1 Environment and Business, Part VI Outsourcing in China: How to control environmental issues? Philips example Prof. Dr. Ir. Ab Stevels Chair of Applied EcoDesign Design for Sustainability Dept. Design Engineering, School of Industrial Design Delft University of Technology

2 Outline About suppliers and outsourcing China is not special and special too! Environmental supply chain management Sustainability management Conclusions

3 Why outsourcing of production by high-tech companies Investment reasons Focus on R&D Focus on Core Technology Focus on Brand Identity Economy of scale needed! Cost reasons Labor cost Cost of parts, materials Costs of organization

4 Why outsourcing for Philips? Huge investment in R&D ( but also income from patents) Investments in core technologies (incl. achieving economy of scale) : - Lighting - Medical – Consumer Lifestyle Investments in Brand Identity Competitors ( China, …) are cheaper!

5 Forms of outsourcing R&DSpecificationDesignAssemblySubassemblyComponents /parts Integrated production++ Production with suppliers Subcontracting Partial outsourcing Complete outsourcing

6 Why Philips investment in China? Company Core Activities Tap on Chinese Intellect (Lab); generate income from patents Sell core technology solutions (parts, subassemblies ) Sell products on the local market (high end) Outsourcing Costs of parts, materials Labor, organization cost Your competitors do it as well!

7 What is special in China? Requirements:Global Philips standards apply  nothing special Operational:Cultural background (Confucianism) Engineering and Science Environment / sustainability perception

8 Cultural background is different Perception of human beings: all equal or not so equal? Two worlds: how it should be and how it is Truth (“theory”) or practical results Relationships count, contracts do not Nature is basically an enemy Culture of learning

9 Environmental Supply Chain management ISO implementation: works well Chemical content: is difficult Please the customer Inner focus Environmental issues in production: money versus performance EcoDesign / Outsourcing: tendency to suboptimalization Examples: packaging / transport and energy consumption of products

10 What is currently done? Each Business Unit/ Division has specific items (“no one size fits all”) Many locations, many subcontractors/suppliers in different regions Limited capacity – ‘exploding’ activity ! ‘Sustainability’ to be included!

11 Also Supply Chain Management moves from an environmental to a wider sustainability context Next to environment to be incorporated: Codes of conduct: business principles integrity of business partners Employees / Human resource management Economic performance in a wider sense Societal responsibility: communities, sponsoring  Triple bottom line, profit, people, planet

12 Commonalities to all these aspects Have principles, policies, procedures how to handle Have a program with tangible targets Measure progress, performance Reward, recognition, sanctions Also to be applied to all suppliers on a global scale

13 Examples: codes of conduct Global Business principles – Anonymous hotlines Code of Ethics for financial executives – Business control, audits Child labor issues in de supply chain – audit by thirds Business Excellence Model for motivation

14 Examples: Human resources Company values in job description, appraisal Satisfaction surveys (anonymous) Personal growth (career center) Trade unions, Employment Heath and safety statistics

15 Examples: economic performance Employment, added value statistics Wage bills, contribution to local economy (suppliers) Share price Technology / innovation contributions Production (re)location

16 Examples: Social Responsibility Employee engagement in communities Contribution to quality of life (education and health) Sponsoring (cultural, nature, university research) Meaningful technology, empowerment

17 Philips action to handle China environmental issues Set up environmental / sustainability center in Shanghai Hire and train Chinese managers for it Do pilot projects Basis = global requirements Demonstrate ‘Chinese style’ Involve Chinese governments, Academy of Science, Universities

18 Conclusion Know: Why, What, How A lot to do! It can be done!