Supply Chain:

Quality and Our Brands Manufacturing Standards

Kroger operates 38 dairies, bakeries and grocery manufacturing plants around the country. Nearly half of Our Brands grocery products are manufactured in one of our own plants. We follow leading industry practices and use the same type of auditing approach with our plants that we use with our retail grocery stores, combining the data from third-party audits, internal audits, and those of regulatory agencies to help us monitor and continuously improve our operations.

We set high quality and performance standards for all of Our Brands products, whether we make them ourselves or use a third-party supplier. We measure our performance in several ways, including comments we receive on our toll-free phone line and via emails. A standard industry measure of product quality is the number of comments received per million units of product. In 2016, our rate of customer comments per million units of product was 8.62, a 6% decrease from 2015. We continue to monitor this important source of feedback and regularly review all customer comments. Our product technologists investigate the causes and implement corrective actions as needed.

When Kroger customers have questions, concerns or just need help in planning that special meal, they can call us toll free at 1-800-KROGERS or email us through www.kroger.com. We have professional dietitians and home economists on staff, as well as other specially-trained representatives who can help.


SUPPLIER OVERSIGHT AND MANAGEMENT

Our customers and other stakeholders implicitly trust us to source our products responsibly. Kroger is making efforts to improve management of our supply chain so that we may better support fair treatment of the workers who produce our products.


INFORMATION SYSTEMS

Kroger utilizes a Supplier Information Management (SIM) system to automate supplier qualification, set-up, and communication processes. The SIM system helps us maintain a common set of data on all of our existing and potential suppliers, increasing visibility across our vast sourcing network. The data is housed in one central location and accessible to qualified associates across the company. Sourcing teams are able to easily identify suppliers who are, or are not, qualified to do business with us. This improved transparency across the supply chain allows us to better manage the risks associated with third parties and document clearer accountability for all parties involved in our complex global supply chain.


SOCIAL COMPLIANCE PROGRAM

The focus of our social compliance program is ensuring compliance with our Vendor Code of Conduct. In 2015, we expanded our social compliance team, invested in technology and implemented additional processes designed to further improve the lives of workers in our supply chain and increase the trust in our sourcing activities. This team assesses risks of human rights violations in the supply chain, reviews our social compliance audits, and provides reports that inform our business decisions.


VENDOR CODE OF CONDUCT

In order to do business with Kroger, a supplier is required to agree to our Vendor Code of Conduct, which can be found here. This Code makes it clear that our suppliers (and their suppliers) must meet the legal requirements applicable to them and meet the high ethical standards expected by Kroger. We have a zero tolerance policy for human rights violations. If suppliers (or their suppliers) do not live up to our Code, we will not do business with them.


Audits

Our Code allows Kroger or its designated representatives to audit supplier facilities for compliance with the Code.

In designing our audit, we partnered with a world class inspection, verification, testing and certification company to ensure we meet and exceed industry standards. After additional review by a cross-functional business team and consultation with third-party stakeholders, we decided to focus our audits on child and forced labor, disciplinary practices, discrimination, environment, ethics, freedom of association, health and safety, monitoring sub-tier supplier compliance, subcontracting, working hours and compensation.

We recently published the audit questions contained in our audit. This will allow our suppliers to better understand our expectations prior to an audit taking place and increase transparency with our external stakeholders.


IDENTIFYING THIRD-PARTY RISKS

In order to identify risks for audit prioritization purposes, we review information from and meet with governmental organizations, non-governmental organizations, industry groups and other stakeholders. We also rely on our merchandising teams and suppliers to keep us informed of supply chain risks. In 2016, we continued working with The Sustainability Consortium to assess top commodities using their Commodity Mapping Tool, which is designed to help identify and further understand social and environmental risks in upstream commodities. Our social compliance steering committee then reviews the information and recommendations from our social compliance team to prioritize high-risk countries and commodities.


2016 PROGRAM RESULTS

From 2014 to 2016, Kroger increased the number of social compliance audits by more than 150%. We also continued to implement our robust process for analyzing and acting on the results of these audits.

Kroger takes seriously any violations of our Code of Conduct. Facilities with violations are placed on a corrective action plan (CAP). Audited facilities placed on a CAP are required to resolve the pending corrective action items before a given deadline. Facilities that fail to resolve corrective action items before the deadline are subject to order cancellation and disqualification as an authorized Kroger supplier.

Facilities that accumulate any Zero Tolerance violations are automatically designated as "Not Approved," and are considered to have failed the audit. Our policy prohibits the supplier from shipping product to Kroger until the Zero Tolerance violations are corrected. Upon satisfactory resolution of all Zero Tolerance violations, these facilities are eligible to be reinstated.

Some Zero Tolerance violations can result in automatic failure with no opportunity for short-term reinstatement. Cases of suspected child labor, suspected forced labor or attempted bribery by the facility fall within the "Prohibited" category. Prohibited suppliers are immediately removed from the Kroger supply chain.


GOING FORWARD

Our customers trust that the products we bring to market are sourced from reputable suppliers who provide safe and fair working conditions for their workers. We expect our program to continue to evolve and develop to ensure a responsible and ethical supply chain.

Kroger believes that to truly effect change in this area all constituents need to work together. By coordinating the efforts being undertaken at all levels of the supply chain and by working with other retailers, trade associations, and other organizations, we can eliminate audit redundancy and unnecessary costs and refocus those resources to improve the lives of workers and strengthen the supply chain that brings food and other necessary products to our customers.


Risk Management in High-Impact Supply Chains

In 2016, Kroger continued working with The Sustainability Consortium (TSC) to identify and further understand social and environmental risks in the company's supply chain. TSC is a multi-stakeholder non-profit organization that designs and implements measurement and reporting systems that improve product sustainability.

The collaboration between Kroger and TSC includes two elements: (1) using the TSC's Commodity Mapping Tool in combination with Kroger's sourcing data to identify geographic, environmental and social risks for top high-impact commodities, and (2) reaching out to key suppliers to gain increased visibility and insights on risk management and other metrics.

Currently, Kroger and TSC are working together to design an effective survey tool to benchmark suppliers' performance on sustainability issues, identify high-risk suppliers and develop a plan to work with suppliers to improve sustainability. Kroger will launch this program later in 2017.

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