Supply Chain Management

Management Approach

Ensuring our high-quality medicines are available wherever and whenever patients need them is one of our top priorities. We are committed to maintaining the safety and integrity of our medicines, which begins with the procurement of materials and extends throughout the production process. Through integration of Lilly-owned facilities and external suppliers, we aim to manufacture our medicines in an efficient, effective and safe manner. The Lilly Quality System supports this integration and is the foundation for our quality standards and processes throughout the product development life cycle, including auditing and assessing third-party risk.

In addition to our efforts internally, we promote strong health, safety and environmental (HSE) practices with our suppliers and contract manufacturing operations (CMOs). We also work to mitigate counterfeit medicines and ensure we comply with governmental efforts around conflict minerals.

A significant portion of Lilly's environmental and social impact is embedded in our supply chain. We are committed in policy and action to supporting our suppliers and CMOs as they work to continuously improve their operations.

We believe that doing business with a diverse set of suppliers also helps Lilly accelerate innovation and deliver strong results. We seek out fresh perspectives and insights by partnering with minority group-owned, women-owned and small businesses to meet our wide range of internal and external needs.

Supply Chain Governance

We view our supply chain as an extension of our operations and strive to instill our company’s operating principles within our supplier network. We support the United Nations Global Compact (UNGC) principles, adhere to human rights and labor laws, comply with anti-corruption practices, endeavor for a diverse supplier base and promote sustainability efforts designed to minimize our environmental footprint.

We rely on our suppliers and CMOs, including those that supply us with research and development materials, active pharmaceutical ingredients (APIs) and final drug products, to ensure the ongoing availability of our medicines. As our manufacturing base has grown, we’ve taken significant steps designed to reduce our exposure to risks inherent in managing a global supply chain.

We continue to strengthen efforts to monitor our supply chain for quality and HSE events and risks. We institute additional procedures for monitoring suppliers that may pose higher risks, and we intervene quickly when appropriate. Both quality and HSE considerations are integrated into Lilly’s process for evaluating potential new contract manufacturers, and formal assessments are conducted routinely (approximately every three years) for existing contract manufacturers.

We have also taken steps to educate and engage our suppliers directly on HSE issues and to help them build expertise around HSE topics. This includes our ongoing work as part of the Pharmaceutical Supply Chain Initiative (PSCI), a non-profit business membership organization founded in 2006, which counts Lilly as one of its inaugural members. In 2022, Lilly HSE professionals led the Industrial Hygiene PSCI supplier capability building team and served on several of PSCI’s supplier capability building teams. PSCI, along with its member companies, created and maintains the Pharmaceutical Industry Principles for Responsible Supply Chain Management (the PSCI Principles). The PSCI Principles provide our industry with consistent supplier performance standards in the areas of ethics, labor, health and safety, the environment and related management systems. At Lilly, we have aligned several codes, policies and procedures with the PSCI Principles including:

• Internal product stewardship requirements that detail our approach to managing risk across the supply chain

• The Lilly Supplier Code of Business Conduct, which applies to all suppliers

• Relevant procurement standards

• Standard contract language applicable to providers of contract manufacturing services.

• Learn more about our HSE governance.

Third-Party Risk Management

We engage with third parties to provide differentiated services, enable our focus on our core competencies and gain operating efficiencies. Working with third parties may increase potential risks such as service disruptions, data and security breaches, reputational harm, penalties and fines. Mitigating potential risks and protecting Lilly’s reputation is a companywide responsibility that includes third party participation.

With leadership from an internal center of excellence, we have established a third-party risk management program focused on identifying and managing potential risks posed to the organization by working with third parties. Lilly’s program has five foundational operating model components: governance and delivery, policies and standards, management processes, tools and technology, and risk metrics and reporting.

We focus on the following risk areas: anti-corruption, information security, privacy, information systems quality, animal welfare and business continuity. Additional risk areas will be phased in as the program evolves. The third-party risk management program covers the full third-party risk management lifecycle including due diligence activities that are conducted pre-contract and ongoing monitoring activities that are conducted post-contract through the life of the engagement.

Assessing & Auditing Third-Party Operations

To ensure we meet the expectations of the Lilly quality system, our global quality auditing and compliance team conducts annual risk-based audits to oversee both internal Lilly manufacturing sites and external third-party operations. We regularly assess the results of these audits to identify areas for improvement.

