- Risks and opportunities systematically explored on all levels
- Supply chain risks managed actively
- Products and market risks included in the development and marketing process
Flawed risk assessments may seriously impair a company’s reputation, limit its freedom of action or, at worst, lead to insolvency. Mindful of this, Sika reacted years ago by introducing a comprehensive risk management system at Group level and for all its subsidiaries. The aim is to identify risks at an early stage and integrate them in strategic decision-making processes. Risk management may sometimes assist in the identification of new opportunities and thereby help to generate added value.
GROUP MANAGEMENT AND BOARD OF DIRECTORS
While Sika’s Group Management regularly reviews the processes underlying risk management, the Board of Directors bears ultimate responsibility for risk assessment. Its duties include the annual reassessment of the risk situation at Group level. All risks are assessed in terms of a few basic questions:
- Is the risk global or regional in scope?
- What implications does the risk have for the Group?
- How high is the probability of losses occurring?
- What measures need to be implemented to eliminate the risk or mitigate its consequences?
If a risk is rated critical in the overall assessment, effective measures are then taken to reduce the probability of or prevent its occurrence or limit its implications.
Sika pursues a risk-based management approach along the entire value chain from procurement and production to marketing.
SUPPLIER MANAGEMENT AND RAW MATERIAL PROCUREMENT
The raw materials that Sika processes into superior-grade products are the Group’s biggest cost factor. This is why they are high on the risk assessment agenda. Approximately two-thirds of the materials used by Sika in production, such as polyols, epoxy resins, acrylic dispersions, and polycarboxylates, are based on fossil fuels or their derivatives. Purchase prices consequently vary according to the supply and demand situation for each raw material and fluctuations in the price of oil. To reduce its dependency on crude oil, Sika is increasingly relying on renewable raw materials, such as sugar derivatives, bioethanol derivatives, and natural oils. Moreover, recycled raw materials are used wherever possible, and many production plants implement their own, or externally operated, recycling loop systems. Mineral substances, such as such as cement, sand, and calcium carbonate make up the remaining raw materials.
Sika purchases its base chemicals in accordance with strict quality requirements from certified suppliers offering the best value for money. In the case of key raw materials with limited availability or large purchase volumes, Sika mandates at least two suppliers whenever possible. For unique, highly innovative technologies, the Group seeks to manufacture raw materials itself, or source them in close collaborative partnerships with innovative suppliers. In respect of all the materials used, compliance with the relevant statutory registration requirements (e.g. REACH or TSCA ) is monitored and ensured by a network of global and local specialists, as well as external consultants. Sika’s procurement specialists and technical experts work closely with suppliers’ technical units to fully understand the raw material flows, and continually optimize costs, quality, availability, and sustainability.
Potential suppliers are closely screened by Sika. Before working with Sika, new suppliers are required to sign the Supplier Code of Conduct, which includes the Sustainability, Ethics, and Fair Competition principles. Suppliers are regularly evaluated by a comprehensive supply risk management process to achieve continuous uninterrupted material availability, quality, cost competitiveness, and compliance, which are essential for business success. The corresponding findings are incorporated into the risk assessment, along with the suppliers’ self-assessments and data available in the public domain. If a relevant risk is identified, Sika will conduct an audit of the supply company in question to ensure the expected functionality of the latter’s internal risk management system. Raw materials are systematically evaluated within Sika to identify potential risks and to determine relevant measures, such as maintaining safety stocks, and/or securing long-term supply contracts.
2019 saw the successful implementation of an improved risk management process that allows the company to better identify potential risks and put in place well-structured mitigation practices. Sika continues to apply this risk management process stringently to ensure that any potential impacts on the company and its customers are mitigated.
PRODUCTION AND LOGISTICS
Sika sets defined standards for risk provisions that are binding for its production and logistics operations. These standards form part of the Group-wide “Sika Corporate Management System” and lay down minimum requirements and best practices, e.g. processes and guidelines in the areas of safety, health, environment, quality, sourcing, manufacturing, and logistics. The “Sika Corporate Management System” is accessible to all Sika Group employees. Together with the local regulatory requirements, these standards are subsequently documented in the individually maintained Sika management systems of the local Sika companies. Additionally, Sika production companies are certified to ISO 9001:2015 (Quality Management) and ISO 14001:2015 (Environmental Protection), and many also to OHSAS 18001 (Occupational Health and Saftey Assessment) and IATF 16949:2016 Automotive Quality Management). A growing number of larger facilities are also certified to ISO 50001:2018 (Energy Management).
