RISK MANAGEMENT / PRINCIPAL RISKS AND UNCERTAINTIES
Highly competitive markets
Risk trend Description Mitigation
GKN operates in highly competitive markets with customer decisions typically based on price, quality, technology and service. Contracts for major programmes are subject to highly competitive bidding processes and the strength of our competitors and general market conditions continue to drive price pressure and more challenging contractual terms. Strong margins may come under pressure if our competitors improve or as a result of customer actions. An inability or delay in developing or maintaining su cient or appropriate engineering and manufacturing capabilities in high growth markets could further increase the risk. Customer vertical integration (including OEMs taking production in-house), the entry of new competitors, and the consolidation of existing competitors also contribute to increased competition.
• Maintaining a balanced portfolio of businesses across our markets provides some protection against competition in particular markets. • Regular review of competition and market trends. • Targeted investment in engineering, and a commitment to Lean manufacturing, quality and customer relationships. • Flexible management of our variable and xed cost base including outsourcing and low-cost sourcing initiatives where appropriate.
Strong competition and customer pricing pressures have continued to increase throughout 2015. Pressure on margins was particularly strong in some areas of the aerospace market and the Chinese automotive market. Despite these challenges, we continue to win new business and di erentiate ourselves through our technology.
Read more about the trends in each of our markets on pages 4 and 5
Competition risk, if not mitigated, could result in reduced sales and pro t margins and potentially lost growth opportunities in high growth markets. An inability to secure new business awards on major programmes could signi cantly impact future growth, cash flow and pro tability.
Risk trend Description Mitigation
Our suppliers are key to our success. It is essential that suppliers and subcontractors continue to meet our high standards of technical competence, innovation, product quality, reliability, delivery performance, cost, nancial stability, safety, ethics and social responsibility. Our supply chain network is exposed to potentially adverse events such as physical disruptions, environmental and industrial accidents, scarcity of supply, or insolvency of a key supplier which could impact our ability to deliver orders to our customers. The cost of our products can be signi cantly a ected by the cost of the underlying commodities and materials from which they are made. Fluctuations in these costs cannot always be passed on to our customers.
• Ongoing communication of our expectations of suppliers through our Supplier Code of Conduct. • Contract terms and conditions that require our suppliers to meet speci ed performance standards. • Ongoing assessment of supplier technology and dependency. • Monitoring of the nancial and operational viability of key suppliers. • Ongoing monitoring of inventory levels to ensure availability in times of production volatility. • Contingency plans designed to enable us to secure alternative key material supplies at short notice, to transfer or share production between manufacturing sites and to use substitute materials where required. • Dual sourcing where appropriate to reduce dependence on single suppliers. • Supplier quality reviews and audits.
A sustained supply chain disruption, or the delivery of defective product to us, could impact our ability to meet customer requirements, result in additional contractual liabilities and have a consequential impact on nancial performance.