Regulatory Compliance

Whether you’re directly affected by EU REACH regulation or not – you shouldn’t miss what Jan-Willem Scheijgrond, Senior Director of Environment, Health & Safety at Philips has to say in this interview with SSON's Barbara Hodge. The division of the field into "risk" and "non-risk" suppliers (and markets) applies to shared services delivery just as well. Along the way, Jan-Willem outlines third party databases, policing mechanisms, cross-industry collaboration, and typical reasons suppliers cite for not wanting to get on board. All great stuff, and one of my favorite interviews this year. Plus: it’s nice to know that baby-bottles are safer as a result of his team’s (and Infosys’s) efforts.

Jan-Willem, could you start by introducing yourself and your role? What are your responsibilities at Philips?

I'm Senior Director, Environment, Health and Safety within the Corporate Sustainability office. The Corporate Sustainability Office is responsible for the policies and programs, and for reporting on the sustainability performance of the entire Philips organization, across the three sectors we operate in, namely Consumer Lifestyle, Lighting, and Healthcare. My primary responsibilities are the implementation of substance compliance over all three sectors.

I'm also responsible when it comes to Risk and Reputation Management in the areas of legislation, NGOs, investors and other stakeholders, who might have concerns about our sustainability performance, or the sustainability performance of our supply chain – whether to do with substances, social legislation, or health & safety legislation.

Responsibility for the risks inherent in your supply chain is a fairly enormous task. How are you communicating with the supply chain to make sure you are aware of any inherent or potential risk factors?

We've done this in two different ways: First of all, we set up a Supplier Sustainability Declaration about nine years ago, as well as a Philips Regulated Substances List. The Supplier Sustainability Declaration requires each of our suppliers to sign up to a code of conduct, whereby they respect certain environment, health & safety, ethical and social criteria – criteria that we have harmonized with the IT and electronics industry, and which we audit as well.

Secondly, we ask all our suppliers to sign that they comply with the Philips Regulated Substances List, which is a list of substances, which are either banned, should be declared or regulated, or we just don’t like them. They need to attest to the fact that those substances are not in our products, meaning are not in the parts they supply to us that go into our end product. Of course, we may also test those products ourselves.

How would you measure a supplier’s compliance with either of these – the sustainability regulation or the banned substances? What's your policing mechanism?

Our policing mechanism for the Supplier Sustainability Declaration – ie, concerning ethical environment health & safety as well as social standards – is based on how we distinguish our supplier groups. We identify as "risk suppliers" those that are based in countries where there is poor law enforcement, especially in terms of social and environmental issues. "Non-risk suppliers" on the other hand would be based in regions such as Europe the United States, or Japan, where you can rely on the government and the community to enforce environmental and social laws, ie, where law enforcement is strong. We have about 1,000 "risk suppliers," which we audit every three years. We also send in an external audit team to follow up on our internal audits, and to check conformity, and run improvement programs; so that covers the Supplier Sustainability Declaration side.

When it comes to the Regulated Substances List, we’ve always relied on paper declarations from our suppliers. However, when in 2007 the EC introduced the REACH* regulation (Registration, Evaluation, Authorization and Restriction of Chemical substances), we felt that a regulated substances list declaration on paper was no longer sufficient to manage compliance across the supply chain, because the list of substances would be changing every six months, as new substances were being added.

Considering the thousands of suppliers that we – and many companies like us – work with, you can imagine the amount of paper and administrative workload to manage the process. So we decided to switch to a platform, BOMcheck, which is an industry-wide platform that we helped develop. Suppliers can now log on to that tool to update their declarations against a managed and regularly updated list of substances. We can validate those declarations online, and are able to automatically integrate this data into our own IT systems.

So you put your faith in a third-party database to regulate the supply side?

Yes. Now I should explain: this is a third-party database managed by a consultant, whom the industry has appointed, called Environ. They have a track record of working with governments, and industry sectors and are experienced in developing tools to comply with legislation, so they have good credibility. Environ developed BOMcheck** in accordance with industry specifications. A number of companies from our industry – Siemens, GE, and Electrolux – got together to set up this database. We collaborated to produce a list of chemical substances to ensure our suppliers deliver a product that is compliant with the law, and according to our own specific regulations and requirements.

