Human Rights at Ford

Supply Chain Overview

Since 2005, we have made some significant changes in how we manage relationships with our suppliers and in the profile of the supply chain itself. While Ford’s supply chain remains one of the largest and most complex in the world, we are taking steps to rationalize and streamline our supply base. Over time, we plan to reduce by approximately 50 percent the number of suppliers for key high-impact parts and components.

This strategic supplier strategy, which we call the Aligned Business Framework, is designed to create a sustainable business model to increase mutual profitability, improve quality and drive innovation. What it means in practice is that we are working more closely and collaboratively with a smaller number of Global Strategic Suppliers.

Ford’s Code of Basic Working Conditions is an integral part of the new Aligned Business Framework, on par with other fundamental production requirements such as managing financial data and product quality. As previously, Ford’s Global Strategic Suppliers are required to adhere to our Global Terms and Conditions. They must now also take further steps to ensure proper working conditions in their facilities and those of their sub-tier suppliers. Ford is providing additional support and resources to assist them in doing so.

The changes we are making in our supply chain are taking place in the context of broader sourcing shifts underway in our industry. In particular, Ford is expanding its market presence in emerging markets, where the bulk of future sales growth is expected to occur. At the same time, in order to remain competitive, the Company is increasing its sourcing in these lower-cost, emerging markets, as a way to serve both local markets and the global supply chain. Legal structures governing working conditions may not be as well established or consistently enforced in these locations, which has been one of the key drivers of our human rights efforts.

Setting Expectations for Our Suppliers

To reinforce our commitment to our Code, Ford’s Global Terms and Conditions – our core contract covering all suppliers – reflect our specific working conditions requirements on the prohibition of the use of forced labor, child labor and physical disciplinary abuse. These requirements were added in January 2004 for production suppliers and in September 2005 for all others. We have provided a standard for these areas – the same as we use in our own facilities – that supersedes local law if our standard is more stringent. The Global Terms and Conditions also prohibit any practice in violation of local laws.

In addition, the Global Terms and Conditions serve to:

• Set the expectation that suppliers will work toward alignment with our Code in their own operations and their respective supply chains in the areas of harassment and discrimination, health and safety, wages and benefits, freedom of association and working hours
• Make clear Ford’s right to perform third-party site assessments to evaluate supplier performance
• Communicate that Ford can terminate the relationship for noncompliance or for failure to address the noncompliance in a timely manner
• Alert suppliers that repeated failures to comply may be subject to debits of the suppliers’ payables

Supplier Assessment and Training Program

Over the past several years, we have developed and continued to refine a supplier assessment and training program. (See last year's report for more information.) Assessments consist of a detailed questionnaire, document review, factory visits, and management and employee interviews, and are conducted with the assistance of external auditors. Since 2003, we have conducted nearly 400 assessments of existing and prospective suppliers in nine countries.

In 2006, we conducted assessments and training sessions in India, Turkey, Russia, Romania and China. We also conducted follow-up assessments in Mexico, where we had held training sessions the previous year. The findings from the assessments in 2006 were generally consistent with those we had previously conducted in China and Mexico. Namely, they identified a wide range of general health and safety issues, several wages and benefits issues and a limited number of other types of noncompliance.

The findings from Ford’s 2006 supplier assessments included:

• No evidence of forced labor or physical disciplinary abuse
• A wide range of general health and safety issues, including inadequate emergency systems
• In some cases, a lack of appropriate timekeeping systems, and thus a failure to pay correct overtime wages
• In some cases, a failure to pay the correct local minimum wage or overtime or to provide the correct social insurance
• A general need to clearly define policy on harassment and discrimination
• One case of underage workers and a few cases of young workers doing hazardous work

In addition, freedom of association has been difficult to verify. While all suppliers have either union representatives or a grievance process, we believe there may be issues we have not been able to identify with our assessment process.

We continue to focus on the 17 countries we had previously identified as having higher risks of substandard working conditions, see Expanding Our Approach . Among those countries, locations are prioritized based on production and sourcing trends; sales trends; and relative perceived risk based on the input of human rights groups, other companies’ experience and other geopolitical analysis.

While we initially focused the bulk of our efforts on the assessment component, our experience has convinced us that while assessments are a useful tool as part of a larger program, they should not be our main emphasis. Rather, we have learned that we can better understand the conditions of each facility – and help improve conditions where needed – when we engage with suppliers in a more interactive, collaborative way.

