SUSTAINABILITY AT PHARMA IBER S.A.

: Supplier Code of Conduct1

Cristina Gimenez, Joan Rodon, Cristina Sancha

ESADE Business School
Universitat Ramon Llull

On December 2009, Daniel Hernan, Head of Procurement & Trading in the Spanish
division of PHARMA IBER Components, was entrusted with the task of implementing the
Supplier Code of Conduct (SCoC) in PHARMA IBER S.A.. The SCoC, which had just
been designed by Headquarters in Germany, defined a set of sustainability principles for
suppliers that influenced providers’ selection and evaluation. Mr. Hernan was looking
through the window of his office at Sant Cugat del Vallés, Barcelona, outlining an
implementation plan for the SCoC at PHARMA IBER S.A.. In two days he had to travel
to Headquarters and present the plan to the Head of the Board for Sustainable
Development and he still had to clear up some issues.

PHARMA AG

PHARMA AG was a German company with global headquarters in Munich, Germany. In

2009 the PHARMA Group was a global enterprise with companies in almost every
country (Exhibit 1).

• Asia-Pacific: with its tremendous growth potential, this economic region was one
of the most important markets of the future. In 2009, PHARMA generated €7,481
million in sales here – 21.3% of the Group total – with 24600 employees.
• Europe: In 2009, PHARMA achieved sales of €13,751 million on the European
market, which accounted for 39.2% of the Group total. Numerous major
production facilities and 54,300 employees (of whom 36200 were based in
Germany) gave the company a strong presence in this region.
• North America: In North America (United States and Canada), PHARMA was
represented in all strategic business areas. In 2009 PHARMA’s 16400
employees in this region generated sales of €8,228 million, which was 23.5% of
the Group total.

1 The authors prepared this case as the basis for class discussion rather than to illustrate either effective
or ineffective handling of an administrative situation.
 • Latin America/Africa/Middle East: PHARMA had been present in Latin
America for more than 110 years. In 2009, the company’s 16100 employees
in the Latin America/Africa/Middle East region generated 5,628 million in
sales – 16 % of the Group total.

Regarding its mission, “PHARMA: Working for a better world and life”, the group was
committed to the principles of sustainable development and to its role as socially and
ethically responsible corporate citizen. Over the years, PHARMA had become a global
enterprise with core competencies in the fields of health care, nutrition and high-tech
materials. In fact, the company activities were divided into three divisions (MedicalCare,
Agrisolutions and Components) and three service areas (Business, Technology and
MISC). The three divisions and the three service areas operated independently, led by
the Group Management Board. The Corporate Center supported the Group
Management Board in its task of strategic leadership (Exhibit 2).

On December 2009, the PHARMA Group had more than 108000 employees worldwide
and a sales figure of € 31.2 billion. Moreover, capital expenditures amounted to € 1.7
billion and R&D expenses to € 2.7 billion (Exhibit 3).

PHARMA IBER S.A.

The PHARMA Group was organised by geographical areas: Europe, North-America,

Asia-Pacific and Latin America-Africa-Middle East. The European area was, in turn,
structured in 18 regions, among them we found the Iberia area, which included Spain
and Portugal.

In Spain, PHARMA had become a leading company in the pharmaceutical/chemical

industry thanks to its continuous development. PHARMA IBER S.A. headquarters were
located in Sant Cugat del Vallés (Barcelona) and the company had several production
centres located in different Spanish regions. The company was also organised mirroring
PHARMA AG organisation. This way PHARMA IBER S.A. had three divisions:
MedicalCare, Components and AgriSolutions.

PHARMA IBER S.A. contributed in different ways to the group’s international success.
In fact, PHARMA IBER S.A. had some areas that provided services to other PHARMA
companies in the world. In 2009, it has about 2,600 employees and its sales amounted
to €1,047 million.
Procurement Management at PHARMA IBER S.A.

