"Sustainability in the supply chain is the guiding principle of our business"

Procurement plays a crucial role when it comes to the long-term transformation of our company. After all, the decisions made here have far-reaching consequences, for example for the CO2 footprint of our vehicles or compliance with human rights in our supply chain. Gunnar Güthenke, Head of Procurement and Supplier Quality at Mercedes-Benz, on challenges and new standards on the way towards the electric age.

Mr. Güthenke, what does a procurement manager pay attention to when he goes shopping for himself?

Exactly what I would pay attention to if I had a completely different job: the quality, price and origin of the products – and of course issues such as environmental protection and human rights. In my opinion, as consumers, we often underestimate the impact of our purchase decisions on these aspects of sustainability.

The fact that price and quality play an important role in procurement decisions at Mercedes-Benz does not come as a surprise. What's the situation with respect to sustainability?

In procurement, we aim to select suppliers in order to ensure top quality, sustainable materials and parts, and also innovations, that fulfill our promise of luxury. That is what Mercedes-Benz is all about. Therefore, we select suppliers first of all on the basis of innovation, quality and sustainability. Among the leading suppliers who meet our goals in the three categories mentioned, it is of course a matter of ensuring cost-effectiveness for our company. Of course, achieving efficiency as partners is also important.

Dr. Gunnar Güthenke has been Vice President Procurement and Supplier Quality at Mercedes-Benz Cars since July 2019. From the central office in the Stuttgart region, and regional hubs in China and the US, as well as other procurement offices in Mexico and India, the unit manages around 2,000 direct suppliers worldwide. Gunnar Güthenke has been working for Daimler for 19 years, among others in the pProcurement and the After-Sales devisions of Mercedes-Benz Trucks. Most recently he headed the G-Class Division and was CEO of Mercedes-Benz G GmbH in Graz.

Does the issue of sustainability not also affect the price?

Back in the 90s, we had similar discussions regarding the conflict between quality and price. Today we know that quality also benefits costs. We are currently working very actively with our suppliers on necessary product and process innovations in order to resolve the conflict between sustainability and costs, too. Because we have made sustainability an important contract award criterion, it can of course increase costs sometimes. That is clear. In some cases, we have to discuss and deliberate decisions more extensively. However, these discussions repeatedly show that everyone in our company is now aware that we can only achieve the ambitious goals of our sustainable business strategy if we focus on sustainability already in our supply chains. The solutions are not trivial, which is why we are already tackling the necessary processes today – instead of waiting until 2039.

The discussion about human rights in the supply chain focuses in particular on raw materials, which are required for the electrification of our vehicles, but are in some cases mined under conditions that are critical in terms of human rights. One example is cobalt. What approach is Mercedes-Benz taking?

At Mercedes-Benz, we do not generally exclude countries of origin viewed as high-risk such as the Democratic Republic of the Congo as sources of cobalt. Instead, we implement a variety of measures aimed at improving the situation for the local people and strengthen their rights. I believe that this is exactly the right approach. After all, withdrawing from high-risk countries of origin does nothing to improve the situation of the local population, and may even exacerbate local problems. We, on the other hand, want to address these problems and initiate change.

Certainly not an easy decision.

Indeed, we discussed the pros and cons extensively, both internally and with external experts. However, our decision follows the recommendation of many non-governmental organizations - some of which we are in regular contact with - political agencies and other stakeholder groups. Furthermore, it is in line with the United Nations Guiding Principles on Business and Human Rights – one of the most important human rights frameworks – as well as the German government's National Action Plan for implementing them. The principle of "using leverage before withdrawing" is particularly important to us in this context. We want to ensure that people and the environment are better protected in our supply chains instead of turning our backs on problems.

Please give us an example: What exactly does that mean for handling raw materials for batteries such as cobalt and lithium?

One example is the fight against child labor. As a company, we want to make our contribution and actively work against it. There are many different reasons for child labor, with poverty at the top of the list. This means that simply banning child labor will not make the problem go away. That is why we approach the issue from several different angles in the cobalt supply chain. We implement a wide range of measures in order to prevent child labor while also creating alternatives for children and families in mining regions. One example are our projects in partnership with the aid organization Bon Pasteur, which make an important contribution.

We have also incorporated respect for human rights, and therefore the condemnation of child labor, into our supplier contracts. In these contracts, we formulate our requirements for our direct suppliers to create transparency in their supply chains in order to identify high-risk areas and potential human rights risks and combat those using suitable measures. In addition, we will only purchase battery cells with cobalt and lithium from certified mining in the future. These certifications take into account, among other things, human rights aspects such as the prevention of child labour.

