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Theme 3 : Growing with Society

CSR Initiatives in the Supply Chain: Support for CSR Initiatives of Business Partners

CSR Initiatives in the Supply Chain:  Support for CSR Initiatives of Business Partners

CSR Initiatives in the Supply Chain: 
Support for CSR Initiatives of Business Partners

Our business partners are important members of our value chain, who supply the materials, parts and components necessary for the continued operation of our manufacturing enterprise. At Komatsu, we aim to build a Win-Win relationship with our business partners by making interactive efforts under a relationship of mutual trust. Along with the expansion of our global operation, our supply chain has also been expanding all over the world. Taking seriously the recent gain of momentum for the spread of CSR in the overall supply chain, we are working to realize CSR procurement globally by being proactive in providing intense support for the CSR initiatives of our business partners.

Approach and Policy

1. Komatsu's Procurement Policy and Procurement Status

As stated above, Komatsu's procurement policy is based on the philosophy of aiming to build a Win-Win relationship with our business partners, who are on an equal footing with us, encouraging each other. The policy is to promote daily procurement activities taking CSR aspects into consideration, by evaluating and selecting suppliers in a fair and equitable manner from the viewpoint of SLQDC (Safety, compliance with the Law, Quality, Delivery and Cost). Our general production policy is to manufacture products directly within the areas of demand. 
Concerning components, parts, materials and other items, we are promoting local procurement proactively based on production and procurement policies that we set in accordance with the characteristics of each. Above all, for Components B and C listed below, we are expanding cross sourcing between regions to respond flexibly to changes in the international trade environment such as exchange rate fluctuations, FTA and EPA, aiming for globally optimal procurement.

Policy on Production and Procurement of Components and Parts for Construction and Mining Machinery

Category Definition Production and procurement policy Examples of parts
Components A Key components for differentiation that determine product quality and functions Permanent development and production in Japan (supply from Japan to the world) Engines, transmissions, axles, hydraulic equipment, and electronic equipment
Components B Components that we need to purchase intensively from certified suppliers from the viewpoints of functions, quality, and investment Optimal procurement from 2 or 3 regions in the world Floor parts of cabin, cooling parts, undercarriage parts, cylinders, high-pressure hoses, tires, rims, and operator's seats
Components C Parts with relatively low levels of technological difficulty, which should desirably be produced or procured close to the assembly plant Local procurement Thick/ thin sheet-metal parts, machined parts, and cast and wrought products as materials

The breakdown of procurement in monetary terms in the construction and mining equipment business of the Komatsu Group in FY2018 is shown below.

Components Types by Percentage of Procurement in Monetary Terms

Origin of components by Percentage of Procurement in Monetary Terms

2. CSR Procurement Guidelines

We have established the Komatsu Group CSR Procurement Guidelines and the Komatsu Green Procurement Guidelines, in which we have described our expectations we want our business partners to take concerning CSR and environmental management. We disclose them on our website and strive to spread them out. The guidelines are available for viewing at the following:

Areas covered by the CSR Procurement Guidelines

At Komatsu, we launched a whistleblowing system for suppliers in March 2017 to accept whistleblowing reports from suppliers on acts in procurement activities of the Komatsu Group which are violating or alleged to be violating laws and regulations. Matters reported via dedicated contacts, which we set up inside and outside the company, are handled by a department in a neutral position. This department investigates and verifies facts to take corrective measures promptly. We have vowed to ensure that business partners who have reported will not receive any disadvantageous treatment.


