UPM annual report 2014

Sourcing operations play a significant role in ensuring the efficiency and profitability of UPM. The objective of UPM’s sourcing operations is to maintain a supplier base that is capable of delivering material and service solutions that are both cost competitive and innovative to UPM businesses globally. This calls for close co-operation between UPM sourcing professionals and UPM businesses. Suppliers are an integral part of UPM value creation

FOCUS ON SOCIAL RESPONSIBILITY In 2014, UPM focused more intensively on social responsibility issues in its supply chain. Based on a human rights related assessment conducted in 2013, UPM evaluated its present sourcing processes and took the necessary steps in order to highlight human rights related issues in its sourcing activities. The risk assessment related to the supplier base was enhanced. Consequently, the number of risk assessment-based supplier audits was doubled in 2014 with a much wider geographical coverage than earlier. Some of the audits covered the entire up-stream supply chain. UPM also combined forces with the Fair Working Conditions (FWC) organisation on audits in China in order to benchmark the employment practices of UPM’s suppliers, based on the recommendations of the International Labour Organisation (ILO), for example.

STAKEHOLDERS 31–44

UPM experts auditing a pulp supplier in Brazil.

The sourcing of all necessary products and services results in a significant cost element for UPM business. Cost efficiency is the leading principle in UPM sourcing, including price and other cost elements. Besides cost, UPM’s holistic sourcing approach sets requirements for the reliability of deliveries in the long term, the quality of the products and services, the financial stability of the supplier, the environmental management of operations, social responsibility and occupa- tional health and safety as well as product safety. Close co-operation with a wide variety of suppliers UPM aims to be a professional partner to its suppliers and to develop supplier relationships in a responsible manner that deliver long-term benefits to both parties. The company’s sourcing network consists of suppliers ranging from private forest owners and local companies to large international corporations. Long-term co-operation plans based on mutual commitment and openness between companies are in place with key sup- pliers. The aim of this co-operation is to work together to optimise the entire value chain, while sharing best practice in areas such as supply chain, manufacturing and product development. Suppliers are an important stakeholder group for UPM. UPM sourcing professionals, with their full understanding of supply market dynamics, are one of the key resources of UPM. Ensuring responsible sourcing is an integral part of supplier performance management. UPM works closely with suppliers to ensure that all the company’s requirements are met and to establish mutual understanding on the issues of sustainability and social responsibility. Systematic supplier assessment and requirements Transparent and systematic supplier require- ments are the basis for the company’s supplier selection process and supplier performance evaluation. UPM’s risk assessment covers environmental, social and economic risks and is carried out at supplier level. Supplier audits are initiated based on identified risks or gaps in supplier performance. UPM requires its suppliers to apply the principles of the Code of Conduct and to fulfil

WOOD DELIVERIES TO UPM MILLS 1,000 m 3 2014 2013 Finland 17,910 17,907 Germany 1,336 1,691 Austria 962 1,098 Russia 328 352 United Kingdom 289 297 Estonia 135 123 United States 940 881 Uruguay 4,366 4,519 Total 26,266 26,868

In addition, UPM arranged training on responsible sourcing to nearly 200 employees and improved the awareness of the sourcing personnel.

The development of responsible sourcing practices will continue in 2015.

Read more: www.upm.com/suppliers, www.upm.com/responsibility and www.fairworkingconditions.ie

UPM's external purchasing spend

Fibre 30%

Logistics 17% Indirect materials and services 15%

Tracing the origin of wood is a prerequisite for UPM

the criteria concerning social and environmen- tal responsibility. These supplier requirements are defined in the UPM Supplier Code. In 2014, 67% (64%) of supplier spend was qualified against the Supplier Code. Good progress was achieved in sourcing of raw mate- rials for paper and label, where the qualified spend is over 80%. Additional specific require- ments are in place for areas such as wood, chemicals, safety, logistics, pulp and packaging. Suppliers are encouraged to apply manage- ment systems based on internationally recog- nised standards and up-to-date techniques and practices. Wood is the primary raw material for UPM’s businesses UPM is both a major forest owner and a pur- chaser of wood. UPM’s wood sourcing opera- tions are closely integrated with the UPM businesses that use wood as a basic raw mate- rial. UPM sources all wood assortments to ensure optimal utilisation of this valuable raw material. In 2014, UPM sourced 26.3 (28.0) million cubic metres of wood from around the world. The majority of wood is purchased from private forest owners who numbered nearly 24,000 in 2014. A network of local entrepreneurs takes care of harvesting, logistics and forestry work opera- tions. There were nearly 3,000 harvester drivers and more than 3,000 truck drivers working for the entrepreneurs in 2014. UPM wood sourcing creates employment opportunities for thou- sands of people living in rural areas within the UPM wood sourcing spheres.

