Suppliers

Group Policies

The Health, Safety, Environment and Social Responsibility Policy expressly states the Company’s commitment “to establish and actively maintain the procedures to evaluate and select suppliers and subcontractors based on their commitment in the field of social and environmental responsibility”. Sustainability has been integrated into both the General Conditions for Purchase of Goods and Services applied by the Company to its suppliers, and the phases of Vendor Approval and Rating, described in more detail below.

The purchasing processes are described in the Purchasing Manual, which sets out guidelines and procedures aimed at ensuring both transparency in internal processes and honesty in business dealings, and also integrity and contractual impartiality in relations between the Company and suppliers.

For the most important suppliers, the purchasing policies allow for long-term contracts, partnership contracts and, in some cases, shared growth strategies.

Sustainability clauses of contract

In 2008 the sustainability clauses of contract, which had previously been applied since 2006 as an integral part of the General Conditions for Purchase of Goods and Services, were amended so that they could be implemented whether or not the General Conditions for Purchase had been signed by the supplier. In this way, all possible contractual scenarios that might bind the Company to a Supplier of goods/services are covered.

More specifically, the sustainability clauses are introduced in contracts and purchase orders for goods and/or services and/or works, including acting as agent and/or on behalf of the Company, both with private suppliers and with the Public Administration (or entities/companies controlled by them), regardless of whether or not the General Conditions for Purchase format has been signed.

The clauses envisage implementation of the policies implemented in the ambit of sustainability: Ethical Code, Code of Conduct, and the “Health, Safety, Environment and Social Responsibility” Policy. Execution of the contract gives Pirelli the right to carry out audits of its suppliers to assess compliance with the principles and commitments agreed to by signing the clauses.

The sustainability clauses have been translated into 22 foreign languages. This guarantees maximum clarity and transparency towards the supplier in terms of his sustainability obligations under contract, which he assumes not only in his relations with Pirelli itself but also at his own facility and in relations with suppliers.

So that the clauses could be signed by all Group suppliers in an accurate and traceable way, and thus promote maximum operating effectiveness and efficiency, an IT tool dedicated exclusively to signing of the sustainability clauses by suppliers was created in 2008.

This tool has been used on an experimental basis with all suppliers of raw materials and services to the Tyre Sector, sent by the Sector Purchasing Manager for online signing by means of a letter sent via e-mail to each one of them. An excerpt of this letter follows below:

Dear Supplier,

Pirelli Tyre, a leading global tyre maker, fully integrates Sustainability in its growth and competitive strategies. Our sustainable approach is formally recognised and appreciated at the international level, as well as by the world’s most prestigious indices of ethical finance, including Dow Jones and The Financial Times.

We conduct our business in accordance with the Values and Principles set out in Pirelli Sustainability documents, such as the “Ethical Code of the Pirelli Group,” the “Code of Conduct” and the Group “Health, Safety, Environment and Social Responsibility” Policy.

We are proactively committed to support for universally recognised Human Rights and Labour Rights, and to continuous improvement in the environmental impact of our processes and products, doing so in the ambit of activities and relations that we conduct every day at the highest standards of transparency and fairness.

We expect that our Suppliers, as fundamental Partners in developing the business of Pirelli Tyre, operate their own businesses in accordance with our Principles and Values, in view of jointly sustainable growth.

You will find the clauses to be signed by you in your preferred language on the Pirelli Tyre website: (http://sustainability.pirellityre.com). To access the site, please use the following log in: (XXXXX) and the following password: XXXXX

If you do not accept the foregoing clauses, Pirelli may lawfully decline to renew the procurement contract with your firm.

page_3.JPG

Home page of the website “Supplier’s Sustainability” of Pirelli Tyre.

The letter and the clauses have been submitted to suppliers in their local language. If there are any questions, a system contact is guaranteed for dialogue with the supplier.

In 2009 the management system will be gradually extended to the suppliers of all Group businesses, with local operation and control by the Buyers and CSR Referents, supported by the departments with central responsibility.

Distribution of purchased goods and services by geographical area and type

The following table illustrates the geographical breakdown of purchases made by the Group, which are distinguished as OECD and non-OECD countries, with the “weight” of the various areas on the total amount.

geographical breakdown of group purchases

  

% of number of suppliers

% of total value of purchases

  

FY 2008

FY 2007

FY 2006

FY 2008

FY 2007

FY 2006

OECD countries

Europe

51.6%

69.9%

73.1%

50.7%

67%

63%

North America

1.4%

2.1%

4.0%

1.3%

3%

6%

Others (1)

0.4%

0.2%

0.2%

0.4%

1%

2%

Non-OECD countries

Latin America

25.4%

19.0%

19.3%

25.0%

13%

15%

Asia

19.4%

7.3%

1.6%

20.9%

15%

12%

Africa

1.8%

1.5%

1.8%

1.8%

1%

2%

1 Australia, New Zealand, Japan, Korea

The following table instead shows the breakdown of purchases by type of goods and services. The table also shows the percentage weight of purchases made in each area over the total number of suppliers and over the total value of all purchases made.

breakdown by type of goods and services purchased by the Group

 

% of number

of suppliers

% of total value

of purchases

 

FY 2008

FY 2007

FY 2008

FY 2007

Raw materials

3%

6%

59%

48%

Consumables

6%

7%

5%

5%

Services

82%

80%

27%

39%

Plant and equipment

9%

7%

10%

8%

It should be emphasised that the goods and services purchased by the Tyre Sector represent 80% of all purchases by the Group. Therefore, this year was decided to dedicate focus on the relations between Pirelli Tyre and its suppliers, just as in the 2007 annual report.