Our Support for Komatsu Midori-kai in FY2018

1. The Komatsu Midori-kai

In the construction and mining equipment business, Komatsu has deals with approx. 2,700 Tier 1 business partners all over the world. We have established the Komatsu Midori-kai which consists of particular business partners who are deemed especially important or critical for the Komatsu Group. The members are selected through evaluation from the viewpoint of management culture including the management philosophy of top management, SLQDC* performance including development and proposal capabilities in business transactions with Komatsu, the level of importance of the supplied items in light of our procurement strategies and technologies, the track record and the size of business transactions with Komatsu, and other elements. At present, the Komatsu Midori-kai operates in four regions -- Japan, China, North America and Europe. Procurement from members of the Komatsu Midori-kai accounts for approx. 73% of total procurement in monetary terms. The Komatsu Midori-kai in each region collaborates with Komatsu's manufacturing plants in promoting activities that take advantage of characteristics of the region. It also holds regular meetings to promote understanding of Komatsu's businesses and activate communication between Komatsu's executives and top management of member companies. Many overseas member companies, as well as those in Japan, participate in the general meeting, which is held in November every year. At this meeting, executives of Komatsu give business briefings, and explain our global procurement policy and priority activities. In Japan and China, as a measure to support the improvement of member companies' competitiveness, the Komatsu Midori-kai divides its members into some groups (subcommittees) based on the items they supply, and promotes improvement activities in cooperation with Komatsu by selecting common themes such as safety, the environment and the latest production technologies. Information about actual improvements that have been made is shared by companies in the same group to promote the horizontal spread of information.
* SLQDC: abbreviation for Safety, compliance with the Law, Quality, Delivery and Cost

General meeting of Midori-kai (Japan)
General assembly of Midori-kai in North America

Definition of critical suppliers

1. Suppliers with special technology/know-how for important components/parts
(mainly proprietary/electronic components suppliers)
2. Non-substitutable suppliers who are able to do good SLQDC performance, in long-term business relationship
(mainly sub-contracted suppliers)

Breakdown of Critical Suppliers

Region Number of companies
Total Custom goods suppliers*1 Purchased goods suppliers*2
Companies in which Komatsu has invested Companies which are highly dependent on Komatsu Companies in which Komatsu has invested Companies which are highly dependent on Komatsu Major enterprises Trading companies/ material suppliers
Midori-kai member companies Japan 156 7 86 2 7 43 11
China 59 3 32 1 4 14 5
North America 44 1 15   1 19 8
Europe 39   6     30 3
Non-members of Midori-kai Japan 1 1          
North America 2           2
Thailand 9   6 1     2
Indonesia 4 1 1       2
India 1   1        
Vietnam 3   2   1    
Total 318 13 149 4 13 106 33

*1 Business partners who manufacture goods based on drawings and/or specifications from Komatsu (mostly medium and small enterprises)
*2 Business partners who manufacture goods based on their own drawings and/or specifications (mostly major companies)

Classification of Critical Suppliers

Categories Number and Percentage of Total (The numbers of higher-level companies are included in those of lower-level ones.) Percentage of procurement in monetary terms
1 All Tier 1 suppliers 2,666 100% 100%
2 Critical
suppliers
Level 3 318 12% 76%
3 Level 2 179 7% 66%
4 Level 1 17 1% 8%

The level of critical suppliers is determined by the degree of Komatsu's involvement in each.
Level 1: Companies in which Komatsu or the Komatsu Group companies have invested
Level 2: Companies in which Komatsu or the Komatsu Group companies have not invested but which are highly dependent on business transactions with Komatsu
Level 3: All critical suppliers

Field Methods of supply chain risk assessment (〇: Subject of the assessment)
General Management CSR BCP
Bi-directional communication through activities of Midori-kai Regular reporting of management status and financial standing (*1) Corporate evaluation: Evaluation of SLQDC(*2) performance and factors related to corporate management Evaluation of the level of safety activities Evaluation of the level of environmental management activities Compliance and risk (CR) audits (*3) Evaluation of compliance system and its operation Assessing how much damage is caused by a disaster, etc. and whether supply can be continued
Frequency As occasion arises Annually/ quarterly Annually Every six months Annually 2-year cycle Annually As occasion arises
Method ・Business briefing and lecture on procurement policy
・Q&A sessions
・Activities of subcommittees
・Survey through questionnaires ・Full-year performance
・Interview with top management
・Survey through questionnaires
・Interview with top management
・On-site audit
・Survey through questionnaires
・Interview with top management
・On-site audit
・Survey through questionnaires
・On-site audit
・Checking documents
・Survey through questionnaires
・On-site audit
Initial check by telephone or e-mail via supply chain management system and site visit
1 All Tier 1 suppliers - - - - - - 〇(*7)
2 Critical suppliers Level 3 - - - 〇(*7)
3 Level 2 〇(*4) 〇(*5) 〇(*4) - 〇(*7)
4 Level 1 〇(*6) 〇(*7)