In PHARMA IBER S.A., the purchasing function was organised following the next
structure: each division (MedicalCare, Components and AgriSolutions) had its own
Procurement Department leaded by its corresponding Head of Procurement. At the
same time, these three Procurement Departments were enshrined in PHARMA IBER
S.A. Procurement Community whose spokesperson was Daniel Hernan (Head of
Procurement in the Components division). This way, regardless of which division the
procurement employees were assigned to, they remained members of their country
Procurement Community (Exhibit 4).

By following this new concept, the tasks of the procurement function were assigned to
the divisions according to the major-user-principle2. As a result of this organization of the
procurement function, there were decentralized but globally positioned procurement
functions that had been integrated into the operations activities of the divisions. Because
of that, PHARMA classified its procurement volume into synergetic4 and a non-
synergetic. Synergetic procurement volume was defined as comprising those materials
and services that were required by more than one division, and non-synergetic
procurement volume comprises those purchases that were specific to one division.

“One voice, one company” was the motto of PHARMA IBER S.A. procurement
organization, the Procurement Community. As mentioned before, in the distributed
procurement organization within PHARMA, the advantages of decentralized
procurement functions (proximity to internal customers) were combined with the benefits
of a centralized procurement (synergies).

2 The major-user-principle established that if a product was required by more than one division then the
division that consumed the highest quantity of this product was in charge of buying it for all divisions. For
example, in PHARMA IBER S.A., AgriSolutions Procurement Department was in charge of purchasing active
ingredients since AgriSolutions’ consumption volumes were higher than in other divisions.
3 In these case synergies basically come from economies of scale.
PHARMA IBER S.A. Suppliers

PHARMA IBER S.A. had more than 1000 suppliers; most of them located in Spain.
Taking into account that regulations and laws regarding environmental and working
conditions issues existed in Spain, environmental and social risks could be considered
relatively low with respect to other countries with less restrictive rules.

The products and services that PHARMA IBER S.A. bought could be categorized
according to the following procurement areas: active ingredients, trade goods, industry
packaging, consumer packaging, contract manufacturing, marketing services, logistics,
energy, R&D services and medical devices. The importance and relevance of those
products depended on two main variables: profit impact5 and supply risk6. That is, each
product had a different impact on profit and a different supply risk. For instance,
packaging products could be considered as having a low supply risk since they were
easy to buy –meaning that they had a standardized quality and there were several
suppliers for these products–, and their impact on the profit and loss account (P&L) was
relatively low. On the other hand, some active ingredients were considered to have a
high supply risk, since there were only two suppliers who provided them, and hence
PHARMA IBER S.A. was highly dependent on those suppliers. Moreover due to their
high purchasing cost, their impact on the P&L was also high.

PHARMA IBER S.A. constantly monitored and assessed its suppliers. The monitoring
process comprised a questionnaire by which they tried to find out if a supplier followed
all the procurement conditions agreed on the supply contract. This monitoring process
also involved some audits which frequency depended on the type of supplier. The riskier
the supplier was the more frequent the audit was carried out. With new suppliers,
PHARMA IBER S.A. performed an accreditation process in order to assure that their
principles were aligned with those of PHARMA. Finally, in the case that two different
countries had a common supplier, then that supplier was managed from Headquarters.

5 The profit impact refers to the strategic importance of purchasing in terms of the value added by product
line, the percentage of raw materials in total costs and their impact on profitability.
6 The supply risk refers to the complexity of the supply market gauged by supply scarcity, pace of
technology and/or materials substitution, entry barriers, logistics cost or complexity, and monopoly
or oligopoly conditions.
PHARMA IBER S.A. Sustainability Management

For PHARMA, a corporate management strategy oriented to values and sustainability

was the key to lasting success. Sustainable development formed an integral part of their
corporate policy, which was geared towards long-term success and high-quality
solutions. PHARMA’s vision was to achieve sustainability in everything they do. Because
of that, PHARMA had started to link the variable remuneration of its executives directly
to success in the sustainability arena. The sustainability criteria were included in the
annual performance objectives of executives. The aim was to ensure a close link
between sustainability targets and variable compensation components throughout the
Group.

