3. Strategic Plan 2014-2018. 2016 Review

The Strategic Plan for a Stable and Sustainable Supply Chain 2014-2018 includes identifying and properly knowing suppliers and manufacturers, performing exhaustive assessments and helping them to improve and optimize the social and working conditions of their employees, thus ensuring their sustainability and adjustment to the standards required by Inditex, creating stable and long-term business relations. In 2016 we have reached the halfway of this roadmap, approaching its full implementation with worker-centred programmes.

Strategic Plan for a Stable and Sustainable Supply Chain 2014-2018

Monitoring Traceability Training for auditors Compliance programme Worker participation Corrective Action Plans Consolidation of the supply chain Audit quality Effective and efficient reference partners with whom Inditex can share good practices and create shared strategies Training Continual improvement Commitment to stakeholders LINES OF ACTION IDENTIFICATION ASSESSMENT OPTIMIZATION SUSTAINABILITY Training for suppliers Mature relationships with suppliers and a holistic approach Effective auditing

I. Identification of the Supply Chain

Verification of the traceability of 100% of production STRATEGIC OBJECTIVE 2014-2018 DEGREE OF COMPLIANCE 0% 25% 50% 2016 75% 100% 2015

In 2016, the Inditex supply chain was made up of 1,805 suppliers in 53 countries, working in 6,959 factories:

The Inditex supply chain in 2016*

Geographic area Suppliers with purchase in 2015 Suppliers not used in 2016 New suppliers in 2016 Suppliers with purchase in 2016
Africa 130 13 24 141
America 74 19 10 65
Asia 836 159 261 938
Europe (non-EU) 185 49 43 179
European Union 500 83 65 482
TOTAL 1,725 323 403 1,805

(*) Suppliers of fashion items, mainly clothing, footwear and accessories, with a production of over 20,000 units/year. Suppliers with smaller production account for 0.29% of total production.

IDENTIFICATION OF THE SUPPLY CHAIN WITH AN ACCURATE KNOWLEDGE OF IT ALL ASPECTS OF IT SUPERVISION Close relationship with the supplier to supervise and control their production VERIFICATION Traceability audits to verify supplier production on-site ADAPTATION Bringing global and standard practice towards the local circumstances

To correctly identify the supply chain we use complementary monitoring, verification and adaptation tools.

To this end, our sustainability team employs engineers specializing in production systems and processes, production planning methods, and so on. This way, the traceability management is enriched with a technical vision which, added to the social vision, increases the effectiveness of the traceability audits.

In 2016, a total of 2,776 traceability audits were carried out. In these audits, both the internal and external Inditex teams worked in situ to verify that production of the Group’s brands was taking place in correctly declared and authorized factories. In 2016, the percentage of compliance was 89%. The 309 non-compliances that the internal and external teams detected relate, above all, to a lack of information. And they have been dealt with specifically by the sustainability and procurement teams.

Traceability audits in 2016

Geographic area 2016
Africa 388
America 1,313
Asia 617
Europe (non-EU) 418
European Union 40
Total 2,776

Year after year, our suppliers are more aware of the importance of transparency and traceability throughout the entire production process, and are committed throughout the factory declaration procedure. In cases of non-compliance or a lack of transparency, the sustainability and purchasing teams worked together with the supplier to obtain a commitment from them on implementing the measures required. Each case is analysed by sustainability teams, which apply a common maxim throughout the Strategic Plan: opportunity for improvement but zero tolerance for repeated non-compliance. Relations were severed with 17 suppliers on these grounds in 2016.

II. Assessment of the supply chain

Auditing system designed to evaluate and improve management methods STRATEGIC OBJECTIVE 2014-2018 DEGREE OF COMPLIANCE 2016 2015 Ensure sustainable compliance with the Code of Conduct for Manufacturers and Suppliers 0% 25% 50% 75% 100%

Compliance programme

ALL MANUFACTURERS AND SUPPLIERS VERIFICATION OF COMPLIANCE CONTINUOUS IMPROVEMENT FOCUSED ON THE WORKER BASIS FOR SUSTAINABILITY AND CONSOLIDATION OF THE SUPPLY CHAIN Training Collaboration Specific programmes Pre-Assessment: Consists of a preliminary assessment of potential suppliers and factories performed by internal or external auditors without prior notice. Only those meeting the requirements established in the Code of Conduct can enter the supply chain. From that moment on they are subject to the Code of Conduct and to the standards set out in the document Inditex Minimun Requirements . Social audits: The aim of social audits is to verify the degree of compliance with the Code of Conduct and to establish Corrective Action Plans (CAP) intended to ensure respect for fundamental labour rights. Special audits: onsist of visits and inspections related to specific issues such as the health and safety of workers, and competence visits to verify the level of compliance with Corrective Action Plans. These audits also include inspections of laundry processes to ensure that processes banned by Inditex, such as sandblasting, are not in use. Traceability audits: Are used to verify the traceability of the supply chain, based on the analysis of information gathered through the manufacturer management system. Pre-assessment audits AUDIT TYPES PROGRAMME ROLL-OUT Traceability audits Social audits Assignment of rating Corrective Action Plan Special audits Inditex Minimun Requirements B A PAC C



