2015 Corporate Responsibility Report

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Business

Global Supply Chain

We Regard Our Suppliers as Essential Team Members. We owe our suppliers the same type of respect we show customers. Our suppliers deserve fair and equitable treatment, clear agreements and honest feedback on performance. We consider the needs of suppliers in conducting our business.

During government fiscal year 2015, we subcontracted more than $7 billion to a broad base of approximately 9,500 suppliers. We subcontracted more than 37 percent, or $2.68 billion, to small business suppliers. We have met and exceeded the 23 percent small business statutory goals for more than 10 consecutive years and have received recognition and numerous awards for our global supplier diversity programs.

Supplier Responsibility and Diversity At Northrop Grumman, our vision is to have the most trusted, world-class and innovative supply-chain organization that delivers value to our customers. We do so through integration of skilled people, suppliers, processes, tools and communications.

In 2015, we appointed a corporate vice president of supply chain responsible for implementing strategies that will enhance our supply chain capabilities. We also sponsored a corporate compliance organization tasked with driving company-wide standards to identify and avoid human trafficking and corruption in the supply base.

To help ensure we attain goals in alignment with our values, we require all employees with procurement authority to complete additional specialized ethics training each year, as well as the Disclosure of Conflicts of Interest and Certificate of Standards of Business Conduct courses.

The MQ-8C Fire Scout helicopter during a capabilities test at Naval Base Ventura County in Point Mugu, California.
Goals & Performance Summary

GOAL Engage various external stakeholder groups that support and serve Northrop Grumman’s values and interests in recruiting, developing, recognizing a diverse workforce and contracting with diverse suppliers.

PERFORMANCE We partnered with many external organizations in support of the development and growth of diverse talent and a diverse supply base. These organizations provide forums for our employees to create long-lasting connections, to volunteer and develop leadership skills in their communities, and to contribute to the company’s success through the recruitment and development of future employees and suppliers. Several of our employee resource groups aligned their meetings with annual partner conferences and supplier diversity outreach events to identify diverse suppliers that have the potential to be included in the supply chain. These events provided access for employees to assist in developing inclusive strategies and programs that enhance our supply chain.

GOAL Ensure performance of suppliers most critical to Northrop Grumman is consistent with our values and our customers’ expectations.

PERFORMANCE We routinely evaluated performance of our most critical suppliers, monthly or quarterly, using standard industry supply chain criteria for schedule, cost and quality of performance. When a specific subcontract warranted, we also evaluated general management, product performance, systems engineering, software engineering, technical aspects, team commitment, supply chain, proposal adequacy, service levels and process effectiveness.

GOAL Establish a single, consistent operational focus promoting best practices in environmental control and sustainability with our supply base and customers.

PERFORMANCE Our supplier portal Online Automated Supplier Information System (OASIS) provided instant access to our supplier terms and conditions and other important considerations to conduct business with Northrop Grumman. In 2015, we completed our multi-year effort to improve our suppliers’ experience through an OASIS enhancement that further solidi ed the "One Northrop Grumman" charter we instill throughout the company. Advancing our sustainability practices was a continued focus in 2015. We augmented our IAEG work group participation to support the European Union regulation REACH (Registration, Evaluation, Authorization and Restriction of Chemicals).

GOAL Enhance awareness, regarding the protection of our products and information throughout Northrop Grumman, to avoid introducing counterfeit parts and exposure to cyberattacks within our supply chain.

PERFORMANCE We continue to take a proactive approach to prevent counterfeit parts from entering our supply chain. In 2015, we:
• Used a company-wide team of Northrop Grumman subject matter experts to establish consistent communication and processes, procedures, tools, training and governance.
• Established a company-wide working group to implement new customer cyber security requirements to prevent and communicate exposures to cybersecurity attacks and promptly report such instances.
• Co-led the AIA Supplier Management Council Cyber Security working group that shares best practices to uncover effective cybersecurity solutions throughout our supply base.
• Participated in AIA, Tech America Counterfeit Parts IPT and various other external working groups to develop standards and establish industry guidelines.
• Developed and implemented system enhancements that allow us to increase visibility and reporting via automated controls.