So that is the tool that we're using. We've rolled it out to about 1,400 suppliers so far. As you can imagine, that is a huge exercise and we knew that we wouldn’t be able to provide the resources to do that ourselves. So we are working with Infosys to help us with the deployment. We need to educate our suppliers as to why they need to do this, how to get online, and how to make these declarations online instead of sending us a piece of paper. It’s a pretty standardized process.

When was BOMcheck initiated?

We deployed in March 2010.

So you’ve been operating BOMcheck for two years now. Of these 1,400 suppliers you mentioned, what percentage of them falls into the risk suppliers? Presumably if you can get your risk suppliers on to this database it would make your life a lot easier?

We're not that far yet. The risk suppliers, which I talked about for the Supplier Sustainability Development, are based on geographical location. For BOMcheck, the regulated substances list, we've also tried to identify risk suppliers, but in this case we define risk as inherent to suppliers who provide products, which, due to the nature of their composition or due to the nature of the end user, would pose a risk in case something goes wrong. For example, we sell the AVENT brand, which makes baby bottles. I don’t need to tell you that it is vital that those baby bottles are squeaky clean, that there's no substance of any concern at all in those bottles – because if you get the mothers of the world on your back, you're gone, as a brand. So risk suppliers include any that supply materials that go into our baby bottles, or anything to do with baby and mother, and healthcare and wellbeing.

If we combine the two risk categories, in other words those that supply produces that may pose a risk (e.g. plastic for baby bottles) and suppliers from developing or emerging countries, where we know there is not a lot of knowledge about chemicals – say China – then that also puts you in our "risk supplier" category. So far, of the 1,400 suppliers in BOMcheck about 700 are deemed "risk suppliers" over the three sectors we cover. We’ve prioritized these 700 and have really chased them and are constantly checking them. We have face-to-face classroom meetings with them, to explain how important BOMcheck is, and to enforce that their declarations need to be reliable, because we run checks ourselves, from time to time.

What is your strategy for getting a supplier onto the BOMcheck system? What were the incentives you used? What support do you provide? And how was the outsourced partnership with Infosys leveraged?

The storyline, which we've developed with Infosys, and which Infosys has deployed for us is that every supplier to Philips has the responsibility to comply with the regulated substance list. Now, in the past, as I explained, you did this by signing a piece of paper. That was easy because you were either complying with all the bans or you were not. But the introduction of REACH meant this list was changing every six months, and it was no longer just applicable to a company at large, but it was applicable to every single component they sell. So if a company has 1,000 parts that they sell to us, in the past they would have been able to sign one declaration, but now they need 1,000 declarations. Obviously, that involves an enormous cost to that company, and it is a cost that is repeated every six months. In addition, we at Philips would probably have slightly different requirements than the folks at Siemens, etc – so it was felt that it was in everybody’s interest to simplify and harmonize the list across our industry – in other words, we’ve made one list for all. It costs our suppliers very little to join – €300 for a year – and takes little time to update. On top of that, we have provided information in BOMcheck to help them understand the chemistry of their products, because most people don’t understand what chemicals they can find in their cables or in their plastics or in their textiles. So we've provided a service, if you like, and we offer support – through Infosys – to help them, step-by-step, in using the tool. Through Infosys we provide free training and hotlines, which they can call at any time to get help in making these declarations.

Once they’ve received the training etc, most suppliers have an "aha" moment – when the simplicity of it all falls into place. But it can be a struggle to get them there and that’s where we knew we needed an additional resource. The beauty in using Infosys is that – through the operations they have in China and Poland – they offer support, whether online or on the phone, in multiple languages. So Germany gets the forms in German and is offered support in German, and so on. Allowing our Italian suppliers or our Chinese suppliers to speak to somebody in their language, and to see the tool in their language, that has really simplified things, and I think that's why those people who are in BOMcheck are quite excited about it.

What about the cost involved with the whole BOMcheck transition?

