Microsoft Hardware Supplier Audit and Assessment Approach and Findings Our Social and Environmental Accountability (SEA) program focuses on extending the core values of the Microsoft Standards of Business Conduct to how we manage the suppliers in our devices and packaging supply chain. These standards are foundational to our business and values, which include fulfilling our commitment to the highest ethical and legal behavior as we increase personal computing. The SEA program delivers responsible, sustainable, and transparent practices within our supply chain in the following areas: labor, health and safety, environment, and ethics (including anticorruption and respect for intellectual property).
We approach SEA with the same fundamental steps we take with our broader devices and supply chain sustainability efforts: monitoring emerging trends and requirements; integrating the Microsoft Supplier Code of Conduct (SCC) and other requirements into our procedures and supplier specifications; assessing and monitoring supplier performance against the requirements; and continuously reviewing and identifying opportunities for our own and supplier improvement. All contracted suppliers follow specifications related to labor, health and safety, environmental controls, business ethics, and management systems. Suppliers are required by contract to conform to these requirements and are subject to an initial SEA qualification audit. After approval, we require selfOctober 2016
assessments and conduct both third-party audits and DSC SEA assessments. Suppliers must also ensure that their subcontractors conform to our specifications, which allows Microsoft to indirectly push its principles further upstream to Tier 3 or 4 suppliers. In addition to direct engagement with our suppliers, we partner with industry associations, NGOs, and other stakeholders to help build supplier capabilities and develop solutions to broader supply chain challenges. In FY16, we continued to focus on key areas of risk identified through our assessments and audits of our supply chain.
Supplier engagement approach Microsoft SEA-driven assessments and third-party audits help to ensure that suppliers meet our requirements and engage with their workers in a manner consistent with our values and expectations. The assessments and third-party audits include evaluating compliance with the Microsoft Supplier Code of Conduct, SEA specifications, health and safety and environmental requirements, and other important standards, including international best practices. The SEA team and third-party auditors use standard protocols and audit tools developed based on the EICC and supplemental criteria from Microsoft. The onsite review incorporates: • • •
Reviewing documentation, including policies and procedures, personnel records, time records, payroll, and relevant permits Conducting a site tour to assess conditions in various areas, including production operations, dormitories, canteens, chemical and waste storage areas, recreational facilities, and common areas Interviewing employees in their preferred language and away from their factory management
The DSC SEA team supplements the third-party audits with onsite SEA assessments at all Tier 1 sites and high-to-medium-risk Tier 2 component suppliers based on risk. These assessments use the same checklist as the qualified third-party audit firms, but the assessment is frequently limited to a rigorous review of one area. Through the SEA assessments and third-party audits, we are able to obtain valuable insights on supplier sustainability performance, key challenges, and opportunities for improvement at our supplier sites. The results from these audits and assessments also provide key insights into the capability building efforts that will have the most impact.
Corrective action and validation DSC Manufacturing, Strategic Sourcing, and SEA teams work with our suppliers to ensure that the corrective action plans to remedy audit and assessment findings address the identified risks and root causes and are implemented in a timely manner. Follow-up audits are conducted to ensure that
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corrective actions are implemented and closed. Where needed, we also provide suppliers with best practices to help them build necessary capabilities and apply sustainable solutions to identified issues. Our primary motivation is to push for continuous improvement of the SEA program and supplier performance. Suppliers must correct issues within specific deadlines based on the severity of the nonconformance or we may restrict further business to the factory and phase the factory from our active supplier list.
SEA audit and assessment findings In FY16, we completed 333 third-party audits and Microsoft assessments of 185 factories. These audits and assessments continue to provide us with insight into the needs and challenges of our supply chain and guide our investments in supplier capability and future improvements. In this report, we disclose all SEA findings of critical or serious nonconformance severity. These critical or serious findings were escalated to Microsoft senior management, and the suppliers were placed on restricted status with no new Microsoft business awarded until the issues were resolved. In all instances, the suppliers instituted corrective action plans that were approved by Microsoft, and followup audits confirmed that the suppliers were implementing the corrective action plans. In the following SEA Audit and Assessment Results table, we provide year-over-year data on findings of critical/serious nonconformance with the requirements covered in these audits and assessments. Changes in the number of audits and assessments conducted each year and the scope of those audits cause fluctuations in year-over-year comparisons. In addition, we are always learning during the course of our work, which result in improvements to our program and can increase findings. To better facilitate comparisons going forward, last year we also began to report nonconformance percentages of suppliers audited in addition to reporting total findings. We typically see improvements in performance after working with suppliers on an ongoing basis on previously addressed issues. For that reason, last year we began to provide findings by new and existing suppliers. New suppliers are those new to the Microsoft Device Supply Chain and audited for the first time, while existing suppliers are those that received audits and assessments in the past. While informative, we emphasize that the percentages are affected by our raising the bar on supplier performance year over year and on enhancement of audit quality and auditor requirements.
