Annual Report 2013

Economic report

Material expenditures by business unit
Material expenditures by type

Procurement

We use externally procured materials (raw materials, packaging and purchased goods) and services to produce our finished products. These items all fall under the general category of direct materials. Examples include washing-active substances (surfactants), adhesive components, cardboard boxes and external filling services.

Aside from supply and demand, the prices of direct materials are mainly determined by the prices of the input materials used to manufacture them. As in the previous years, 2013 was characterized by fluctuating raw material prices. The situation differed sharply by both region and type of input material. The average crude oil price was lower than in the prior year, but severe fluctuations occurred over the course of the year. The price for palm kernel oil rose steadily from one quarter to the next. Prices declined for butadiene until the third quarter, when they started to rise again. Ethylene prices rose in Asia while remaining below the prior-year level in Europe and the USA. Overall, prices for direct materials in 2013 remained unchanged year on year.

Direct material expenditures were 7.3 billion euros in the year under review, 0.2 billion euros less than in the previous year. The reduction is particularly attributable to foreign exchange effects, savings from cost reduction measures and improvements in production and supply chainsupply chain
Encompasses purchasing, production, storage, transport, customer services, requirements planning, production scheduling and supply chain management.
efficiency. Additionally, selective price increases enabled us to increase our adjusted 1 gross margingross margin
Indicates the percentage by which a company’s sales exceed cost of sales, i.e. the ratio of gross profit to sales.
.

Our five most important groups of raw materials within the direct materials category are raw materials for use in hotmelt adhesives, washing-active substances (surfactants), raw materials for polyurethane-based adhesives, inorganic raw materials and water- and acrylic-based adhesive raw materials. These account for around 37 percent of our total direct material expenditures. Our five largest suppliers account for around 14 percent of our direct materials spend.

Purchases made in the general category of indirect materials and services are not directly used in the production of our finished products. Examples include maintenance materials, and logistics, marketing and IT services. We were able to more than compensate for the slight increases in gross prices in these areas in 2013 through our global procurement strategy and structural cost reduction measures. At 4.7 billion euros, expenditure on indirect materials and services for 2013 was up on the prior-year level.

In order to improve efficiency and secure material supplies, we continuously optimize our value chain while ensuring that we maintain our level of quality. In addition to negotiation of new, competitive contract terms, our ongoing initiative to lower total procurement expenses is a major factor in the success of our purchasing strategy. Together with the three business units, Purchasing works continuously on reducing product complexity, optimizing the raw materials mix and further standardizing packaging and raw materials. This gives us stronger negotiating positions and greater flexibility to further consolidate our supplier base. For long-term business relationships, we choose suppliers who offer the greatest potential in terms of innovation and optimization of manufacturing costs and logistics processes, while limiting the risk of supply shortages. We agree on individual targets with our strategic suppliers. Last year, we succeeded in further reducing the number of suppliers by around 8 percent.

We were able to increase the efficiency of our purchasing activities by further standardizing, automating and centralizing our procurement processes. In addition to making greater use of eSourcing tools to support our purchasing processes, we have also already pooled large portions of our administrative purchasing activities – such as order processing, price data maintenance, and reporting activities – within our shared service centers. In 2013, we also set the groundwork for our new “Sourcing@Best” initiative, enabling central purchasing to consolidate its global strategic procurement operations into eight global purchasing centers in the future.

Given the uncertainties with respect to material price changes and supply shortages in procurement markets, risk management is an important part of our purchasing strategy. Emphasis is on reducing price and supply risks while maintaining uniformly high quality. As part of our active price management approach, we employ strategies to safeguard prices over the long term, both by means of contracts and, when appropriate and possible, financial hedging instruments. In order to minimize the risk of supplier default, we stipulate supplier default clauses and perform detailed risk assessments of suppliers to determine their financial stability. With the aid of an external, independent financial services provider, we continuously monitor important suppliers whose financial situation is seen as critical. If a high risk of supplier default is identified, we systematically prepare back-up plans in order to ensure uninterrupted supply.

We expect our suppliers and business partners to conduct themselves in a manner consistent with our own corporate ethics and values. The basic requirements in this regard are set out in our purchasing standards, valid across the Group, and our safety, health and environmental standards formulated in 1997, through which we have long acknowledged our responsibility for the entire supply chainsupply chain
Encompasses purchasing, production, storage, transport, customer services, requirements planning, production scheduling and supply chain management.
. Consequently, in selecting and developing our suppliers and business partners, we take into account their performance in terms of sustainable development. We use the cross-industry Code of Conduct published by the German Federal Association of Materials Management, Purchasing and Logistics [BME] as a globally applicable supplier code, and the basis for our multi-stage Responsible Supply ChainSupply Chain
Encompasses purchasing, production, storage, transport, customer services, requirements planning, production scheduling and supply chain management.
Process. The objective of this process is to ensure supplier compliancecompliance
Acting in conformity with applicable regulations; adherence to laws, rules, regulations and in-house or corporate codes of conduct.
with these standards and to improve the sustainability standards in our supply chainsupply chain
Encompasses purchasing, production, storage, transport, customer services, requirements planning, production scheduling and supply chain management.
in harness with our strategic suppliers. A global training program ensures that the requirements regarding the sustainability profile of our suppliers are understood and properly applied by our employees.

Systematic expansion of our supplier audit programs will be a major focus in this regard in the coming years. We plan not only to increase the number of supplier audits but also to improve their transparency and efficiency. In collaboration with five other businesses from the chemical industry under the initiative “Together for Sustainability,” Henkel has largely standardized the procedure for evaluating sustainability and the auditing criteria for the – in many cases – common suppliers, and established an online training program for suppliers. The results of audits and assessments are shared among the members of the initiative.

1

Adjusted for one-time charges/gains and restructuring charges.