Build a Robust Supply Chain

The Nabtesco Group does business with about 1,600 suppliers of various scales, centering around the purchase of metal parts, and electronic and electrical components, outsourced machining, assembly and processing. Our business with suppliers is an important factor that affects the Nabtesco Group’s cost structure and QCD performance. It is indispensable to secure the supply chain continuously in order to achieve medium- to long-term growth. Therefore, we develop collaboration systems through fair business transactions based on the proper cost structure, and close partnerships with suppliers.

Also, we are well aware of the importance of meeting the demands and expectations of society regarding social and environmental impacts of activities in our supply chain. By developing mutual trust relationships with suppliers through fair transactions, we are committed to meeting our social responsibilities not just through the efforts of the Nabtesco Group alone but with the cooperation of the entire supply chain.

Among the companies that make up our supply chain, we designate those that are particularly important for the Group’s business continuity as “major suppliers.” In FY2024, as in FY2023, the number of major suppliers among the Group’s primary suppliers came to 100, and these major suppliers accounted for around 70% of the Group’s total procurement amount. The Group updates the selection of major suppliers every year and in FY2024 we included ESG performance, country risks, risks specific to companies in the machinery sector, and risks of critical components in the criteria for selecting major suppliers, in addition to transaction volume and QCD performance.

The Nabtesco Group has clarified areas with potential human rights and environmental risks in its supply chain. The distribution of these risks is identified as follows:

The Nabtesco Group is promoting CSR procurement to address ESG issues in the supply chain. In view of the need to prevent the emergence of increasingly complex and diverse supply chain risks in recent years, we revised the Nabtesco Group CSR-Oriented Procurement Policy in December 2020 with the approval of the Executive Management Committee and announced that we would further strengthen supply chain management.

We at the Nabtesco Group have been working on manufacturing innovation and promoting collaboration with suppliers with the aim of strengthening our comprehensive procurement capabilities from the perspectives of sustainability, including quality, cost and delivery (QCD), and technological development. In order to achieve medium- to long-term growth for the Group, it is essential to secure a sustainable supply chain, for which we need to promote fair procurement and collaboration with our suppliers.

Also, in order to promote CSR-oriented procurement, we need to have expertise and know-how on environment- and human rights-related issues, which are not conventionally handled by procurement departments. Therefore, the Procurement Planning Department of the Production Innovation Division, in collaboration with the head office departments, plays a central role in promoting CSR-oriented procurement, including supporting the activities conducted to this end by the in-house companies and Group companies. The Nabtesco CSR Procurement Policy is discussed and decided by the Management Committee (MGC). For measures related to CSR-oriented procurement, representatives of the procurement departments of each in-house and Group company discuss and decide on the policies and measures at the Group Procurement Meeting and then obtain approval for the decisions from the Management Materiality Committee, which reports directly to the CEO.

Through these Group-wide efforts, we endeavor to fulfill our social responsibility throughout the supply chain in cooperation with our suppliers.

We have revised the Basic Purchase Agreement that we conclude with new suppliers, in line with the Civil Code Amendments effective April 1, 2020. In the Agreement, we list not only compliance with the CSR-oriented Procurement Policy, thorough compliance including the prevention of any form of corruption such as bid rigging or bribery, but also consideration to the environment and occupational health and safety and the elimination of anti-social forces as the most important items to be observed by our suppliers.

We have requested that even existing suppliers comply with our Basic Purchase Agreement, as well as consideration of the environment, safety, and health through the SAQ. Through the penetration of a CSR-Oriented Procurement Policy within our supply chain, on-site briefings, and the SAQ, we have taken proper actions to encourage new and existing suppliers to conduct themselves in accordance with social norms.

As part of our efforts to facilitate understanding of the Policy among all suppliers, we made sure that all of them understood the details of the revision and asked each to submit a letter of consent to the Policy in June 2021. Based on the Policy, which has been translated into multiple languages (Japanese, English, Chinese and Thai), we will continue to execute a PDCA cycle and promote CSR-oriented procurement by proactively engaging in communication with suppliers. Moreover, by continuously reviewing our procurement to ensure adherence to the Policy, we will respond promptly to ever changing community expectations and ESG issues.