The current certification status of individual Group companies is shown on page 145 et seq. of the download version of the Annual Report 2019. Audits and inspections are core elements of Sika’s comprehensive management system. They provide management at Group, regional, and local company levels with a regular, independent assessment of compliance with official requirements, as well as with Sika’s internal risk management guidelines and principles. These audits and inspections ensure the effectiveness of processes and related controls. Quality, environment, health, safety, property loss prevention and business interruption, product development and technology, legal matters, application risks, IT security, suppliers, and product performance are all subject to audits.
In 2019, Sika conducted 181 centrally documented audits throughout the organization. Supplier audits are carried out by the purchasing and quality assurance departments based on the risk assessment, and the number of reviews is steadily increasing. In 2019, 69 supplier audits were performed, and supplier audit trainings for more than 20 purchasing and quality assurance employees were conducted. Sika also regularly audits production and logistics operations at local companies. This includes recording any risks that may result in personal injury, incidents, production downtime, property damage, or liability claims. The probability and significance of these risks are assessed, and measures are subsequently defined and implemented to minimize the risk potential at the site and to enhance operational safety.
Sika is also insured against production losses. Over recent years, Sika has succeeded in significantly reducing the number of accidents and is constantly working on further improvements. The company is focusing more closely on systematic accident and incident prevention.
PRODUCT DEVELOPMENT AND MARKETING
For products and services, Sika implements a structured product development process that factors in potential risks. The Group monitors ecological and safety aspects during the development, production, and product-handling stages. For this purpose, it has introduced the specific checking of new developments against a sustainability profile. Sika also focuses on market opportunities and risks, product sustainability performance, and the protection of intellectual property.
Over a period of many years, Sika has had a global program in place to minimize the risks in advisory and sales activities that could provide grounds for product complaints. Thanks to a host of additional measures, including the regular training of employees, clearly formulated standards, detailed causal analyses, and stricter controls, expenditure for product-related claims is steadily being reduced. To avoid the risk of customers using Sika’s products incorrectly, Sika provides systematic instructions, application training, and support to customers, as well as extensive documentation and quality control.
CUSTOMERS AND MARKETS
Sika has a policy of strategic diversification to limit market- and customer-related risks. Geographical diversification is tremendously important in the locally based construction industry, given the sometimes-contrary business trends witnessed in this sector in different regions of the world. Customer diversification – with no single customer accounting for more than 2.5% of Sika’s turnover – is another stabilizing factor. As a further safeguard against economic fluctuations, Sika operates both in the new-build sector, and in the less cyclical renovation and maintenance market.
The purpose of financial risk management is to optimize funding and achieve a liquidity position geared to financial obligations. Liquidity is ensured by means of long-term bonds and a long-term revolving credit facility. Liquidity is optimized by means of a cash-pooling arrangement. Sika also manages its net working capital with the utmost prudence. For example, the local companies have precisely defined processes for handling accounts receivable.
A cost structure dovetailed to the prevailing market conditions ensures adequate cash generation. Sika attaches high priority to open and cost-efficient access to capital markets. In this context, the A-/stable rating of Standard & Poor’s must be taken into account.
The Sika Code of Conduct as well as Sika’s Values and Principles are the guiding principles of integrity and ethical conduct. They help minimize reputational risks for Sika. Compliance with the Code of Conduct is required by all Sika employees and read and signed by every new employee. All employees and anybody joining the company through acquisitions are trained on the Code of Conduct and on how to use the Sika Trust Line (whistleblower line).
Furthermore, there are external tools in place to support the monitoring and managing of potential reputational issues.
While the Sika Code of Conduct also applies to social media, there are additional specific guidelines in place to govern the use of social media. Employees must adhere to the confidentiality agreement and compliance regulations at all times. The employees are required to avoid conflicts of interest and always be clear if they are communicating on their own or the company’s behalf. Sika does not tolerate any dishonorable content. This policy of zero-tolerance includes but is not limited to offensive, racist, or homophobic content.
Internal Audit carries out audits as set out in the annual audit plan, approved by the Audit Committee. The internal audits are primarily for Group companies in the areas of sales, accounts receivable and accounts payable management, product development, purchasing, production, quality control, inventory management, financial and operational reporting, payroll processes, and IT management. In addition to the global audit of sales and production companies, regular in-depth audits are carried out in the area of headquarter functions and Group-wide support processes. Internal Audit is an instrument of the Board of Directors and reports to the Audit Committee.