At Inditex, suppliers and manufacturers are first evaluated before they enter our supply chain through a Pre-Assessment audit. In 2016, some 2,302 pre-assessment audits were performed, of which 81% had a positive outcome. The number of such audits has declined compared to 2015, when we conducted 2,703. This fact that reveals the progressive consolidation of the supply chain, since each new factory registered by a supplier is audited.


Geographic area Pre-assessment audits % Approved
Africa 71 85%
America 19 63%
Asia 1510 75%
Europe (non-EU) 350 89%
European Union 352 98%
Total 2,302 81%

In 2016, the Pre-Assessment Audit methodology was updated. The changes in methodology were based on the experience gained since the previous review, conducted in 2012. In order to carry it out, the best practices, experiences and proposals for improvement of all local sustainability teams have been collected and 39 representatives of external auditing companies were trained with the train the trainer methodology so that, in turn, they can train their respective teams. The result reinforces this first assessment, which increases the level of demand and maintains the maxim of ensuring that only suppliers and manufacturers that comply with our Code of Conduct enter the supply chain.

After the Pre-Assessment audit, all companies producing for Inditex face periodically social audits. With this we re-evaluate their degree of compliance with the Code of Conduct and assign them a rating based on it. In 2016, 4,011 social audits were carried out, 187 more than in 2015.

Social audits are conducted by external and internal auditors. The procedure is the same regardless of who performs them, since in Inditex we have our own social audit methodology. This methodology was developed jointly by Inditex, IndustriALL Global Union, the Cambridge Centre for Business and Public Sector Ethics and the University of Northumbria (UK). Its application allows a complete and detailed evaluation of the factories and suppliers and identifies their strengths and their improvement needs.

The time that elapses until the next social audit varies according to the ranking obtained. However, all factories and suppliers are socially audited on a regular basis, regardless of the performance of other audits or programmes to which they are subject. Moreover, after the social audit, the results are analysed to identify areas for improvement at both individual and aggregate levels in a geographic area in order to establish the necessary programmes.


Geographic area Total
Africa 191
America 288
Asia 2,022
Europe (non-EU) 685
European Union 825
Total 4,011

Social audits assess suppliers’ compliance with each and every section of the Code of Conduct. In 2016, the requirement level of health and safety at work increased, which has led to an increase in health and safety-related programmes in a greater number of countries and factories. Our auditors are specialized in this aspect, which allows them to detect various breaches and go further in their evaluations.

In 2016, 95% of the production was carried out by suppliers with A or B qualification, the two highest compliance levels within Inditex's own rating methodology. Likewise, the percentage of suppliers with a C ranking, which fails to comply with one or more sensitive aspects of the Code of Conduct, fell by two percentage points compared to 2015, as a result of the continuous work with suppliers to improve working conditions.

What is a social audit?

Interview with management CONTINUAL IMPROVEMENT AND TRAINING All non-compliances found as well as related corrective actions are shared and explained to the factory Interviews with employees and their union representatives. Comprehensive documentation review Inspection of the premises

Classification of suppliers with purchase in 2016(*)

2016 2015
Classification* Suppliers % Suppliers % Production Suppliers % Suppliers % Production
A 694 38% 40% 724 42% 41%
B 917 51% 55% 794 46% 54%
C 83 5% 1% 116 7% 3%
CAP 61 3% 3% 35 2% 1%
RP 50 3% 1% 56 3% 1%
Total 1,805 100% 100% 1,725 100% 100%

(*) Supplier A: complies with the Code of Conduct
Supplier B: breaches a non-material aspect of the Code of Conduct
Supplier C: breaches a sensitive aspect of the Code of Conduct
Supplier subject to Corrective Action Plan (CAP): breaches of the Code of Conduct, requiring the immediate implementation of a Corrective Action Plan
PR supplier: undergoing an auditing process.

Percentage compliance with the Code of Conduct in active factories (*) associated with suppliers with purchase in 2016

Prohibition of forced labour 2016 2015 Africa America Asia Europe (non-eu) European Union 2016 2015 2016 2015 2016 2015 2016 2015 Prohibition of work by youths or minors (**) Prohibition of discrimination Respect for freedom of association and collective bargaining Prohibition of abuse or inhuman treatment Occupational health and safety Wage compliance Working hours Environmental commitment Formal work Implementation of the Code (***) +90% compliance +70% +50% -50%

(*) Does not include factories rejected in 2016.
(**) Includes the lack of suitable systems for checking the age of workers.
(***) Includes the lack of suitable systems for registering and informing workers.