*1: In the case of a listed company, financial reports are reviewed alternatively.
*2: Safety, compliance with the Law, Quality, Delivery and Cost
*3: Finance and accounting, labor management, procurement (the Subcontract Act) and information security
*4: Custom goods suppliers and Purchased goods suppliers who are highly dependent on Komatsu
*5: Custom goods suppliers only
*6: Companies in which Komatsu has invested
*7: Plants located in Japan only

2. Support for Member Companies of the Komatsu Midori-kai

Komatsu supports Midori-Kai member companies in a variety of ways. Main support activities that we have carried out are described below.

(1) Safety

As part of the effort to strengthen safety and health activities, we provide support for the establishment of systems for safety activities and improvement of the activity level (including acquisition of OSHMS certification) to 99 companies, the majority of which are custom goods suppliers belonging to the Midori-kai in Japan. The support includes continuous safety patrols by specialists from Komatsu, and sharing information and horizontal application of occupational safety measures conducted by other companies. We also promote the mutual improvement of member companies in each group of the subcommittees, by encouraging them to perform mutual visits and spot-checks to acquire data and investigate potential areas of improvement from the viewpoint of companies in the same trade. In FY2017, we developed a check sheet for evaluating the level of safety, which is common to all companies. Using this check sheet, we keep track of the status of the improvement of each company's activities under the same standards. We have also opened safety training centers at Komatsu plants to member companies. We provide their employees with a way to simulate workplace hazards and receive anticipatory training for potential dangers to raise their safety awareness. These activities are also carried out at the Midori-kai in China.

Risk assessment training
Group performing a mutual safety patrol
Presentation by Sekigahara factory
 at a Komatsu safety meeting

Results of the evaluations of the level of safety activities from 99 member companies of the Midori-kai in Japan

Changes in the results of the evaluations of the level of safety activities from 2017 to 2018 (99 member companies of the Midori-kai)

(2) Environment

We have requested all member companies of the Midori-kai in Japan and China to obtain certifications for environmental management systems (EMS), such as ISO14001 and Eco-Stage, and provided them with instructions and support for obtaining the certifications. In Japan, all 156 member companies have obtained the certifications, and we began to check the renewal status of the certifications in 2018. In China, we are planning to have all 59 members obtain the certifications within FY2019. Of all 318 Critical suppliers, although companies in Europe, the U.S. and other Asian regions are expected to work towards certification in the coming future, we are aiming for an 85% acquisition (for all manufacturing companies excluding trading companies) by 2021. In addition, in 2012, we began activities for reducing the power consumption of 96 companies in Japan by setting the target of reducing the consumption of electricity by at least 15%, compared to 2010. This target was achieved in FY2016, with an average reduction of 20%.

In the future, we will work to maintain the reduction level through independent activities of each company. In FY2018, we set a target to reduce CO2 emissions from all kinds of energy, including heavy oil and gas and also electric power, by 15% (by 2021/ compared to 2010). As a first step, we conducted a fact-finding survey of ten cast and wrought iron companies and heat treatment companies, which emit large amounts of CO2, and began to provide them with information about improvements we actually made and install these improvement measures to them. We will expand this activity to 179 suppliers that fall under Major Suppliers-Level 2*. Furthermore, since FY2017, we have also been engaged in activities for addressing water risks, such as floods and water pollution, and activities for reducing the water consumption by 15% (by 2021) of other ten companies, which use large amounts of clean water.

