Operational risk

Updated 23.2.2023

Operational risk management is part of the daily work of the businesses. Opportunities and risks are identified, assessed, and managed daily and reported to, and managed by, the appropriate management level. The status of these opportunities and threats is reviewed periodically, and appropriate further actions are then taken.

Manufacturing risk

Wärtsilä constantly analyses its manufacturing cost and the associated supply cost of raw materials and components, and maintains a suitable manufacturing footprint with adequate capacity. In 2022, Wärtsilä inaugurated the Sustainable Technology Hub in Vaasa, Finland, being a modern, state of the art R&D and manufacturing facility with a high level of flexibility and automated logistics, but also partnering campus for collaboration and innovation.

Risk assessments have been made for all the main delivery centres, and significant safety, environmental impact, and risk mitigation investments have been completed. Risk identification, assessment, and mitigation actions are executed on a regular basis as part of operational management. Management systems for quality, environmental, occupational health and safety, and other systems are utilised to improve productivity, while safety and business continuity plans have been implemented for the key delivery centres.

Cost inflation risk

In 2022, rapidly accelerated cost inflation burdened Wärtsilä’s profitability and caused cost overruns on the contracts with fixed price in the orderbook. To mitigate the impact of cost inflation, the company has widely implemented raw material indexation and other cost related indices into the pricing of contracts to the extent possible. Furthermore, Wärtsilä has executed price realisation in its transactional business and services as well as continuous improvement measures to improve profitability. There is close monitoring and co-operation between the supply management and the sell-side pricing departments in the businesses to react on cost increases.

Supplier and subcontractor risk

In 2022, intensifying cost inflation (materials, components, transportation, and test fuel costs), high energy prices, and other disruptions to global supply chains had a negative impact on the operating result of Wärtsilä. Continued congestions at ports and disruptions to global supply chains have caused availability issues and longer lead times posing a risk to factory activities and the delivery of spare parts and services.

Wärtsilä’s supply management is integrated within the businesses. The aim is to work in partnership with the supplier base to create value for Wärtsilä’s customers by ensuring quality, on-time delivery, and the lowest total cost of ownership. Category management is in place to ensure coordinated interfaces and synergies for the crossbusiness supplier base. Indirect Procurement is a centralised function responsible for managing strategic sourcing activities for indirect materials and services in all businesses and support functions.

Wärtsilä has a process for managing and controlling its supplier network and for verifying that the suppliers’ performance meets expectations. Supplier performance is, therefore, continuously measured. A key activity in managing business continuity planning is the regular assessment of business interruption risks, which is carried out in cooperation with the company’s suppliers.

Wärtsilä has established close collaboration and long-term relationships with its main suppliers and follows up their credit worthiness and financial condition. Wärtsilä uses an online solution for supply chain risk identification, assessment, and monitoring. Sourcing risks around the key components and materials are mitigated through diversification and dual- or multi-sourcing where possible.

Lifecycle quality of products and product liability risk

Wärtsilä’s quality strategy focuses on preventive and proactive actions to deliver increased customer satisfaction, shorter lead times, and a reduced number of non-conformity claims. This is delivered by effective project risk management and strengthened awareness and ownership, supported by a streamlined product improvement process.

Several risk management techniques are applied in R&D, including the risk elimination tool FMEA (Failure Modes and Effects Analysis) and in-house validation testing. Wärtsilä seeks to control quality risks by monitoring the incoming quality of the supply chain, and by designing and manufacturing its products with all due care. A nondestructive robotic ultrasonic data analysis procedure enhances the probability of detecting imperfections in key components with a complex geometry.

Wärtsilä applies a GATE model in order to control the product development process. Initially, only a limited release of new products is allowed, and full release authority is given to the sales organisations only after testing and further validation has been completed.

Wärtsilä controls its manufacturing quality risks by applying several assurance and quality control principles. The level of quality assurance and control requirements are determined based on component criticality and are applied throughout the delivery chain.

Requirement management is used to assess components systematically, enabling the allocation of resources and efforts according to component criticality. The ranking criteria indicates the consequence if a component fails. The objective is to improve quality proactively within product development, supply management, and the entire delivery process.

Lessons learnt from the sales to delivery process are shared between responsible organisations to continuously improve operations in serving customers, and for minimising risks. 

Non-conformity management focuses on developing and improving operations by registering and handling detected nonconformities, ensuring that the products and services received by customers are according to the agreed scope and specifications. Efficient handling, monitoring, and reviewing of non-conformities is crucial for proper risk management and mitigation.

Product improvement management (issue resolution) projects are prioritised based on risk and importance. Such a project is initiated when Wärtsilä identifies a technical issue according to claim statistics, customer feedback, or internal analysis, and the case fulfils the risk categorisation for a non-isolated case.

The businesses support customers in all warranty issues. This offers a feedback loop from the field to production and R&D, while taking care of the customers’ installations throughout their lifecycle. Warranty provisions are made to cover any costs that may arise after product delivery. The company’s product liability insurance covers unexpected damages.

Best industry practices and good governance are adopted to continuously improve quality. Each business is responsible for the quality of their products, its way of working, and services. Management at all levels are responsible for the quality output from their organisations and are accountable for ensuring that appropriate review and feedback mechanisms are in place.