Special audits are other type of evaluations carried out and are focused towards a specific area of improvement. Examples of objectives addressed in these visits are structural technical assessments, the review of laundry processes to verify that practices prohibited by Inditex such as sandblasting are not carried out, or the assessment of workers' working conditions from an exclusively health and safety point of view. Also included in this category are competence visits to verify the progress of Corrective Action Plans.

Year by year the number of special audits increases progressively; this is also seen in a greater specialization of our sustainability teams, among which there is an increasing number of specialized technicians in each area. Thus, in 2016, 1,794 special audits were carried out, compared to 1,584 in 2015. Of these, 183 were specific audits to verify the conditions of workers from the health and safety perspective.


Geographic area Special
Africa 127
America 26
Asia 1,418
Europe (non-EU) 141
European Union 82
Total 1,794

III. Optimization of the supply chain

Establish and maintain stable relationships of trust with suppliers STRATEGIC OBJECTIVE 2014-2018 DEGREE OF COMPLIANCE 0% 25% 50% 2016 75% 100% 2015 Corrective Action Plans targeted at improving management systems, with self-assessment and worker participation

The evaluation of the supply chain must be accompanied by optimization actions to advance its sustainability and the improvement of working conditions. At Inditex we believe in continuous improvement as a key element in our daily relations with suppliers, so throughout the business relationship we help and collaborate to optimize their management systems to the workers’ benefit.

The detection of any type of non-compliance implies the immediate implementation of a Corrective Action Plan. This plan establishes all improvement actions that the factory or supplier must perform to correct the non-compliances detected in the audit, as well as the deadline for this, which will be more or less restrictive depending on the seriousness of the breach detected. In this regard, we firmly believe that helping factories to improve their conditions brings the best possible results for workers, as well as contributing positively to the consolidation of a stable and sustainable supply chain. And we leave rejecting a factory as the last option.

We constantly support our suppliers and manufacturers in the development of the Action Plans. The participation and support of the purchasing teams is very important in this process. As well as Inditex's internal teams, members of civil society such as unions or NGOs participate in Corrective Action Plans. As an example, in 2016, the participation of IndustriALL Global Union and its local affiliates, the Refugee Support Centre in Turkey or the NGO Pratham in India stand out.

A key milestone in the improvement of a factory is the competence visit, in which Inditex’s internal team analyses on site the progress of the measures taken by the company and offers advice to progress towards the successful completion of the Plan. We made 619 competence visits in 2016.

Corrective Action Plans (CAP) focus on factories or suppliers where non-compliance with sensitive points in the Code of Conduct has been identified. In these cases, monitoring and follow-up is much stricter, limiting its duration to six months. After this period, a new social audit is carried out to ensure that the necessary corrections have been carried out. If the social audit proves that the Corrective Action Plan has not been fulfilled, the factory or supplier will be blocked.

In 2016, 453 factories with breaches at sensitive points in the Code of Conduct initiated a Corrective Action Plan. It should be noted that the number of factories involved in this type of Corrective Action Plan has been decreasing over the last four years, despite the increase in audits. This demonstrates how collaboration and daily work in close contact with suppliers and manufacturers result in a better level of compliance. And how suppliers are increasingly proactive in adapting their conditions to the Code of Conduct.

Fabric processing at an Inditex supplier in Portugal.


(*) Corrective Action Plans in factories with sensitive breaches of the Code of Conduct.

Inditex bases its relationships with suppliers on mutual trust and on a philosophy of continuous optimization whereby opportunities for improvement are encouraged. However, we also maintain a zero tolerance attitude towards those who do not take advantage of these opportunities and do not comply with the Code of Conduct or with the requirements for working with us. Thus, of the 1,805 suppliers used in 2016, 76 were rejected during the year for failing to comply with the conditions necessary to work with Inditex. This includes both business and sustainability-related reasons. In this regard, 41 suppliers were blocked due to some type of non-compliance with the Code of Conduct.

Suppliers rejected in 2016

Geographic area Suppliers with purchase* Rejected due to breach of the Code of Conduct Rejected for commercial reasons Active suppliers at 31/01/2017
Africa 141 2 0 139
America 65 3 6 56
Asia 938 15 25 898
Europe (non-EU) 179 15 2 162
European Union 482 6 2 474
Total 1,805 41 35 1,729

(*) Suppliers with purchase in 2016 of fashion items, mainly clothing, footwear and accessories, with Inditex production of over 20,000 units/year.