Let's not forget that we're transitioning to a world whereby there will be more regulations about dangerous substances. In the last 50 years we've basically been able to use whatever substance we've found; that is changing. So we all need to understand that the risks of putting a product on the market with the wrong substances has increased, and therefore the compliance costs have increased for everyone.

To manage rising costs of compliance, we need to collaborate – across the industry and with our suppliers. We need to team up and share information across our supply chain. You can only do that if you choose an online tool. There's no way you can do this as an individual company, or through a paper-based system.

We at Philips, together with Siemens, GE, Osram, etc, have invested money in this, because we know that as A-brands we cannot afford to run the risk of having the wrong substances in our products. By combining our chemical experts in one group and collecting all the chemical knowledge that we have, and by putting that knowledge into BOMcheck, and making it available free of charge to our users, we are providing a huge support to compliance efforts. Our suppliers only need to pay a license fee of €300 a year to get secure log-on details; to guarantee their data’s confidentiality; and to get free training. The system provides the risk profiles, and tells them what to test and what not. So we guide our suppliers through what might otherwise be a very cumbersome and costly process.

You are working with your competitors to collaborate on BOMcheck. Was this a difficult decision?

There's no competitive edge in damaging the environment. There's no competitive edge in selling toxic-free products to consumers. As competitors we do work together in certain areas, in the interests of consumers, because we all have the same interests at heart.

When a supplier calls a hotline that is maintained by Infosys, do they know that they're speaking to a subcontractor, or do they think they're speaking to someone from Philips?

The two teams are actually based in China and Poland, and they sign off with a Philips email, so suppliers may be under the impression that they are speaking with someone from Philips. And in this situation, of course, the Infosys team is an extension of the Philips team.

How do you collaborate with Infosys?

We use Infosys to measure our progress in BOMcheck. We review all the data with them, we work on ways to improve our convincing power over suppliers, and we also constantly evaluate how Infosys can develop new competencies for us, to help us towards maturity in substance management.

Are there some recurring reasons suppliers cite for why they are hesitating to move to BOMcheck?

Yes, and it's good that Infosys collects those so that we can formulate answers on these questions. The first one we always get is: Why is Philips the only one asking us to do this – meaning BOMcheck? Well, someone has to take the lead in rolling it out and it happens to be us. But that question is getting asked less now that there are more and more companies adopting BOMcheck.

The second thing we hear is that that information must be confidential. "We don’t want to put it online. We don’t trust the system." So we can show them the reports that prove its confidentiality. People still tend to believe more in paper than in online systems, and there's some hesitation. But we don’t believe there's anything confidential in telling your consumer that there are no toxic substances in your products.

The third most asked question relates to administrative issues: "We don’t know how to pay for this," or, "We have some issues with the registration online."

At the start there were also some technical issues, and it was great that Infosys was able to collect those details across geographies, so we knew that in India we're experiencing this problem, in China that problem. It made it easier to address them.

The alternative to partnering with Infosys would be to provide your own staff. Did you consider this?

Yes, of course that's something we considered, and the maths was very simple. There was no way that we could have insourced this. Also the flexibility, which Infosys offers is important. At the beginning, we initially thought that most of the support would be necessary in Europe, and the United States. We quickly realized though that support was needed mainly in China. So we were easily able to move capacity to China, by leveraging Infosys’s operations there. As a company, we can't just switch people from Amsterdam to Shanghai overnight, whereas Infosys can, because of their structure, manage those fluctuations. We simply could not compete with Infosys on these kinds of services.

Jan-Willem, thank you for taking the time to speak with me.

* In 2007, the European Commission introduced chemical/substance-related legislation known as REACH (Registration, Evaluation, Authorization and Restriction of Chemical substances), which has far-reaching [no pun intended!] implications for communicating the presence of a number of "listed" substances in any of the products produced by an organization. To add some complexity: every 6 months, new substances are added to the list. What's required, therefore, is an excellent communication vehicle between a company and its multitude of suppliers, so that the existence of a given substance can, at any time, be verified and communicated. Any company that is involved in manufacturing products needs to be in compliance.

** www.BOMcheck.net