Level 2*: Critical suppliers who depend highly on business with Komatsu

In China, extremely tough environmental regulations were imposed in 2015, mainly in the coastal areas, aiming to improve air pollution issues (PM2.5). As a result, companies engaging in businesses such as painting, welding, casting and plating are required to take thorough measures to reduce exhaust air, smoke and soot (including VOCs). Working together with member companies of the Midori-kai in China, we provide support for complying with the regulations, including the installation of facilities. As a result of measures taken by the companies, 14 companies had been certified as exempt from the regulations (as green companies) as of March 31, 2019.

Survey based on interviews on environment
An example of measures to meet regulations in China (Daikyo Machinery Shandong Co., Ltd.: Installation of a welding fume dust collector and exhaust air ducts)

Number of Midori-kai Member Companies with EMS Certifications

Region Number of member companies Number of companies which have obtained certification Percentage of companies with certification
Japan 156 156 100%
China 59 55 93%
North America 44 19 43%
Europe 39 29 74%

Values for North America and Europe are as of September 2017. The latest data are being collected.

Number of Midori-kai member companies in China which have obtained EMS certifications

Results of activities in Japan for reducing power consumption from 2012 to 2016 (reduction of electric power consumption rate calculated against the 2010 base unit)

 

FY2017 CO2 emissions (Midori-kai 93 companies)

 

Results of activities for reducing clean water consumption during 2017 and 2018

 

(3) Personnel Development

We believe that the greatest support that we can provide to the Midori-kai is human resource development. Based on this belief, we provide various job-level training programs as listed below. In recent years, we are particularly committed to Management Salons and skills transfer activities. Management Salons are aimed at developing young individuals in management positions, who have inherited a business recently. Through these engagements, Komatsu executives exchange views on medium-term management visions of the companies with their counterparts who do not have much experience in company management to align and share management policies and ideas. The skills transfer activities are aimed at facilitating the improvement and succession of the on-site skills of each company. In these activities, we help each company build a system for promoting skills transfer and develop instructors in core skills fields by disseminating our knowledge and skills.

Training Programs for Midori-kai Member Companies

Target job level Program Outline Major achievements
Management Commissioned training Komatsu accepts sons and daughters of corporate managers of member companies and provides them with on-the-job training for up to five years. 49 trainees have been accepted since 1972.
Middle management training Komatsu's training program for its executive candidates is open to candidates for member company successor. Duration of the training is seven months. 23 people have participated since 2005.
Management Salons Young corporate managers of member companies make presentations on medium-term management visions of their respective companies, which are discussed and shared with Komatsu. Provided to a total of 22 companies since 2014
Employees  in managerial positions Managerial training Exclusive training programs for the Midori-kai. The training is provided two times a year. Around 40 people participate every year.
Leader training (for field managers) Around 60 people participate every year.
Representatives Komatsu Technical Institute Intended for leader candidates related to production engineering and manufacturing who are aged 30 or younger. It is a boarding school which provides a two-year program. 22 people have participated since 2008.
Production engineer training It is an exclusive training program for the Midori-kai on sheet metal processing and mechanical engineering. Five-day training is provided once a year. Around 40 people participate every year.
Skilled workers Instructor training A 30-day program for candidates for skilled instructors of each company 69 people have participated since 2015.
Inspection training school Inspection skills training and classroom lectures  
Others All Komatsu QC competition Participants are selected from among the Midori-kai members. Around 20 companies participate every year.
All Komatsu skills competition (Advanced Technique Contest) Participants are selected from among the Midori-kai members.
Management Salon

(4) Supporting Productivity Improvement Activities by Using ICT

Addressing the issue of the labor shortage, which has been growing more seriously in recent years, is an urgent task for Komatsu and members of the Midori-kai as well. We promote the networking of production sites and facilities by making effective use of ICT (KOM-MICS) and using the network to improve productivity and save human resources. As a countermeasure against the labor shortage, we are expanding these activities to members of the Midori-kai proactively. Tools such as ones for monitoring operating rates that we developed on our own (K-MICS PAD) automatically collect data, including operational statuses and operating conditions, from the controllers of machine tools and welding robots of each company. These data are accumulated on the network, and processed and edited on a PC with application prepared for each purpose. We thus visualize the issues that need to be overcome to improve the operating rate, leading to collaborative analysis and implementation of measures.