Wärtsilä’s business level quality, environmental management, and occupational health and safety systems are ISO 9001:2015, ISO 14001:2015, and ISO 45001:2018 certified, with an emphasis on proactive risk and opportunity management. In addition, Wärtsilä has obtained UL9540 safety certification for its Quantum battery storage container

Contractual risks

Wärtsilä’s equipment business includes projects and deliveries of various sizes. The most substantial orders typically concern power plants delivered on a complete EPC (Engineering, Procurement, and Construction) basis, but the majority of deliveries are made also on an EEQ (Engineered Equipment) basis. These and other major marine and energy delivery contracts require extensive coordination, efficient risk management, and seamless integration of all contracted systems and solutions. There are risks related to the efficient and fast scaling up of the energy storage business and its resources to meet the increasing market demand.

Wärtsilä provides lifecycle services to its customers in the form of transactional sale of spare parts and field service work, long-term service agreements and service projects, such as engine upgrades, retrofits, and modifications of the installed base.

Wärtsilä places strong emphasis on having project management competences, proper technical assessment controls, proper time schedule and cost controls, supplier approval routines, and internal training programmes in place. With these measures, Wärtsilä aims to ensure the quality of its contractual obligations during execution, and the upfront identification of specific risks and opportunities.

The product liability claim risk is reduced through maintaining high level of lifecycle quality of the company’s products and work. This applies from the initial design and continues through all stages of the production process to the eventual field service activities.

From time to time, Wärtsilä may be a defendant in a number of legal cases that have arisen out of, or are incidental to, the ordinary course of its business and, the company receives claims of different amounts and with varying degrees of substantiation. It is Wärtsilä’s policy to provide for amounts related to the claims as well as for litigation and arbitration matters when an unfavourable outcome is probable, and the amount of loss can be reasonably estimated.

Risk of non-compliance, corruption, and fraud

Wärtsilä complies with the law and its own internal policies and procedures everywhere the company operates. Wärtsilä’s Code of Conduct is the key guideline for all employees globally, demanding high ethical standards and integrity.

Wärtsilä is fully committed to complying with anti-corruption laws and regulations. Wärtsilä acts to prevent corruption and does not accept violations of the principles set forth in the Code of Conduct, or in Wärtsilä’s Anti-Corruption and Compliance Reporting policies. The company forbids any kind of corruption and bribery and has a strict zero tolerance policy. There is a whistle-blowing channel in place for reporting misconduct incidents.

Compliance processes are embedded in all the businesses, and the responsibility for compliance and awareness of ethics and integrity is that of all Wärtsilä employees. The Compliance function promotes Group-wide compliance and continuously strives to raise awareness of the risk of corruption, bribery, and other misconducts.

While being aware of the risk of being subject to fraud by external business parties, and that the risk of corruption and fraud is heightened in several markets where the company operates, Wärtsilä consistently maintains its highly ethical practices.

Commodity price risk
Oil and gas

The direct effect of oil and gas price changes on Wärtsilä’s operations is limited and mostly related to fuel costs for engine testing, R&D activities, and the heating of some premises.

Higher oil and gas prices represent a risk for global economic growth and increased operating costs, especially in the shipping markets. However, they also stimulate investments in the exploration and production of oil and gas, both on land and offshore. They also spark interest in our energy efficiency related offering, as well as increasing demand for alternative green fuels as they become more cost competitive against conventional fuels.

Furthermore, high oil and gas prices increase investments in gas carriers, gas-based power plants and, increasingly, also in gasfuelled vessels, whereas low oil prices can delay investment decisions in oil producing countries and regions, as well as in the offshore industry. Wärtsilä is a global company involved in different shipping and power plant segments where oil price changes can have an opposing impact on demand drivers. This position is further diversified by the increasing importance of natural gas to Wärtsilä’s business. In the marine markets, high gas prices or their volatility are not expected to reduce the appetite for LNG as a fuel in the long run. However, persistent high gas prices may encourage ship operators to switch from LNG to low-sulphur fuel, which most modern vessels can use in dual-fuel engines.

In the energy markets, gas price volatility and increasing prices have a negative impact on the competitiveness of thermal baseload gas plants and may lead to more running hours of coal and nuclear power plants. Higher fuel prices may have an impact on project viability and customer decision making. However, these are expected to have less of an impact on thermal balancing power plants with lower running hours

Metals

Metal prices have an indirect effect on the component cost of Wärtsilä’s products. Some key components are sourced with longterm contracts, and raw material price volatility is, therefore, limited.

The battery industry has been suffering from price increases, and the price of lithium has increased significantly during the past year. The market seems to have accepted a price reset which took place in the spring and the ordering activity picked up throughout the second half of the year.

Energy and electricity

High electricity prices, in general, support investments in new capacity by utility customers in the energy markets. High volatility, however, may likely have negative impact on new investments.

Wärtsilä’s annual total energy consumption is approximately 1,200 terajoules (TJ). This includes the electricity, heat and fuels used in Wärtsilä’s companies. Fuels are used mainly in engine testing and for R&D purposes, but also in heating, production, and transportation.

Electricity is needed for manufacturing operations, but electricity prices have no substantial direct impact on Wärtsilä’s production capacity costs. In the new Sustainable Technology Hub facility in Vaasa, the heat generated in engine test runs is used for heating, whereas the excess electricity produced is sold to the grid at prevailing market prices. The upcoming discontinuation of engine manufacturing in Trieste Italy will reduce electricity consumption to some extent.