Focus on Pirelli Tyre

The following table shows the distribution by type of goods and services purchased by Pirelli Tyre in 2007-2008. The table also gives the percentage weight of purchases made in each category over the total number of suppliers and over the total value of all purchases made.

breakdown by type of goods and services purchased by Pirelli Tyre

 

% of number of suppliers

% of total value of purchases

 

FY 2008

FY 2007

FY 2006

FY 2008

FY 2007

FY 2006

Raw materials

3%

7%

7%

54%

53%

56%

Consumables

5%

5%

5%

6%

6%

4%

Services

83%

80%

80%

32%

32%

32%

Plant and equipment

9%

8%

8%

9%

9%

8%

Raw materials are selected in order to reduce as much as possible the use of substances that are harmful to humans and the environment. Accordingly, Pirelli systematically evaluates the environmental and toxicological characteristics of any new chemical before using it in production processes.

Pursuant to recent European classification, labelling and packaging rules for hazardous substances and preparations, Pirelli has updated the list of substances that cannot be used in production processes, or for which replacement programmes have been initiated.

The following graph illustrates the percentage composition of the mix of raw materials purchased by Pirelli Tyre in 2008:

Raw material mix

Interaction between Pirelli Tyre and its suppliers

Relations with suppliers are defined and enforced by specific Company processes. There are two fundamental underlying phases to supplier management:

  • Approval of new suppliers (or Vendor Approval), where the interdepartmental process based on specific quality standards lead to the addition of the approved material/vendor to the Vendor List. This is the Company’s list of approved suppliers for each individual product. The sustainability limits have been integrated in this phase since 2007. This led to the signing of a sustainable development plan by a strategic supplier in 2008. The sustainable development plans can have the following targets: improvement of the environmental impact of the activities and/or relations with the internal/external community. In these situations, Pirelli know-how is provided to the supplier, in order to create a qualitatively adequate growth plan based on dialogue and in view of sustainable growth that is fully accepted in terms of values and operating procedures.
  • Vendor Rating, assessed on the basis of the quality of the product supplied or service provided (monitored using the specialised CARMAC software), the quality of the commercial relationship, technical/scientific cooperation, performance in terms of occupational safety, environmental and social responsibility through on-site audits and periodic monitoring of the progress of the actions scheduled in any improvement plans that have been signed.

The Vendor Rating now covers all merchandise and geographical areas of purchase and is used as an integral component of commercial negotiations.

These procedures are implemented by the entire sector and are supported by a special website available online through the Purchasing Portal. This website supports the Regulations (including the Purchasing Manual, General Conditions to be applied by suppliers), the Vendor List, surveys, Vendor Rating with feedback and the definition of support actions. This portal provides both an assurance of process uniformity and a guarantee of transparency, in addition to being a communications, ongoing training and knowledge sharing tool.

Cina supplier convention

Yanzhou, China. Supplier Conference 2008.

Dialogue

The processes of dialogue and interaction with suppliers are the object of continuous process improvement, in terms of both quality and tools. Specifically, the Vendor Rating results are regularly revised and commented on by the Sector Purchasing Department. This process involves meetings organised with the suppliers, aimed at identifying any corrective actions or measures to improve performance. Each purchase contract includes the name of the buyer contact, to provide the supplier with a company channel that is always available for any feedback.

In November 2008 the “1st China Suppliers Conference” was held at Pirelli Tyre China, located in Yanzhou, in order to introduce Pirelli Tyre in China and exchange questions, solutions, methods and strategies in view of development. This conference was attended by about 200 production companies of raw materials, spare parts, services and industrial goods, both locally based and large multinational groups, for a total of over 400 participants. Special emphasis was given to sustainability as a competitive advantage. Following a presentation on Sustainability at Pirelli and in relations between Pirelli and its supplier, the participants received a copy of the Pirelli sustainability clauses (which include the CSR Policy and the Ethical Code) to be signed in both Chinese and English. The initiative was a success and many of the suppliers that attended the event signed it.

Projects in 2008 and goals for 2009

Several new projects to improve the purchasing process and support relationships with suppliers were developed and implemented in 2008. In particular:

  • a business intelligence project on raw materials, which permits monitoring and managing purchases for each merchandise category and individual supplier more efficiently;
  • start-up of the project to create a data warehouse for equipment;
  • development of the IT management system for signing sustainability clauses by suppliers, which permits tracking their signatures and managing their objections on a punctual basis;
  • “One Supplier” Project, designed to maximise the traceability of and separation of roles in the purchase process for compliance with Law 262 and Legislative Decree 231.

The “Rubber Network Project” - developed in 2007 - which permits automation of the order/delivery/invoicing flow between Pirelli and its suppliers through WEB or HUB platforms, the use of Electronic Data Interchange (EDI) documents and scanning of documents continued in 2008 and reached North America with extension of the Order to Invoice project.

Specifically in regard to supplies of indirect production materials, an IT platform will be developed in 2009 for monitoring and managing expenditure in view of process efficiency.

In 2009, the “One Supplier” project is expected to be closed, and the supplier base to which the IT management system for signing sustainability clauses applies will be extended by involving buyers and local CSR contacts.

AUDIT of Supplier Sustainability

As part of its audits of supplier compliance with the sustainability clauses, Pirelli Tyre plans to subject its own Suppliers to sustainability audits in 2009 to address the following scope of activities:

  • 50% of natural rubber purchases;
  • 50% of the revenues of services purchased in countries of concern (according to the EIRIS classification of countries defined as highly at risk of corruption and/or violation of human rights).

“Starting from an unprecedented crisis in the post-war era, we have to figure out what Pirelli will be like three years from now and beyond. Industrial processes are changing, and we have focused our whole plan on transforming the company with eco-compatible technologies that will enable us to compete on the market. This means focusing research more on the green component, and this applies to tyres, to particulate filters, to all our businesses.”

Marco Tronchetti Provera