Outline of KOM-MICS

(5) Management System

(i) Checks and Balances System for New Business Transactions and Agreements

In order to decide whether or not to begin transactions with a new business partner, we use a check sheet to evaluate the company not only in terms of basic SLQDC items but also from the viewpoints of environmental protection, employee training and others. In the basic transaction agreement that we conclude before beginning transactions, we include articles on compliance, environmental protection activities, elimination of anti-social forces and other elements, thereby encouraging the business partner to promote CSR activities. In addition, in the annual evaluation of custom goods suppliers (Japan and China) belonging to the Midori-kai, we evaluate them in terms of the business attitudes of their top management and their systems for promoting activities in areas such as safety and health, environmental protection and human resource development, in addition to their full-year QDC performance. We provide feedback on the results of the evaluation to business partners to help them make improvements.

(ii) BCP to Prepare for Natural Disasters

In FY2012, we began to operate in Japan a supply chain management system linked with disaster information from the Japan Meteorological Agency. This is aimed at minimizing the impact on our production of a natural disaster, such as earthquakes and tsunami, by quickly inspecting damage to our business partners and the impact on our supply chain after the occurrence of a disaster. We have built a database of locations and production items at 20,000 sites of 7,662 business partners, including Tier 2 and 3 suppliers, thereby visualizing the risks of interruption in product supply that can be expected to be caused by a disaster. This enables us to take well-focused countermeasures promptly. In the event of a disaster, we first check the damage to our suppliers at high risk which have been assessed through the system. Where necessary, we dispatch security maintenance personnel to the companies to support their activities for the prompt recovery of production. In 2018, we were reminded once again of the necessity of the BCP system in the supply chain because we suffered many natural disasters, such as earthquakes, heavy rains and typhoons, mainly in West Japan. We took the Great East Japan Earthquake in 2011 as an opportunity to take countermeasures against earthquakes and floods, mainly for tangible properties of 104 Midori-kai member companies, including their buildings and equipment. Moving forward, we will also strengthen intangible measures, such as the creation and appropriate revisions of the BCP manual, and the provision of simulation training.

Examples of recovery support (lending of power generators and assistance in machine centering)
 
Map showing the epicenter of the Northern Osaka Earthquake in June 2018 and the distribution of our business partners

(iii) Compliance

We conduct compliance and risk audits (CR audits) internally. In 2016, we began to conduct the CR audits even for 17 business partners in which we have made minority investments. The audit is conducted in four fields -- finance and accounting, labor management, procurement (the Subcontract Act) and information security. It is aimed at identifying potential risks and taking corrective measures at an early stage. The risks are identified mainly by checking the status of compliance with relevant laws and regulations, confirming business rules, segregation of business and decision-making authorities, inspecting relevant business documents and conducting on-site examinations. Voluntary establishment of compliance systems by business partners is essential for promoting CSR procurement. We believe that such a system should desirably be established by 1) formulating rules (establishing codes of conduct of each company), 2) building a structure for promoting CSR procurement (including the appointment of a person in charge and promoters), 3) introducing a whistleblowing system, and then 4) providing employees with awareness training. In accordance with this policy, in FY2018, we conducted a questionnaire survey on the status of forming own compliance systems against 99 companies mainly consisting of custom goods suppliers belonging to the Midori-kai. Five model companies were selected from among them, to which we provided support for establishing a compliance system through providing practical examples and employee training materials. This initiative will be continued until FY2021 for all 318 Critical suppliers.