If any of our existing or new suppliers is found to have seriously violated the “Policy” or “Basic Transaction Agreement,” we will ask the supplier to correct the situation and implement improvements. If improvement cannot be confirmed, we will nevertheless review our business relationships with that supplier. To date, we have not terminated business with any supplier due to such a violation.

We are implementing a mainly online educational program on CSR- and ESG-related themes for suppliers. In FY2023, around 760 of our primary suppliers received training on general CSR, conflict minerals, and cybersecurity under the program. We are working to help our suppliers deepen their understanding of the need to foster CSR-oriented procurement across the supply chain through the program. We also introduce cases in which supply chain risks were materialized and badly affected our business continuity as well as examples of good outcomes in the program.

We will continue to hold briefings and implement the educational program to help existing and new suppliers to fully understand and implement the Nabtesco Group’s CSR-Oriented Procurement Policy.

We also provide employees in charge of procurement, who are often in direct contact with suppliers, with education and training for CSR-oriented procurement, with the goal of further familiarizing both members of our group and suppliers with the CSR-Oriented Procurement Policy.
In addition to the basics related to CSR procurement in general, including labor (human rights), ethics, environment, and health and safety, we distributed e-learning content on biodiversity, reducing global resource use, conflict minerals, cybersecurity, and other topics in particular to employees and managers belonging to Nabtesco’s procurement departments in Japan. Everyone provided with the content completed the course.

To check the effectiveness of the Nabtesco Group’s CSR-oriented procurement, we have implemented an SAQ for our primary suppliers, including our major suppliers, in and outside of Japan every year. Following the revision of the CSR-Oriented Procurement Policy in December 2020, we also renewed our SAQ form by using the standard questionnaire form created by the Global Compact Network Japan (GCNJ) as an SAQ template to be shared by its members, including Nabtesco. By using this template, we reduced the burden imposed on suppliers requested to answer the SAQ, while also updating the questions by adopting the standard questions prepared by the Global Compact Network Japan (GCNJ) and adding items from the Nabtesco Group’s CSR-Oriented Policy.

In FY2023, we set the target of conducting the SAQ survey on 1,600 of our primary suppliers, including the 100 major suppliers. We subsequently conducted the survey on 1,182 suppliers (1,137 in FY2022), including the 100 major suppliers (also 100 in FY2022), and thus achieved the survey target. As for the response rate, we received replies from 83% of the targeted primary suppliers (77% in FY2022). The response rate for our 100 major suppliers was 100% (95% previously).

According to the results of the SAQ conducted in FY2023, eight suppliers were assessed to have high ESG risks*. In FY2023, we received no reports of serious noncompliance regarding labor and environmental issues for our supply chain.

After conducting the SAQ, we informed each supplier of the results, including their own score and the average score of all respondents for each of the questions, so that they can understand where their own CSR activities rank and points to be improved.

Nabtesco evaluates suppliers' CSR activities (second-party assessment) through interviews by the Procurement Planning Department to ascertain the suppliers' level of understanding of the CSR procurement policy and the state of implementation. The priority target of these interviews and audits are major suppliers whose SAQ scores are low for human rights and the environment and who have not yet set their own GHG emissions reduction targets. We update the details of the interviews and assessments from time to time. When revising the CSR-Oriented Procurement Policy, we added items related to due diligence for human rights and the environment to the SAQ. Furthermore, since FY2022, we have been using our own in-house check sheet for the assessments, to which items on labor and occupational health and safety have also been added.

For FY2023, we set the target of conducting CSR-related interviews and audits for 25 of our major suppliers and subsequently interviewed and assessed 27 major suppliers, thus achieving the target. Of the eight suppliers that had been deemed to have high ESG risks according to the FY2023 SAQ results, we supported seven companies to make and implement plans to take corrective actions.

Moreover, in FY2022, we started to set the number of CSR interviews with suppliers as a medium-term target KPI, while promoting third-party audits by an independent auditing organization from 2024. (Please refer to “On-site Supplier Assessments by Independent Auditors”)

Going forward, we will continue to identify the ESG risks posed to our suppliers, assess corrective action plans and activities to implement them, and foster support through individual interviews with suppliers.

The Procurement Planning Department and the Environment & Safety Department are jointly supporting suppliers in monitoring greenhouse gas (GHG) emissions and setting their own GHG emissions reduction targets. These activities fall under SBT Scope 3, which contributes to the reduction of greenhouse gas emissions not only within the company but also for the entire supply chain. We have been pushing forward with the activities so that the initiatives will be implemented by approximately 100 suppliers, which account for the top 70% of our total procurement amount, by 2050.

