Supply Chain Sustainability Management

A company needs to base its purchasing decisions not only on production, service and operational concerns, but also on CSR (Corporate Social Responsibility) and reputation risk as well. LITE-ON's supply chain management, given compliance with regulatory obligations, focuses beyond quality control to cover issues such as workers' welfare, environmental protection, safety and health. It has implemented multiple measures to manage the standard of material supplies and to reduce the risks and costs of both suppliers and itself for a sustainable, mutually beneficial partnership in order to provide responsible quality services for our customers on an ongoing basis.

Supply chain management commitment

• Establish a sustainable development as the goal of the supply chain.
• Ensure sourcing and product are not contained with Conflict Minerals in our supply chain.
• Co-operate with our suppliers to aware corporate social responsibility, protect the environment, and pay attention to human rights, health and safety.
• Encourages the development of innovative business models that help reduce environmental impact.
• Enhance competitiveness through managing suppliers’ quality, cost, delivery, service and sustainability capabilities.

Supply chain management aspect:

Supply Chain Sustainability Management Objective

Supplier Sustainability Guidelines

Supplier Executive Certificate of Compliance

To ensure that the supply chain provides a safe workplace, employees are treated with respect and dignity, and enforce environmental regulations and ethical practices, LITE-ON has adopted the EICC Code of Conduct and considered international regulations including the International Labor Organization's Declaration on Fundamental Principles and Rights at Work and the Universal Declaration of Human Rights and requires its suppliers to comply with the rules herein regarding workers, health and safety, environmental concerns, business ethics, and management structures and comply with the laws and regulations in the countries/regions where they operate their businesses.

Green Procurement and Supplier Selection

In order to build a Sustainable supply chain, LITE-ON has adopted the following principles to assess suppliers in addition to conventional criteria involving quality, cost, delivery time, service, and technological capability:

• Materials supplied to LLITE-ON must fully comply with the applicable regulations in the operational countries or regions, and risk control mechanisms must be defined.
• Suppliers of LITE-ON must establish relevant systems for the management of environmental protection, health and safety of employees, and the control of hazardous materials.
• Meet the LS-301 standards of LITE-ON on "Concentration limit of toxic chemical substances in prohibited materials".
• Provide suitable and updated declaration documents or evidence in line with the requirements of the hazardous substances free management plan of LITE-ON.

Restriction on the Use of Hazardous Substances

The detailed description can be linked to http://www.liteon.com/Page.aspx?id=8ee8a32a-8f61-4207-83ff-178b281034c2

Sourcing Policy for Conflict Minerals (Metals)

Reported by EICC (Electronic Industry Citizenship Coalition), the mining of some minerals has become the main revenue sources to the armed rebel groups in Democratic Republic of Congo (DRC). The revenue is used to buy weapons, and it caused bloody conflicts between governments, devastating the safety of the local civilian, and triggering international disputes. LITE-ON Technology, as a global citizen, declared and committed not to accepting these conflict minerals from the conflict mining area in DRC or relevant regions in Africa; meanwhile, we requested our supply chain to follow LITE-ON's policy as well.

Since 2010, we initiated to utilize the EICC tool (Conflict Minerals Reporting Template, CMRT) to control the uses of conflict minerals in place. We annually complete and report the survey report to our customers. All suppliers are involved and acknowledged the requirement. All mineral and metal smelters were reviewed for approval in the survey. It’s found that we have a metal smelter in the supply chain from DRC; however, it’s verified free from the conflict metals.

Conflict mineral management processes include:

1. Parts verification management
2. Monitoring parts compliance
3. Conflict mineral Training
4. CMRT Report
5. Supplier assessment

Conflict minerals (metals): The minerals composed of columbite-tantalite, cassiterite, wolframite and gold from the fighting region of Democratic Republic of the Congo (DRC) or other Africa regions. These minerals are refined into tantalum (Ta), tin (Sn), tungsten (W) (referred as 3T), cobalt (Co) and gold (Au), respectively, and are widely used in electronic and other products.

Supply Chain Risk Management

LITE-ON considers supply chain risk management is one of a company's competitive advantages and expects suppliers to work together with the company to strength supply chain. Therefore, LITE-ON teams up with several Taiwanese ICT companies to form the “Corporate Green Competitiveness Alliance, CCGA”, which supports a mutually beneficial and sustainable environment to respond to green regulations around the world and follow green trends to create green value. In 2016, the CGCA continued to focus on issues regarding the conflict mineral, recycling and legal compliance aspects, and to co-work for pushing forward to green supply chains in Taiwan.

Supply Chain and Local Procurement

LITE-ON offers a diverse and flexible range of products and services; it makes an enormous amount of purchases annually and has built up an extensive supply chain to support its businesses. There are approximately 1,792 qualified suppliers at level one offering an extensive variety of goods. Suppliers are mainly categorized by their relevance to LITE-ON's products' materials, and are distinguished between direct material and indirect material suppliers. Direct material suppliers have accounted for the majority of purchases made in the past, totaling 89.55% in 2016. Direct material suppliers are further classified into three types: manufacturers, agents, and subcontractors.