PHARMA conceived sustainability as having three main dimensions:

1. Products and innovation: the basis of their strategy comprised their products
and innovations, which created value for their business and society.
2. Business practices: PHARMA’s everyday business practices in dealings with
their suppliers, employees and customers were aligned to sustainability. Core
areas include compliance, product stewardship, a responsible human
resources policy and sustainable supplier management.
3. Corporate Social Responsibility: through their foundations and voluntary
social activities PHARMA focused on tasks with a particular social relevance
and with a connection to PHARMA.

Moreover, their focus on sustainability was underscored by their commitment to uphold

the 10 principles of the United Nations (UN Global Compact) (Exhibit 5) and to the
Responsible Care® initiative of the chemical industry (Exhibit 6).

On this basis, PHARMA developed Group-wide directives covering issues such as

Health, Safety, Environment and Quality (HSEQ) audits, donations and process and
plant safety designed to ensure that their sustainability strategy was consistently
implemented in all parts of the company and along the entire value chain. PHARMA
followed the principle that a company was no more sustainable than its supply chain,
which lead to the statement that a company was no more sustainable than the suppliers
that were selected and retained by the company. Accordingly, sustainable purchasing
management was a key factor when extending sustainability across the supply chain.
This way, PHARMA Procurement Department played a leading role in achieving
sustainability. In fact, the policy guideline of the Group-wide Procurement Community
supported the principles of the UN Global Compact, PHARMA’s values and
leadership principles, and PHARMA’s position on human rights and labour conditions.
Moreover, PHARMA had combined all of its fundamental sustainability standards and
requirements for its suppliers in a Supplier Code of Conduct (SCoC).

Responsibility for defining and steering PHARMA’s sustainability strategy lied at the top
management level. The PHARMA Community Board for Sustainable Development (CB
SD) was responsible for steering PHARMA’s sustainability strategy across the PHARMA
Group. Headed by the member of the Board of Management responsible for Innovation,
Technology and Environment, this body each year defined goals, adopted corresponding
group directives and monitored the implementation of the measures involved. Further
members included one management board director from each of the subgroups, the
managing directors/executive board chairmen of the PHARMA service companies, and
the heads of six Corporate Development Departments. The CB SD was responsible for
designing the SCoC and its evaluation questionnaire.

Supplier Code of Conduct and Evaluation Questionnaire

PHARMA expected all of its suppliers to share the principles which were expressed in
their SCoC and which represented an important component of the supplier selection and
evaluation processes. The main goal of the SCoC was to strengthen the understanding
of how sustainability should be practiced in day-to-day business.

The SCoC comprised the following areas:

- Ethics: to meet social responsibilities, suppliers were expected to conduct their

business in an ethical manner and act with integrity.

- Labour: suppliers were expected to protect the human rights of their employees
and to treat them with dignity and respect. For example, the prohibition of
corruption and child labour, the observation of human rights, and the assurance
of product and workplace safety and health protection.

- Health, Safety, Environment and Quality (HSEQ): suppliers were expected to

provide a safe and healthy working environment and to operate in an
environmentally responsible and efficient manner. Moreover, suppliers would
integrate quality into their business processes. For example, the responsible use
of natural resources.
 - Management Systems: suppliers were expected to implement management
systems to facilitate adherence to all applicable laws and to promote continual
improvement with respect to expectations set forth in the SCoC.

Finally, the implementation of the SCoC was steered by the Procurement Department
and specifically by the spokesperson in the Procurement Community.