For the responsible sourcing of minerals, the Nabtesco Group will cooperate with its suppliers to prevent the use of conflict minerals^*1 such as tin, tantalum, tungsten, gold, cobalt, mica and others. Conflict minerals are those which are supplied via parties in supply chains that are complicit in the abuse of human rights in conflict-affected and high-risk areas in the Democratic Republic of the Congo (DRC) and surrounding countries.

In 2020, we added a paragraph entitled “Responsible procurement of minerals” to the Nabtesco Group’s CSR-Oriented Procurement Policy to contribute toward maintaining international peace and safety through responsible sourcing of minerals and also to enhance our risk management to ensure the sustainability of our supply chain. We ask suppliers to submit a letter of consent to the Policy. In 2022, we conducted a survey of our 100 major suppliers, which together account for around 70% of our total procurement, and in 2023, we added another 100 suppliers, expanding the scope to 200 suppliers, which together account for around 80% of our total procurement, to ensure safety in regard to the procurement of minerals to be delivered to us. For the survey, we used the CMRT^*2 and EMRT^*3 provided by the Responsible Minerals Initiative (RMI) as standardized formats. In addition, to enhance the effectiveness of the survey, we also check the status of procurement from smelters that have passed RMI's Responsible Minerals Assurance Process (RMAP) audits. According to the conflict minerals survey results for FY2022, 28 of our major suppliers procured the relevant minerals from smelters that had passed the RMI's RMAP audits. However, for 14 suppliers, we were unable to identify the smelters from which they had procured the minerals.

For the additional 100 suppliers from 2023 to the present, 9 were sourcing from smelters that had passed RMI's RMAP audits. In addition, for 16 suppliers, we were unable to identify the smelters from which they had procured the minerals.

In response to our customers’ requests, we have been conducting surveys on the countries of origin of minerals in cooperation with our suppliers.

From the results of the conflict minerals survey, we will identify suppliers sourcing from smelters that have passed RMI's RMAP audits and suppliers that have not yet identified their smelters. In the event that the use of any potentially unethically sourced minerals is detected through such surveys, we will bring up the issue with the related suppliers and promptly take actions to discontinue their use and find an alternative supplier.

The Nabtesco Group has a hotline for suppliers with a view to ensuring transparency and fairness in its transactions with business partners for the sustainable development of mutual relationships.

We will prevent the occurrence of problems or take corrective actions in response to the information given to us via the hotline about the Nabtesco Group’s or its individual member’s unfair acts or acts that might constitute misconduct.

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For the reduction of GHG emissions by suppliers, the Procurement Planning Department of the Production Innovation Division is leading efforts to provide support. The Department cooperates with the Environment & Safety Department and the Manufacturing Engineering Department to make use of the SAQ and CSR audit results to help suppliers set their own GHG emissions reduction targets and implement measures to achieve them.

In June 2020, Nabtesco Corporation made a “Declaration on Partnership Building.” The “Declaration on Partnership Building” was introduced by the Council for the Promotion of Partnership Building for the Future, which consists of representatives from the business and labor sectors and related ministers. It is a framework and mechanism promoted by the Cabinet Office and the Small and Medium Enterprise Agency. By presenting a policy of coexistence and co-prosperity to the Nabtesco Group’s suppliers, we aim to achieve sustainable growth with our suppliers.

The Nabtesco Group signed the United Nations Global Compact in April 2014 to show that it supports this international initiative, and has since been proactively participating in the activities conducted by the Global Compact Network Japan. We have worked to set norms and criteria and to solve problems for global CSR-oriented procurement (including themes on the environment, labor, and human rights) in cooperation with peers and companies in other industries in the study group on supply chains. In FY2017, Nabtesco was appointed a corporate leader for the supply chain study group again and contributed to the completion of an SAQ (self-assessment tool for CSR-oriented procurement) that can be used across the industry. In FY2020, we conducted a survey targeting the Nabtesco Group’s suppliers based on the standard questionnaire tool (common SAQ) formulated by GCNJ. We will continue to work on the enhancement of the SAQ while promoting its use in collaboration with external initiatives in the future.