GOAL Continue to ensure commitment to ethical conduct and identify any conflicts of interest with current and potential suppliers.

PERFORMANCE During 2015, procurement employees reviewed the procurement integrity policy and signed a certification specifying that he/she will not accept supplier gifts, bribes or kickbacks. We also regularly performed due diligence to assess whether suppliers and potential suppliers have been debarred or suspended from U.S. government contracting.

Department of Defense (DoD) Mentor-Protégé Program
This program encourages major DoD prime contractors to develop the technical and business capabilities of:
• Small Disadvantaged Businesses
• Women-Owned Small Businesses
• Service-Disabled, Veteran-Owned Small Businesses
• Historically Underutilized Business (HUB) Zone Small Businesses
• Organizations Employing Severely Disabled Individuals

Since the inception of the Mentor-Protégé Program, Northrop Grumman representatives have provided guidance to more than 130 small businesses. Northrop Grumman has won 23 Department of Defense Nunn-Perry awards, the most awards of any prime contractor. Nunn-Perry awards are the highest honor prime contractors can receive for participation in the program. The award honors retired U.S. Senator Sam Nunn, who sponsored legislation to enact the Mentor-Protégé Program in 1991, and former Secretary of Defense William Perry.

2015 Highlights

Local Focus We used local small businesses within communities surrounding our operating facilities whenever feasible. More than 37 percent of Northrop Grumman procurement spend went to small, women- and minority-owned businesses.

U.S. Government Mentor-Protégé Program We managed six Mentor-Protégé agreements, and in fiscal year 2015 subcontracted $23.2 million to these protégé organizations.

Small Business Support Calendar year 2015 marked the fifth consecutive year that we hosted a joint technology interchange workshop creating synergy among small business owners, military representatives and Northrop Grumman employees. As part of the joint Department of Defense Industry Small Business Innovation Research (SBIR) and commercialization readiness program, Air Force and Navy representatives invited people from SBIR firms for one-on-one meetings at a Northrop Grumman facility.

At Northrop Grumman, our vision is to have a highly trusted, world-class, innovative supply chain organization that delivers value to us and our customers.

Building Strong Supplier Relationships Suppliers to Northrop Grumman are valued team members. We expect each to understand the critical need for top performance in quality, schedule, delivery, occupational health and safety, human rights, labor and environmental responsibility. Northrop Grumman suppliers receive an annual letter outlining our ethics policies and code of conduct. In 2015, we communicated with our supply base representatives to emphasize our company’s continued commitment to Equal Employment Opportunity/Affirmative Action and the detection, avoidance and reporting of counterfeit material.

Most Critical Suppliers Determination We use a dynamic set of criteria to determine the "most critical suppliers" to our core business requirements. We designed these criteria to be flexible and correlate each element appropriately based on business needs.

Critical Suppliers Criteria
• Level of criticality of program
• Past performance
• Dollar value and total spending
• Open purchase order value and volume
• Sole-source versus single-source
• Multiple programs
• Affordability
• Risk and financial health
• Investments, business agreements and small business categories
• Unique technology
• Current pursuits, future pursuits and strategic partnering efforts

Small Business Performance At Northrop Grumman, we repeatedly exceed small business guidelines. We serve as the prime contractor on government programs. In that role, there are increased challenges to achieving small business goals because in certain commodities, small businesses have greater influence on performance at the component, sub-assembly level, of the process. To mitigate these challenges, we have initiated tools such as Technology Domain Teams to concentrate our supply base management efforts on key technology areas.

We emphasize the importance of meeting our small business performance goals, which is key to our corporate values. Throughout Northrop Grumman, we enhance small business performance by aligning individual and organizational performance goals that align with our supplier goals.

