Supply shortages at our suppliers – e.g. as a result of Brexit or the economic situation – may lead to production downtime and delays in our own deliveries if there are no alternative sources of supply. This would adversely affect our earnings. These potential risks arise specifically in connection with the procurement of components and input materials from third parties. This could have a negative impact on DEUTZ’s net income and on its capacity utilisation.
We seek to mitigate these risks by carrying out intensive supplier management and ongoing monitoring of the market.
Besides these global activities, there are three cornerstones to our procurement strategy for strategic and production-critical components: firstly, long-term supplier relationships and supply agreements; secondly, increased dual sourcing; and, thirdly, where appropriate, allocation of production to subcontractors. These proven approaches together minimise the procurement risks and secure the required capacity to the greatest possible extent.
Furthermore, we supported a change of ownership at a supplier of cast parts in order to improve this supply relationship. This involved making a financial commitment in 2018 that may give rise to financial risks.
In view of the measures in place, we categorise the procurement risks with regard to the attainment of our financial targets as ‘low’ in 2019.
Fluctuations in capacity utilisation in production that result from our level of dependency on the general economic situation can, just like breakdown-related production delays, have a negative impact on profitability.
In order to avoid mistakes in planning and capital expenditure, the necessary production capacity is regularly reviewed and planned using different timescales: over a number of years as part of the medium-term planning process, which is revised each year, and for the following financial year as part of the budget planning process, which is then updated quarterly for the current year. Production programme meetings and capacity planning meetings are held monthly to ensure that our capacity is adjusted in line with orders on hand. We are also increasingly making use of temporary employment contracts in order to ensure greater flexibility.
In view of the measures in place to avoid or minimise these risks, we continue to categorise the level of production risk with regard to our financial targets as ‘low’.
The DEUTZ Group is exposed to liability and warranty risks, for example as a result of delays to production start-up. Potential warranty claims and claims for compensation could have a negative impact on our financial position and financial performance.
We have set up local quality departments to ensure quality in all plants and relevant areas of the Group. These departments systematically analyse sources of errors and defects, optimise production processes, take action to minimise the risk in production start-ups and reduce warranty risks. A central quality management organisation ensures that standardised processes and methods are in place and carries out regular audits. In addition, DEUTZ has defined uniform standards for the selection of suppliers and, in close cooperation with the suppliers, continuously improves the quality of supplied parts.
Regular certification audits and additional quality initiatives also enable us to handle the significant technical complexity of engines and to satisfy the steadily increasing quality requirements of our customers. In 2018, twelve employees successfully trained as Lean Six Sigma Black Belts. This method is being applied to projects in development, production and service departments with the aim of quickly rectifying errors or even preventing them in the first place.
Sufficient provisions are recognised on the balance sheet to account for warranty risks. In view of the precautionary measures that have been taken, we categorise any further quality risks that could negatively impact on our financial targets as ‘low’ for 2019.