Inditex continuously works hand-in-hand with its suppliers, in line with the objective of establishing stable and lasting relationships. Therefore, we seek to cooperate closely with our suppliers with a constant dialogue where trust is mutual. The benefits of daily work from the outset with the supplier can be seen in how suppliers’ classifications improve with the years of relationship with Inditex. Thus, the percentage of suppliers with ranking A and B is higher among those suppliers that have been collaborating with Inditex for over three years and taken part in several programmes under the 2014-2018 Strategic Plan.

Supplier RATING according to years of commercial RELATION with Inditex (%)

(*) Supplier A: complies with the Code of Conduct
Supplier B: breaches a non-material aspect of the Code of Conduct
Supplier C: breaches a sensitive aspect of the Code of Conduct
Supplier subject to Corrective Action Plan (CAP): breaches of the Code of Conduct, requiring the immediate implementation of a Corrective Action Plan
PR supplier: undergoing an auditing process.
Tailoring process of an Inditex supplier in Portugal.

IV. Sustainability

To ensure that the activities of our suppliers have a positive impact on the communities where they operate, Inditex cooperates with global and local stakeholders. In addition to our Global Framework Agreement with IndustriALL, we join forces with various local, regional and international initiatives and organizations to promote sustainability in the textile sector and, consequently, improve the quality of life of communities dependent on this industry. This is done through clusters that Inditex defines as cooperation spaces for promoting a sustainable production environment in a strategic geographical area and within a framework of compliance with Human Rights and Fundamental Labour Rights.

Currently, we have clusters in Spain, Portugal, Morocco, Turkey, India, Pakistan, Bangladesh, Vietnam, Cambodia, China, Brazil and Argentina that account for more than 95% of our production and contribute to our social and labour standards being applied locally. Pakistan is the last to be created, with the aim of responding to local challenges and in close proximity to suppliers and their workers.

Internal and External TEAMS IN CLUSTERS

Cluster Internal team External team
Spain 14 14
Portugal 2 28
Morocco 4 12
Turkey 9 26
India 6 71
Bangladesh 10 28
Vietnam 2 20
Cambodia 1 19
China 11 321
Brazil 1 26
Argentina 2 7
Pakistan 1 15
Total 63 587

Main cluster collaborations

Activities in clusters in 2016

Spain Portugal Morocco Turkey India Bangladesh
Traceability audits Coordination traceability strategy 40 388 418 12 52
Suppliers with purchase during the year 208 170 121 175 136 94
Active factories in the year 466 1,357 283 1,427 394 262
Workers in active factories 10,298 49,714 73,772 192,173 200,139 479,859
Pre-Assessment 71 158 48 327 214 78
Social 50 694 155 679 392 190
Special 82 127 141 379 739
Rating of suppliers
A suppliers 99 88 51 82 71 38
B suppliers 70 69 54 68 55 51
C suppliers 9 4 6 5 6 2
CAP suppliers 2 8 8 15 4 3
Corrective Action Plans 1 86 40 160 61 15
Featured initiatives Coordination of global strategy and representation in the UN Global Compact or Ethical Trading Initiative, among others. Training and work experience for young students of the Catholic University of Porto. Health and safety programme in factories and collaboration with Medicus Mundi Andalusia for the health and hygiene of workers. Joint Turkey Programme to improve productivity and social dialogue, training project with IndustriALL. Sakhi Health and Sakhi Gender Equity Programmes for women empowerment, Sowbhagyam Programme for eradicating sumangali, Sankalp Programme for eradicating child labour. Participation in Accord, effective implementation of participation committees with IndustriALL, reinforcement of internal health and safety programmes
Vietnam Cambodia China Brazil Argentina Pakistan
Traceability audits 53 156 344 318 995 0
Suppliers with purchase during the year 4 1 393 15 45 42
Active factories in the year 134 125 1,654 65 83 107
Workers in active factories 152,101 126,843 368,428 10,712 5,099 125,316
Pre-Assessment 50 59 1,019 9 9 30
Social 101 74 1,133 161 104 90
Special 18 138 144 18 8 0
Rating of suppliers
A suppliers 2 0 45 14 37 23
B suppliers 1 1 301 0 3 18
C suppliers 1 0 35 0 0 0
CAP suppliers 0 0 8 0 3 1
Corrective Action Plans 9 1 72 0 5 2
Featured initiatives Participation in Better Work Vietnam with 13 factories Participation in Better Work Cambodia with 54 factories SCORE Programme with ILO, LEAN Project, health and safety training in collaboration with EHSA Centre, Ling’nan University Participation in an Agreement with ILO to promote improvements in the working conditions of workshops in Sao Paulo Collaboration with the National Institute of Industrial Technology to develop production monitoring criteria. Participation in the Buyers Forum of Pakistan