What happens if a supplier does not comply with the appropriate requirements?

Our direct suppliers have committed themselves to comply with our sustainability requirements. We also require them to communicate the standards to their employees and to their upstream value chains, and then checking to ensure that the standards are complied with. We support them with information and qualification measures.

If a supplier does not yet meet certain criteria, we support them in planning and implementing improvement measures. If they do not implement changes within an agreed period, however, we will ultimately part ways with a supplier. There are also some examples, but fortunately only a few.

How is compliance with the standards and the criteria set out in them monitored?

In addition to existing, direct suppliers, we also systematically assess new suppliers on-site before awarding them a supply contract. If there are any doubts regarding a supplier's sustainability performance, we initiate a deeper review. Last year we conducted a total of 1,127 on-site audits and assessments. In terms of sub-suppliers, we take a risk-based approach in accordance with the Human Rights Respect System (HRRS) to address human rights violations actively at an early stage. Using our HRRS, 24 raw materials were identified, whose extraction and further processing pose potential risks to human rights. We are successively creating transparency regarding these raw materials throughout the supply chain via our direct suppliers, and taking appropriate measures, if necessary.

Mercedes-Benz has gone one step further with respect to cobalt.

That's true. In 2018, we commissioned the auditing and advisory firm RCS Global to establish transparency regarding the complex cobalt supply chains of battery cell suppliers, and to audit these at every stage in accordance with OECD guidelines. More than 120 suppliers at different levels of the cobalt supply chain have now been identified as part of this process, and 60 audits were conducted after a corresponding risk assessment.

You mentioned that Mercedes-Benz will only be sourcing battery cells with cobalt from certified mining sites in the future. What exactly is that about?

It is important to us to ensure that the raw materials for our electric fleet are from responsible mining. That is why, in the future, we will only work with suppliers who source raw materials for battery cells from certified sources in accordance with the recognized mining standard of the Initiative for Responsible Mining Assurance (IRMA), and who fulfill their due diligence obligations throughout the supply chain in accordance with the OECD guidelines. The most important criteria of this standard include both human rights aspects and the environmentally friendly mining of raw materials as well as further social and societal aspects that are related to the consequences of industrial mining. We are working with IRMA and RCS Global on a step-by-step approach that will allow a limited number of cobalt mines in the Democratic Republic of the Congo to be audited against a series of specific sets of requirements in the IRMA Standard for Responsible Mining. In the medium term, we are targeting raw materials that are certified by the IRMA, with an initial focus on battery cells – starting with lithium and cobalt.

Regarding CO₂: What measures are you implementing in procurement in order to reduce the CO₂ footprint in the supply chain?

How much time do we have left? (laughs). But seriously, we are doing a great deal of measures, and we are currently in the process of setting the course for the next important measures. Our ultimate goal is above all to reduce the CO₂ emissions associated with the procurement of components and raw materials. That is why we have made CO₂ targets an important part of our supplier contracts. In the future, we will only work with suppliers who commit themselves working on reducing their emissions as consistently as we do.

Almost half of our approximately 2000 suppliers have signed an 'Ambition Letter' and are committed to supplying us with only CO₂ neutral parts in the future. These companies account for more than half of the annual purchasing value of Mercedes-Benz AG. From 2039 at the latest, only production materials which are CO₂ neutral in all value creation stages will be allowed through the factory gates of Mercedes-Benz. A supplier declining to sign the Ambition letter will not be taken into account for new supply contracts in the future.

In order to assess the environmental impact of our supply chain and make it more transparent, we also work with organizations like CDP. Another important element are our strategic partnerships in the field of battery cells. In the future, we will procure battery cells produced in CO₂-neutral processes from both suppliers, which will also have a very positive impact on CO₂ emissions in our supply chain. This will reduce the total CO₂ emissions for each battery by 30 percent.

Mr. Güthenke, with around 2,300 colleagues, you manage around 2,000 direct suppliers worldwide, and you are responsible for procurement with an annual volume of approximately 40 billion euros. How do you cope with this immense responsibility?

We have a great team. Together, we are pursuing the goal of having procurement and supplier quality make an important contribution to our company managing the “SpurWechsel”. The work we do plays an important role in helping us to become more profitable again, reducing our CO₂ footprint, respecting and protecting human rights, and handling resources responsibly. Close, constructive collaboration is particularly important to me – with the specialist units we work with around the world, and with our suppliers. It is crucial for us to be able to get our suppliers on board. We want them to comply with our standards when it comes to sustainability issues in particular – because we cannot bring about the necessary changes in highly complex supply chains alone.

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