor news about our suppliers and diligently follow up on any questionable practices reported.
Our Australian program is focused on helping develop and grow sustainable local communities in the areas where we operate. As a part of this, we are committed to proactively providing local businesses the opportunity to compete for our business.
To ensure that we are inclusive, we established a local community procurement policy. The goal of our policy is to add value to local economies by:
- Working with local business-interest groups to identify local suppliers and spread awareness of business opportunities;
- Inviting capable suppliers to bid on locally supplied or locally manufactured goods or services;
- Structuring bid packages to enable local supplier participation, where possible; and
- Giving preference to local businesses in competitive situations.
For major initiatives where we have identified local supplier participation, a cross-functional team determines bid strategies and award decisions. Additionally, we encourage national and global suppliers to connect and partner with local suppliers wherever appropriate.
Some of the overall benefits provided to local businesses include the award of short- and long-term contracts and downstream benefits from our extensive apprentice training programs and traineeships.
Sustainability of Alcoa Procurement
In addition to a strong supplier sustainability program, there are several unique aspects to the global procurement function at Alcoa that contribute to our overall sustainability.
Procurement is considered one of our five key parental advantages as a company. A parental advantage reflects our belief that the power of the company as a whole is greater than the sum of the individual businesses. Procurement parental advantage is based on leveraging spend, expertise, and structure to deliver more value at the lowest cost to Alcoa businesses throughout the world.
We achieve results and ensure control through a framework that includes:
- Strong purchasing standards;
- Continuous spend management;
- Collaborative environment; and
- Active risk management.
To ensure adherence to our values and integrity, we have established a set of common procedures contained in the Alcoa Global Procurement Procedures Manual (GPPM) that clearly identify control requirements and are designed to both provide a structured work environment and mitigate potential business risk. All global procurement personnel, including temporary employees and contractors acting on behalf of Alcoa, follow the GPPM procedures. In addition, our procurement employees are responsible for adhering to all applicable government standards and regulations.
To recognize and avoid unacceptable business conduct in the course of exercising job responsibilities, all procurement personnel (including long-term contractors) are required to participate in business conduct training through Alcoa’s Ethics and Compliance Program. Additionally, those individuals working in roles where they face business conduct risks are enrolled in the ethics training program managed through Alcoa’s Ethics and Compliance Department. Business conduct risks include dealing with and awarding commitments to suppliers, having access to commercial information relevant to Alcoa or its suppliers, and entering into commercial transactions that require regulatory compliance.
On an annual basis, we test our GPPM, standard operating procedures, and ethics and compliance training activities through our Alcoa Self Assessment Tool (ASAT) to ensure financial control and business process compliance. ASAT testing allows us to identify financial and business risks, assess the adequacy of existing controls and processes, verify processes are operating as designed, identify process improvement opportunities, and identify and transfer best practices.
Spend management is a holistic and continuous approach to controlling and optimizing the money Alcoa spends. Utilizing this methodology, we continuously and systematically evaluate our spend to identify additional opportunities to reduce overall costs.
Our spend-management process cycle starts and ends with category management. Strong category management strategies establish the framework for optimal spend execution. Resulting commercial agreements govern the spend terms, while standard requisition-to-payment processes guide and control the efficient execution of transactions. The transactional data are then collected and categorized into a spend profile, which is analyzed in the identification of the next opportunity for category management.
Spend Management Process
Our spend-management framework provides us with the visibility to leverage our spend categories across our businesses. With this leverage, we are able to work across the supply chain to increase the value provided to the businesses by managing:
- Demand—Reduce usage, complexity, and variability;
- Total cost of ownership—Move beyond price to a full-cost approach, including specification optimization and standardization;
- Price reductions—Achieve the best possible price; and
- Supply assurance—Ensure adequate supply of materials required for our businesses to operate.
We establish spend-reduction teams in each major commodity area and benefit from the full support of our chief executive officer and the Alcoa Executive Council.
We set targets for each team that are jointly owned by the businesses and procurement. This joint ownership provides accountability for the results, links business and procurement leadership, and allows all available options to be explored for the delivery of optimal value.
Our teams systematically review all spending, challenge all assumptions, collaborate across functions to drive cost savings, and address demand management, sourcing, and process levers. Results are tracked and aligned between reported savings and bottom-line financials.
As a world leader in primary aluminum, aluminum fabrication, and alumina, we are dependent upon the supply of refining and smelting materials, alloying metals, chemicals, coatings, and energy.
As part of our value-chain management, we work to actively manage risk for our businesses using an established model that consists of a comprehensive approach to evaluating cost, availability, and demand.
Procurement Risk Management Model
In the development of our category strategies, we seek to identify and mitigate potential risks as they relate to price volatility, supply availability, and customer demand. To identify the risks, we conduct a thorough assessment of the competitive landscape, supply base composition, market dynamics, and criticality of the category to Alcoa. This assessment also takes into consideration the impact that environmental, geopolitical, regulatory, and resource risks may have on our category areas now and in the future.
Our category strategies are presented at periodic leadership review sessions where stakeholders have the opportunity to question and challenge the proposed strategies before they are finalized and communicated within the organization.
Section 1502 of the U.S. Wall Street Reform and Consumer Protection Act, known as the Dodd-Frank Act, and U.S. Securities and Exchange Commission (SEC) rules require subject companies to disclose whether conflict minerals that are “necessary to the functionality or production of a product manufactured or contracted to be manufactured by such person” originated in the Democratic Republic of the Congo (DRC) or adjoining countries. The Dodd-Frank Act directed the SEC to adopt related disclosure requirements. The SEC issued final rules on such disclosure in 2012, and the regulations are effective for reporting on the 2013 calendar year.
Conflict minerals are defined as columbite-tantalite (coltan), cassiterite, gold, wolframite, or their derivatives, which currently are limited to tantalum, tin, and tungsten.
Certain of our products require the use of tantalum, tin, and tungsten or alloys containing tantalum or tungsten. We purchased approximately US$72 million of these metals, or alloys containing these metals, from 26 suppliers in 2012.
We are in the process of gathering information to enable us to verify which products we manufacture (or contract to manufacture) contain conflict minerals and are endeavoring to conduct due diligence on the origin or source of such minerals.
We are not aware of any conflict minerals being used in the production of products that we sell that are not DRC conflict-free. Due to a lack of origin transparency in many supply chains, however, we are unable to state with certainty at this time that conflict minerals that are not DRC conflict-free were not introduced into our supply chain and ultimately used in the production of the products that we sell.
We are continuing with our due diligence in preparation for our first reporting on conflict minerals, which will be completed no later than May 2014 for the 2013 calendar year. This information will be made available on SEC Form SD.