Regarding the evaluation questionnaire, it comprised a total of 54 questions regarding

the four areas of the SCoC (Ethics, Labour, HSEQ and Management Systems).
Suppliers must fill it in taking into account their current situation regarding each aspect
and give it back to PHARMA. Then, PHARMA analysed the questionnaire results and
evaluated the suppliers’ performance accordingly.

Next Steps

Daniel Hernan was aware of the crucial role Purchasing Management played when
extending sustainability across the supply chain. In fact, he knew that a company was
no more sustainable than its suppliers. He had heard about some companies whose
reputation had been damaged because of their suppliers’ behaviour. One company
made a huge loss when it was known that its main supplier spilt toxic waste into the sea.
If PHARMA wanted to be sustainable its suppliers needed to be sustainable. Daniel
Hernan, as spokesperson of the Procurement Community, was in charge of the
implementation of the SCoC at PHARMA IBER S.A.. This way it was time, for Daniel, to
set some priorities and answer some questions: How can he align suppliers with the
principles stated in the SCoC? Should PHARMA IBER S.A. adopt the same approach
with all suppliers? What measures should be taken in order to control that suppliers are
following the SCoC? What if they do not follow it? While he was asking himself all these
questions someone knocked on the door. It was his assistant; she had just booked flight
tickets for tomorrow at 6:00. The plane was supposed to land in Germany at 8:30, just
two hours before the meeting was due to start.
Exhibit 1: PHARMA worldwide

Exhibit 2: Divisions and service areas organization

Exhibit 3: PHARMA Group Key Data
PHARMA GROUP

Exhibit 4: Procurement Department organization

MedicalCare AgriSolutions Components Business

Technology

MISC
Exhibit 5: UN Global Compact Principles1

The UN Global Compact’s ten principles in the areas of human rights,

labour, the environment and anticorruption enjoy universal consensus and
are derived from:

- The Universal Declaration of Human Rights

- The International Labour Organization’s Declaration on Fundamental
Principles and Rights at Work
- The Rio Declaration on Environmental Development
- The United Nations Convention Against Corruption

The UN Global Compact asks companies to embrace, support and enact, within
their sphere of influence, a set of core values in the areas of human rights, labour
standards, the environment and anti-corruption:

Human Rights:
o Principle 1: Businesses should support and respect the protection of
internationally proclaimed rights; and
o Principle 2: make sure that they are not complicit in human rights abuses
Labour:
o Principle 3: Businesses should uphold the freedom of association and the
effective recognition of the right to collective bargaining;
o Principle 4: the elimination of all forms of forced and compulsory labour;
o Principle 5: the effective abolition of child labour; and
o Principle 6: the elimination of discrimination in respect of employment and
occupation.
Environment:
o Principle 7: Businesses should support a precautionary approach to
environmental challenges;
o Principle 8: undertake initiatives to promote greater environmental
responsibility; and
o Principle 9: encourage the development and diffusion of environmentally
friendly technologies.
Anti-Corruption:
- o Principle 10: Business should work against corruption in all its
forms, including exortion and bribery

1
Source: http://www.unglobalcompact.org/aboutthegc/thetenprinciples/index.html
Exhibit 6: Responsible Care initiative 2

Responsible Care is the chemical industry’s global voluntary initiative under which
companies, through their national associations, work together to continuously
improve their health, safety and environmental performance. Through Responsible
Care industry communicates with stakeholders about its products and processes,
and cooperates with others in the value chain in the manufacture, supply and use of
products that bring real benefits to society.

Associations sign up to Responsible Care through ICCA which acts as “guardian” of

the Initiative. ICCA’s Responsible Care Leadership Group monitors implementation
and ensures Responsible Care evolves to address current concerns and issues.
Each association runs its own national or regional programme with its member
companies. Launched in Canada in 1985, the number of chemical industry
associations embracing the Responsible Care ethic has grown significantly. At the
end of 2009, 54 chemical associations in 60 countries are part of this global initiative.

2
http://www.icca-chem.org/en/Home/Responsible-care/