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Operational risks

Operational Risk Management is part of the daily work of the Businesses. Apart from normal risk management work, the specific Operational Risk Groups that include members from each Business aim at establishing a continuous process of operational improvements.


Manufacturing risk

Risk assessments have been made, and significant safety and risk mitigation investments completed, in the main delivery centres. Wärtsilä uses management systems for quality, environmental, occupational health and safety, and other systems to improve productivity and safety. Wärtsilä has implemented business continuity plans (BCP) in its key delivery centres.

As the majority of ship construction has already shifted to Asia, Wärtsilä needs to constantly analyse its manufacturing footprint and capacity costs, including within the supply chain. A significant step in the adjustment of the manufacturing footprint was taken in January 2010 when Wärtsilä announced its plan to close the delivery centre in Drunen, the Netherlands, and to move the production primarily to China. This was seen as being necessary in order to meet market demand in Asia, as well as to address over capacity by concentrating production within fewer units. The flexibility and agility needs of the market are also being met by introducing multiproduct factory concepts.

Supplier and subcontractor risk

The centralised Wärtsilä Supply Management (WSM) function is responsible for all strategic sourcing activities. Within that responsibility, WSM manages and controls Wärtsilä's supplier network to make sure that the supplier performance is in line with Wärtsilä's expectations. Supplier performance is, therefore, continuously measured. A continuous assessment of business interruption risks in co-operation with our suppliers is one means of managing business continuity planning. Several supplier risk audits have been completed jointly with the insurer as another means of mitigating risks. These audits are now part of the regular work for the WSM and Risk Management functions. To further mitigate risks, a comprehensive follow-up of suppliers' creditworthiness has been established.

Wärtsilä Supply Management has developed its activities by creating close collaboration and long-term relationships with its main suppliers. By having these close relationships, WSM secures a common view with its suppliers on values and goals. These shared values and goals support Wärtsilä's management of strategic risks. In addition, WSM continues its supplier structuring programme in order to create and maintain a sustainable supplier base. As part of that programme, WSM further develops its global sourcing activities. Furthermore, supplier related risks are also addressed by having double sourcing on key components.

Lifecycle quality of products and product liability risk

Launching new products always involves risks. In the R&D process several risk management techniques are applied, including FMEA, a risk elimination tool, a single issue list, and in-house validation testing. Furthermore, Wärtsilä seeks to control quality risks by controlling the incoming quality from the supply chain, and by designing and manufacturing products with all due care. Wärtsilä applies a GATE model in order to control the product development process. First, only a limited release of new products is allowed. Using the gate approach, only after testing and further validation has been completed is the full release given to the sales organisations. The 5S (meaning sort, shine, set, standardise and sustain) philosophy is being implemented in all production sites to increase quality and to support lean operations. Services is responsible for all warranty issues, and offers a feedback loop from the field to production and R&D, while taking care of customers' installations throughout their lifecycle. The company makes warranty provisions to cover any warranty costs that may arise after product delivery. Product liability insurance covers unexpected damages.

Contractual risks

Wärtsilä's non-Service sales consist of project deliveries of various sizes. The most substantial orders concern turnkey power plants, the biggest of which during 2010 was a 380 MW plant in Brazil. However, the risks from individual projects do not reach significant levels considering the total volume of business. The lifecycle quality of the products and work, initiating from the design and extending throughout all stages of the production process as well as the field service work, plus the use of standard sales contracts including the establishment of a contract review process, reduce the risk of product liability claims.

Commodity price risk

Oil

The direct effect of oil price changes on Wärtsilä's production is very limited. The indirect effects of oil price volatility on customers are outweighed in importance by the long economic life of the investments, fuel-efficient technologies, and the availability of alternative fuels.

Metals

Metal prices have an indirect effect on engine component costs. This exposure is not hedged but annual agreements are in place to balance the short-term fluctuations. Furthermore, some key components are sourced with long-term contracts and thus raw material price volatility is limited.

Electricity

Electricity prices have no substantial impact on Wärtsilä's production costs.