Small Business Innovation Research (SBIR) Throughout 2015, we continued to develop our SBIR program, which is a Small Business Administration effort to engage such firms in federal research and development projects with commercialization potential. The SBIR program is a three-phase process of transitioning new small business technology from proof of concept to prototype development to commercialization within industry and government platforms.

Objectives of SBIR
• Stimulate technological innovation
• Contract with small businesses to meet federal R&D needs
• Foster and encourage participation by minorities and disadvantaged businesses in technological innovation
• Increase private-sector commercialization innovations derived from federal research and development

We currently track an estimated 20 SBIR firms involved in all phases of the program and have partnered with SBIR firms for them to receive an estimated $6 million in transition funding to commercialize innovative technology. Technical-lead employees at each Northrop Grumman sector use the program to augment the company’s technical and scientific expertise. The teams consist of a technical point of contact, a supply chain manager and a small business liaison officer, who collectively work to identify and provide subcontracting opportunities to SBIR firms. Ultimately, the SBIR program provides funding to small business firms to assist them in bringing game-changing technologies to market.

Being Responsible: Supply Chain Management/International

Global Supply Base: As the Northrop Grumman business portfolio expands further into global markets, we are enhancing our efforts to prevent human trafficking and other misconduct within our global supply base. We have a robust anti-corruption program to help ensure that we are doing business only with parties that share our corporate values for integrity and adhere to transparent and ethical business practices.

Human Rights: We are focused on identifying, managing and eliminating the potential of human rights violations occurring within our supply base. Within our current supply base, we maintain a standard set of terms and conditions for entering into contracts with international parties. We have a robust and comprehensive focus on ensuring the integrity of our international supply chain and other third-party relationships.

Conflict Minerals: We are committed to complying with the Dodd-Frank disclosure requirements regarding conflict minerals. In 2015, we filed our conflict minerals report and disclosed that we determined that during 2014 we manufactured and/or contracted to manufacture products containing conflict minerals but were not able to determine the countries of origin or facilities used to produce the conflict minerals in our products. We continue to enhance our conflict minerals due-diligence process, including leveraging new data management automation to make the supplier assessment and reporting processes more efficient. Northrop Grumman is also a member of the Aerospace Industries Association Conflict Minerals working group that establishes best practices and provides industry benchmarking opportunities.

We are committed to complying with the Dodd-Frank disclosure requirements regarding conflict minerals.

Integrated Structure: Northrop Grumman utilizes an integrated global supply chain structure. Each of our suppliers is provided an annual letter emphasizing, “Strict adherence to ethical practices is a Northrop Grumman priority and is an essential element of all our supplier relationships.” The letter links the supplier to the Northrop Grumman Associate Values Ethics and Conduct brochure, which outlines our values and company standards for ethical behavior for employees and suppliers.

Risk Management: Supply Chain Risk Management also includes the supplier’s information security risk profile and commitment to privacy. Information protection practices of our suppliers impact the security of Northrop Grumman’s infrastructure and information, and we take it seriously. We have policies and processes to mitigate risk. In 2015, we focused on a number of supply chain risk mitigation activities that enhanced our ability to identify and mitigate potential program execution risk prior to issuing offerings to our customers.

Supply Chain Diversity: The Northrop Grumman Global Supplier Diversity Program office is a link to small and disadvantaged business owners, as well as Historically Black Colleges and Universities, Hispanic Serving Institutions, Tribal Colleges and Universities interested in procuring subcontracts to Northrop Grumman. We have received national recognition for our efforts to increase the number of successful minority- and women-owned subcontractors. Along with these outreach and mentoring programs, we sponsor academic, customer and industry activities that support growth and development in the small business community.

Ron Penick, contracts administrator, and Melissa Poli, socio-economics business liaison, provided small business counseling at the Service Disabled Veterans Conference.