ers. The results of these surveys are discussed with the suppliers, both on and off-site, resulting in improvements, action plans and commitments such as continuous improvement. Since 2011, UPM Raflatac has annually conducted the Responsibility Survey with the most important paper, film and chemical suppli- ers. In 2014 the survey was conducted with 70 suppliers. The completed surveys were scored and ranked and the suppliers were given feed- back based on their responses. UPM is a significant user and buyer of recovered paper UPM is the world’s largest user of recovered paper for the production of graphic papers. In 2014, the total consumption of recovered paper was approximately 3.4 million tonnes. Efficient paper recycling depends on the local infrastructure for national collection schemes and recovery systems. The recovered paper used by UPM is purchased from Europe, where the most significant suppliers are local authorities, waste management companies and printing houses. UPM aims to optimise the value chain of recovered paper by focusing on local supply close to the mills with minimal costs and environmen- tal impact. Energy from renewable sources UPM is both a significant purchaser and pro- ducer of energy. The majority of electrical and thermal energy is used for the company’s pulp and paper production. UPM favours a wide range of low-emission energy sources and focuses on energy efficiency and energy savings in its businesses. In 2014, 67% (67%) of the

fuels used by UPM were from renewable sources. In addition to the company’s own electricity generation, electricity is also purchased from the Nordic and Central European energy markets. In Germany, the company has bilateral agree- ments in place with electricity suppliers. In 2014, 4.9 TWh (5.1 TWh) of electricity was purchased. Logistics form the foundation of on-time deliveries UPM delivers approximately 1.3 million truck- loads (c. 25 tonne each) of products and raw materials around the world every year; that is one load every 25 seconds. Of all UPM deliveries, 68% are transported by rail and road and 32% by sea. The majority of UPM’s haulage is handled by contract partners. UPM aims to create strategic long-term alliances to create benefits for the company and its customers. UPM has focused on optimising transporta- tion. At the same time, emissions caused by transportation are reduced to the lowest possible volume. Wood sourcing, transportation and logistics have a significant socio-economic impact on rural areas around the UPM mill sites. In Finland alone, the total external workforce includes 1,000 harvester drivers, 1,400 truck drivers, 550 railroad workers, 360 dock workers and 650 sailors. The number of entrepreneurs and companies involved is 230. Looking at UPM global scale this, together with purchases from the forest owners, results in significant support for local livelihoods in rural Europe, USA and Uruguay.

Raw materials 27%

Energy 11%

UPM’s tracing systems and chain of custody model cover the requirements for both PEFC ™ and FSC ® forest certification schemes. UPM considers forest certification to be an excellent tool for promoting sustainable forestry. With its chain of custody system, UPM ensures full traceability of the origin of wood worldwide. UPM has several decades of experi- ence of wood supplier audits. UPM verifies that the wood raw material supplied to its mills is sustainably sourced, legally logged and procured according to the basic requirements of international forest certifi- cation schemes and the EU Timber Regulation, US Lacey act and other regional jurisdictions. UPM therefore has control over the origin of its own harvesting and ensures that other sources are controlled through contractual terms of agreement and supplier audits. All of UPM’s wood supplies are covered by third-party-verified chains of custody and 83% (80%) of the wood used is certified. UPM buys approximately 1.8 million tonnes of chemical pulp from external suppliers. Spe- cific requirements are set for pulp suppliers with regard to environmental performance, social responsibility, forestry, wood sourcing and performance reporting. Environmental and social performance data collection is an integral part of supplier risk and performance management. The data is collected regularly from UPM’s pulp and chemical suppli- Pulp and chemicals are purchased worldwide

Sources of wood to UPM mills 2014

Company forests 17%

Import 12%

State forests 4%

Private forest 35%

Delivered sale/ incl. sawmills 32%

UPM group’s electricity supply TWh

20

16

12

8

4

0

14 13 12 11 10 09 08 07 06 05

■ CHP production ■ Hydro ■ Nuclear ■ Condensing ■ Purchase Electricity consumption

Read more on UPM’s sustainable forestry (p.53).

CONTENTS

39

40

UPM Annual Report 2014

UPM Annual Report 2014