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SEA Audits and Assessments
SEA Audit and Assessment Results
Category/ Provision
Percentage of Suppliers with Serious/Critical Nonconformances* FY16
Labor
New Suppliers
FY15
Existing New Existing Suppliers Suppliers Suppliers
Freely Chosen Employment
0%
0%
1%
1%
Child Labor Avoidance**
6%
5%
7%
3%
Working Hours ***
18%
9%
0%
1%
Wages and Benefits****
9%
2%
3%
2%
Humane Treatment
0%
0%
0%
0%
Non-Discrimination*****
3%
0%
1%
0%
Freedom of Association
0%
0%
0%
0%
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Health and Safety Occupational Safety
0%
1%
2%
1%
Emergency Preparedness and Response
0%
0%
0%
0%
Occupational Injury and Illness
0%
0%
0%
0%
Industrial Hygiene
0%
0%
1%
0%
Physically Demanding Work
0%
0%
0%
0%
Machine Safeguarding
0%
0%
0%
0%
Sanitation, Food, Housing Transportation
0%
0%
0%
0%
Environmental Permits and Reporting
2%
0%
0%
1%
Pollution Prevention and Resource Reduction
0%
0%
0%
0%
Hazardous Substances
0%
0%
0%
0%
Wastewater and Solid Waste
0%
0%
0%
0%
Air Emissions
0%
0%
0%
0%
Product Content Restrictions
0%
0%
0%
0%
Business Integrity
0%
0%
0%
0%
No Improper Advantage
0%
0%
0%
0%
Disclosure of Information
0%
0%
0%
1%
Protection of Intellectual Property
0%
0%
0%
0%
Fair Business, Advertising, and Competition
0%
0%
0%
0%
Protection of Identity
0%
0%
0%
0%
Responsible Sourcing of Minerals
0%
0%
0%
0%
Privacy
0%
0%
0%
0%
Environment
Ethics
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0%
0%
0%
0%
Labor and Ethics Mgmt. Systems
0%
0%
0%
0%
Environment, Health & Safety Mgmt. Systems
0%
0%
0%
0%
Non-retaliation Management Systems
* Percentage represents number of the suppliers with critical/serious findings on each issue out of the base of suppliers audited and assessed by third-party audits and Microsoft SEA assessments. Audits and assessments are based on the EICC audit protocols with additional Microsoft requirements ** Out of the 10 cases, one is related to historical child labor at the factory. The other 9 cases are related to student workers. For student workers, examples include salary not paid directly by factory and student workers working overtime. *** Findings include workers’ workweek exceed 72 hours or workers consecutively work for more than 24 days without rest. **** Eight cases involve factories not paying the workers sufficient overtime wage or workers’ basic wage does not meet minimum law requirement. ***** Two cases are for requiring pregnancy test for female workers during the onboarding health examination.
Grievance Hotline Beyond auditing, providing workers a voice and learning directly from workers is a key priority. We launched an anonymous and factory-independent worker grievance hotline pilot project three years ago that we continue to scale. Through the end of FY16, the hotline has received and resolved 367 inquiries. The top three inquiries received are related to wages and benefits, factory procedure and policy, and living conditions. With a number of calls to the hotline seeking basic psychological counselling, in FY16, we worked with a China-based training organization with both counselling and manufacturing supply chain experience to train the hotline operators servicing our Tier 1 suppliers to enable them to increase their abilities related to basic counseling. Complex cases are referred to an experienced organization that would provide comprehensive services, including professional psychological telephone counseling service to the workers.
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