Operational risk

Updated 14.2.2022

Operational risk management is part of the daily work of the businesses. Opportunities and risks are identified, assessed, and managed on a daily basis 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 footprint and capacity costs, including costs related to the supply chain. 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.

Supplier and subcontractor risk

In 2021, disruptions to global supply chains posed a risk to factory activities and the delivery of spare parts, while having a negative impact on raw material and component prices and availability, as well as transportation costs.

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 cross-business supplier base. Indirect Purchasing 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. Risks are further mitigated through a comprehensive follow-up of suppliers’ credit worthiness. Wärtsilä uses an online solution for supply chain risk identification, assessment, and monitoring. Risks around key components are mitigated through dual- or multi-sourcing when 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 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 non-destructive robotic ultrasonic data analysis procedure enhances the probability of detecting imperfections in 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 non-conformities, 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, way of working, and services. Management at all levels is responsible for the quality of output from their organisations and is 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.

Contractual risks

Wärtsilä’s equipment business includes projects and deliveries of various sizes. The most substantial orders concern power plants delivered on a complete EPC (engineering, procurement, and construction) basis, and major marine and energy delivery contracts requiring extensive coordination, efficient risk management, and the integration of contracted systems and solutions.

To avoid unforeseen cost overruns, even in the most complex projects, Wärtsilä puts a strong emphasis on having proper technical assessment controls, supplier approval routines, and internal training programmes in place. With these measures, Wärtsilä aims to ensure the quality of its project execution activities, and the upfront identification of project specific risks and opportunities.

The risk of product liability claims is reduced through the 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, as well as the established contract review process.

In activities related to lifecycle support, contractual risk is mainly related to long-term agreements and service projects, such as engine upgrades, retrofits, or modifications. In large-scale performance-based agreements, the recognised contractual risk is related to the ability to manage and maintain assets as planned.

Risk of non-compliance, corruption, and fraud

Wärtsilä complies with the law and its own internal policies and procedures everywhere the company does business. 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. There is a whistle-blowing channel in place for reporting misconduct incidents. 

Compliance processes are embedded in all of 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 and 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 many markets where the company operates, Wärtsilä maintains its highly ethical practices at all times. Full compliance with its stringent anti-corruption regime, including policies to prevent the corruption and bribery risk of third parties, is demanded by Wärtsilä.

Commodity price risk
Oil and gas
The direct effect of oil price changes on Wärtsilä’s production is limited, with their impact being mainly demand related. Higher oil 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. Furthermore, high oil prices increase investments in gas carriers, gas-based power plants and, increasingly, also in gas-fuelled vessels. 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 may impact the competitiveness of thermal baseload gas plants, but is not expected to have a major impact on thermal balancing power.

Metals and electricity
Metal prices have an indirect effect on the component cost of Wärtsilä’s products. Some key components are sourced with long-term contracts, and raw material price volatility is, therefore, limited. Electricity prices have no substantial impact on Wärtsilä’s production costs. In the energy markets, high electricity prices support investments in new capacity by utility customers.