In 2016, 58.3.62% of purchases made to direct material suppliers involved parts and components supplied by manufacturers; these manufacturers represented the majority of LITE-ON's supplier list at 77.62%. Agents of worldwide large suppliers for critical parts and components also accounted for a significant portion at 36.17%, whereas others (including transportation and professional services) accounted for 5.5%. See the figure below for a detailed analysis.

LITE-ON's production sites are mainly located in Mainland China, Thailand and Taiwan. For our production facilities in China, local suppliers accounted for 66.6% of the total supplier counts; in Thailand, local suppliers accounted for 35.4%, and in Taiwan, 90.0% of the total supplier counts were local suppliers.

Critical Suppliers

To ensure effective management of suppliers, stringent screening criteria is applied during the selection stage followed up with on-site inspections and review meetings to assess suppliers' performance. LITE-ON has identified a list of critical suppliers on which to direct its management efforts; in 2016, these critical suppliers represented 36.89% of the total supplier count contributing 79.38% of purchases made by LITE-ON. Inspired by the fact that 56.73% of critical suppliers in China, 9.68% in Thailand and 83.33% in Taiwan are local businesses, most of LITE-ON's suppliers are eager to become a critical supplier for LITE-ON. Critical suppliers are identified based on the following criteria:

• High proportions in LITE-ON's spending
• High technological and creative abilities
• Unique source
• High level of customization
• Labor intensive or high polluting process industry
• Ability to fulfill CSER

High risk suppliers’ identification

LITE-ON's "sustainability high-risk definition” is the result of assessment on ESG, the factors including location of the supplier's operations, production processes, and EICC audit results. The factors in the risk assessments include the following:

Major sustainability risks in 2016:

Sustainability risks management in tier-1 suppliers:

• In 2016, LITE-ON newly added 222 companies to its suppliers list; 100% of which were recognized by the field LITE-ON EICC Audits and complied with LITE-ON's standards regarding environmental protection, workers' welfare, human rights, and social impact. 4 suppliers were removed from the qualified list due to suppliers renamed.

• Non tier1 supplier management: In addition to our requirements for first tier suppliers, we also require that our suppliers manage their first tier suppliers in order to create a more reliable supply chain.

The Control of Volatile Organic Compounds (VOCs) and Water-related Risk

VOCs are threats to the environment and the health of human beings. LITE-ON requires all suppliers involved to install treatment facilities for VOCs in compliance with the local laws. Furthermore, LITE-ON also encourages all suppliers to introduce relevant technologies voluntarily for the effective treatment of all volatile sources to reduce the release of VOCs.

Water conservation is a critical topic currently, and also in the future. Due to ongoing climate change, the water resources that we used to rely upon may someday disappear, posing a major concern for sustainability of our suppliers. LITE-ON has identified heavy water-consuming processes in supply chain, such as Plating, PWB (Printed Wiring Board), steel and LCM (Liquid Crystal Module), and we assessed suppliers' capabilities on water-saving and recycling. Meanwhile, LITE-ON employed the Global Water Tool, developed by WBCSD, to identify and prepare action plan for the potential water scarcity regions after 2015—Taiwan, North China, Bangkok in Thailand.

Management mechanism

Audit and Guidance on Suppliers' Human Rights, Environment, Health and Safety

LITE-ON continuously encourages to value business ethics, protection of Human rights, health and safety for employees, and innovation of environmental-friendly production processes. LITE-ON has established the supply chain management procedure since 2009 by introducing EICC as the tool of supervision and audit on key suppliers on "human rights, environment, health and safety and management". LITE-ON audited a total of suppliers in 2016, and there was no supplier found with significant or potential negative impacts on human rights and labor practices while the most common issue found was overtime. After the audit was completed, LITE-ON required suppliers to take corrective actions within a given time. Suppliers' conduct was rated either qualified or disqualified; no suppliers were disqualified in 2016 for CSER issues. See the following figure for audit results in recent years. Note: In 2016, there're 4 disqualified suppliers due to change the name.

CSER Training for Supply Chain

Seminars on "The Practice of Corporate Social Responsibility for Suppliers"

9 seminars and workshops on "The Practice of Corporate Social Responsibility for Suppliers" were held in 2016 to address LITE-ON's CSER commitments. Executive management of suppliers was requested to sign the "Executive Certification of Compliance" that binds them to comply with EICC

Capability Building for Suppliers

We assess and provide suppliers the following assistances for suppliers to enhance their capability in ESG performances and operation efficiency. It involved but not limited to

1. Training courses on EICC management, GHG inventory, HSF (hazardous substances free) and green products, and energy saving technology.
2. Optimization consultation of manufacturing system and process.
3. Introduction of IT management tools.
4. New technology development.