This process – focused on training and education – may mean that in some cases suppliers will be in noncompliance while they work to meet our standards. However, we continue to engage with cooperative suppliers to develop and implement appropriate corrective action plans. In this manner, we also have an opportunity to encourage change throughout the tiers of suppliers and affect positive change more broadly.

Building Supplier Capacity

Our primary focus now is building capacity among suppliers by developing and conducting tailored training programs. The locally customized workshops emphasize interpretation and application of legal standards and international best practice rather than a simple review of labor law and expectations. The interaction with managers from the Human Resources, Health and Safety, Labor Affairs and Legal departments of participating companies allows for a two-way learning experience touching on the areas of interest for each company. Material for the training workshops is developed by Ford and typically delivered by the Automotive Industry Action Group, a member-based, nonprofit industry group that will be offering industry-wide working conditions training in select markets in 2007.

While Ford’s supplier training sessions are customized to align with the unique laws, customs, cultures and needs of each location, in general they consist of:

• A daylong interactive workshop with specialized Ford trainers and other automotive suppliers to develop and confirm an understanding of Ford expectations, local labor law, best practices and management systems, and
• A confirmed communication cascade including information obtained during the classroom training, to all supplier personnel and direct sub-tier suppliers

As of the end of 2006, 755 managers from 534 different supplier companies in nine countries had completed a full day of training. These suppliers have now moved on to the process of self-assessing their facilities for compliance with local law and Ford expectations, and completion of the final stage of the program, which is communication to both personnel and suppliers on the topic of working conditions expectations.

Expanding the Program with our Global Strategic Suppliers

Over the last year, one of our central areas of focus has been to embed our supplier working conditions expectations into our new strategic supplier strategy – called the Aligned Business Framework – and to communicate these expectations to our suppliers. The Aligned Business Framework emphasizes longer-term, more collaborative relationships with a set of Global Strategic Suppliers. Through this approach, we also saw an opportunity to strengthen and expand the ways in which we engage with our suppliers on human rights.

As part of the Aligned Business Framework, Ford’s Global Strategic Suppliers explicitly commit to manage and assure proper working conditions in their facilities and in their sub-tier suppliers’ facilities. In addition to complying with Ford’s Global Terms and Conditions, this means we expect suppliers to develop:

• Their own working conditions code (if they do not have one already), aligned with Ford’s Code of Basic Working Conditions,
• Internal training and compliance processes, and
• Training and compliance processes for their sub-tier suppliers

As a first step in rolling out this new program, we have distributed a questionnaire to Global Strategic Suppliers to help us understand how their policies, processes and programs align with Ford’s Code. Initial findings suggest that few respondents already have consolidated processes driven by stand-alone codes. However, the majority have policies or programs in place to manage some or all elements of Ford’s Code – and, indeed, some do have consolidated processes, including those that extend beyond their own operations into those of their supply chain.

Ford has committed to providing suppliers with a range of support and assistance based on our experience in this area. We have developed an in-depth resource guide to give suppliers information and background on human rights, generally, and on the development of their own codes, specifically. We have also offered to share the training materials we have developed, as well as information on our compliance and training processes. Finally, we have committed to working with suppliers to help resolve issues or concerns, rather than issue automatic exclusions.

We are particularly excited about this new phase, which represents a further shift from a top-down, compliance-focused approach to managing human rights issues in our supply chain to a more collaborative, in-depth one. In our view, it will help embed ownership for human rights issues throughout our value chain, and lead to the development of more robust, sustainable human rights programs.

The shift towards greater emphasis on tailored training and engagement versus assessments is inherently more qualitative than quantitative. This has meant a reevaluation of our approach to collecting and managing data. We have begun collecting new data on training. Additionally, as our systems mature, we are working to develop new indicators that are more reflective of performance, rather than just process. Finally, we have taken steps to better align the data we provide with that used elsewhere in the Company to ensure it is useful and accessible to people within our business. While we have made progress developing – and remain committed to – a data tracking and reporting system, we are also looking for ways to streamline the data collection process, targeting those indicators that are of highest value to us and our stakeholders. See Working Conditions Assessment Status for Supply Chain.

Next Steps

In 2007, we plan to launch supplier assessments and training programs in Brazil, Colombia, Malaysia, Thailand and Venezuela. In addition, as part of the working conditions efforts under the Aligned Business Framework, we plan to work with our Global Strategic Suppliers to assist them in developing their own codes and/or expanding their programs or processes, where needed, to ensure they meet Ford’s working conditions expectations.