Main Findings through CR Audits (2016 to 2018)

Field Findings Countermeasures
Finance and accounting -Business flow, operating procedures and decision-making authorities have yet to be set/ are insufficient.
-Physical inventory check is not conducted/ not regularly conducted.
-Rules on sale and disposal of stagnant assets and loss on forced write-down of such assets are not clear.
-Management of corporate seals and password updates for the accounting system are not done thoroughly.
Formulation/ review of business flow/ operating procedure, provision of instructions on physical inventory check, and others
Procurement (the Subcontract Act) -Insufficient details provided on the order form (document set forth in Article 3)
-There is a risk of delay in payment (within 60 days after receipt).
-There is a risk of early deduction of the price of raw materials purchased by a subcontractor from the subcontract proceeds to be paid.
-Violation of the provisions prohibiting reduction of subcontract proceeds (Reducing the amount of subcontract proceeds by the amount equivalent to that of discount commission where the payment is made in cash)
Review of order form and supporting documentation, review of business flow, and others

Policy and Actions Regarding Conflict Minerals

In line with our corporate social responsibilities, Komatsu does not condone the use of conflict materials produced by the Democratic Republic of Congo (DRC), or its neighbors (Angola, Republic of Burundi, Central African Republic, Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia). We have informed our business partners of this policy through the Komatsu Green Procurement Guidelines. Working hand-in-hand with suppliers, we conducted a country-of-origin survey to determine the location of origin of our materials and to ensure that none of them are sourced from areas of conflict.

Moving forward, we will continue to take steps to enforce strict adherence to this policy, which will serve to restrict funding for military groups situated in such areas. Any conflict materials discovered to be within our supply chain will be immediately discontinued from use.

Procurement Education in Human Resource Development

We have compiled basic matters that purchasing departments must not forget in promoting global procurement - in particular, the basic philosophy and code of conduct that should be kept in mind when working with business partners -- in the KOMATSU Way (Purchasing). In addition, we have been facing significant changes in laws and regulations of Japan and other countries on business transactions, employment and labor, environmental protection, export control and other matters. Responsible persons from the procurement department are required to understand these trends and reflect them appropriately in their daily procurement activities. At Komatsu, we strive to inform all employees of the trends by providing group training and e-learning designed for each one of the job classes, from new employees to managers.

DATA

Support Activities in FY2018

Main Support Activities in FY2018

Field Content FY2018 results
Safety Spot-checks (Safety patrol) 99 companies in Japan and 35 companies in China
Mutual visits and spot-checks within subcommiittee members 104 companies in Japan and 35 companies in China
Risk assessment training 98 companies
Reporting of safety activities at Komatsu safety and health meeting 4 companies in Japan and 1 company in China
Environment Environmental survey (status of compliance with laws and regulations, and on-site check) 4 companies
CO2 reduction workshops 10 companies
Activities for reducing water consumption 10 companies
Personnel Development Acceptance of trainees for commissioned training 3 trainees from 3 companies
Participation in the middle management training 2 participants from 2 companies
Participation in Midori-kai managerial training 19 participants from 17 companies
Participation in Midori-kai leader training 92 participants from 40 companies
Participation in Midori-kai production engineer training 23 participants from 18 companies
People enrolled in Komatsu Technical Institute 3 persons from 3 companies
Participation in instructor training 22 participants from 14 companies
TQM training 121 participants
Management Salons 3 companies
Participation in all-Komatsu QC competition 8 companies
Participation in Komatsu skills competition (Advanced Technique Contest) 28 participants from 18 companies
ICT Number of K-MICS PAD units mounted on machine tools of Midori-kai member companies Cumulative total: 250 units
Number of welding robots of Midori-kai member companies that are connected to KOM-MICS Cumulative total: 134 units in Japan and 75 units overseas
BCP Participation in Komatsu's BCP training as observers 10 participants from 8 companies
Compliance Compliance and risk audits 8 companies
Support for establishment of compliance system 5 companies
Workshops on the revised Immigration Control and Refugee Recognition Act (specific skills) 140 participants from 79 companies
Internal Awareness-Raising Initiatives Training for updating knowledge about the Subcontract Act (e-learning) 456 participants from the Procurement Division
929 participants from related divisions and companies
DFF Inc.