Lilly manufacturing sites conduct internal risk analyses of each purchased material (raw materials, APIs, intermediates, packaging materials, and GMP consumables) based on global quality standards. The risk analyses evaluate the supplier, complexity of the supply chain and how the material will be used at our internal sites to determine an overall risk classification. The overall risk classification helps inform the actions needed to approve a new supplier, and the ongoing requirements that we will apply to the supplier. We have similar quality standards and oversight activities for contract manufacturers as well.

For managing HSE risks, our manufacturing procurement contracts ask suppliers to support the PSCI Principles for Responsible Supply Chain Management, which set out the relevant practices any business operating within the pharmaceutical supply chain is expected to uphold in the areas of ethics, human rights and labor, health and safety, environment and management systems. Lilly also expects our suppliers to conform to the HSE expectations outlined in our Supplier Code of Business Conduct. Standard contract language also requires that manufacturing suppliers, if requested by Lilly, agree to submit to audits that assess compliance with our expectations. Additionally, we engage with key suppliers on environmental sustainability topics such as climate change (greenhouse gas emissions), waste reduction and other relevant opportunities to minimize the environmental footprint of our supply-chain.

Partnerships and Leadership

We are an active member of external associations and consortiums aimed at enhancing the security, quality and safety of pharmaceutical supply chains. Team members of Lilly’s global quality auditing and compliance group actively participate in Rx-360 and International Pharmaceutical Excipients Council (IPEC) working groups to provide input into industry guidelines and standards and align our processes with our peers.

We currently hold a seat on the board of directors at Rx-360 and participate in several of the consortium’s working sub-groups to help ensure we stay informed of and help set industry best practices. During 2023, we are continuing the use of Rx-360 Supplier Audit Reports to supplement our internal audit plan as needed. Some highlights of our involvement with Rx-360 include:

• In 2020, Lilly co-authored a Remote Audit Best Practice Guide for members to utilize as they face difficulties in auditing supply chains due to the COVID-19 pandemic.

• In 2021 Lilly participated in the validation testing of the now-launched auditsPLUS® system interactive database, which provides users of the Rx-360 program new and enhanced tools to help reduce their audit burden.

• In 2022 Lilly participated in development of a white paper on Good Distribution & Warehouse Practices for Warehouse & Transportation in Latin America (LATAM). This document sets the guidelines for the proper warehousing and distribution of regulated medical products within Latin America in compliance with Good Distribution Practices.

A supplier is considered diverse when at least 51% ownership and control are held by an ethnic minority group member (MGM), a woman, someone who is LGBTQ+ or disabled. Small suppliers are defined by the U.S. Small Business Administration’s (SBA’s) small business size standards.

Given the importance of advancing supplier diversity, we have developed a comprehensive strategy focusing on three key areas:

• Engage small and diverse suppliers, advocacy organizations and industry partners (for best practices);

• Empower small and diverse suppliers as well as internal stakeholders; and

• Impact the community where we live and operate.

As part of our Racial Justice Commitment, we set an aggressive goal in 2020 to double our spend with African American-owned suppliers and vendors in two years. We exceeded this doubling goal by 25%, increasing from a baseline of $143 million in 2020 to $358 million for fiscal 2022.

We again offered the Lilly Mentor Protégé program again by, mentoring nine Black-owned businesses through an eight-month structured development program. The objective of the program is to develop small/diverse suppliers by sharing Lilly methodologies and industry best practices to increase the proteges’ readiness for future business opportunities. Through this program, the supplier builds its their network and capabilities for working with Lilly and more broadly with other customers. Of the nine Black-owned businesses in the program, four were new suppliers in 2021, two were added in 2022 because of the program, and the remaining three suppliers are pursuing opportunities at Lilly in 2023.

Externally, we continued to provide strategic leadership influence by serving on various boards and committees with several advocacy organizations, including being a leader on the Business Equity for Indiana – Procurement Roundtable, which is advocating and advancing diverse suppliers. To better support small/diverse supplier communities and the Racial Justice Commitment, we also formed a new corporate partnership with INDY Black Chamber of Commerce in 2022.

In 2022, we also rolled out supplier diversity training for our procurement team and over 900 managers. This training underscores the positive broader economic impact of creating a level playing field for small and diverse suppliers to compete and win business contracts.

See important information about our ESG report.