Risk management

In common with all organisations, Flowtech Fluidpower faces risks which may affect its performance. There is little that we can do about the macroeconomic environment. However, the Board believes that our strategy, which is designed to exploit opportunities created by the market, places the Group in a strong position relative to others, particularly where those markets are volatile. For the risks we are able to manage, the Group operates a system of internal control and risk management in order to provide assurance that we are managing risk while achieving our business objectives. No system can fully eliminate risk and therefore the understanding of operational risk is central to management processes. The long-term success of the Group depends on the continual review, assessment and control of the key business risks it faces and this is done formally by the Board on an annual basis. From 2019 each significant risk area is managed via a subcommittee chaired by a member of the Executive Management team with attendance on an ad hoc basis by a Non-Executive member of the plc Board.

Risk management is a key part of the twice-yearly meetings that each Profit Centre Director (PCD) has with the Board. These meetings focus on financial and operational plans, opportunities presented by the market and by other businesses in the Group and the potential threats and risk that the PCDs consider may hamper progress.

The risks identified form the basis of the Board's risk management process designed to identify and manage significant risks wherever possible. Each risk is owned by a member of the executive management team and reported on regularly to the Board.

1

Talent management and succession planning

Trend

Owner

Chief Executive Officer

Description

There is a risk that the business is not able to attract and retain high performing employees.

The Group also needs to maintain engagement with the employees to ensure they remain supportive of the business strategy.

Mitigation

Attraction and retention of employees is supported by bonus plans, recognition and reward programmes and innovative benefit packages. Profit sharing scheme introduced in 2017 and enhanced in 2018.

Succession planning process introduced to identify and develop key employees. Training forms a key part of all employees' development within their roles. Training is arranged to support the Group's business plans and the personal goals of all employees. Profit Centre Directors to attend rolling programme at Leadership Trust in 2019 and 2020.

Group-wide technical and sales conferences to aid skills sharing.

2

Inability to recognise and control cyber exposures

Trend

Owner

Chief Executive Officer

Description

The Group recognises there is an increasing exposure to cyber-risk, including advanced techniques to disrupt our websites and direct attacks on Group systems with the potential loss of confidential information.

Mitigation

Current mitigation measures for local business systems include anti-virus software, virus scans on incoming emails and firewall protection.

The main Group website is hosted in the cloud with dual servers ensuring automatic switchover should one fail with daily backup procedures.

An onsite IT review is carried out post acquisition followed by standardisation of networks and controls. Continuing review of all existing lT systems during the year while working towards IASME Gold certification for all sites.

3

System and site disruption

Trend

Owner

Chief Executive Officer

Description

There is heavy operational dependence on the resilience of warehousing and IT infrastructure to support business operations and maintain high service levels. The risk is present that unplanned events could disrupt the functioning of key elements of the operational infrastructure, damaging customer service and business reputation.

Mitigation

Offsite disaster recovery provision for IT systems, including cloud-based technologies.

Business continuity plans in place at key operational locations. As the Group increases in size, resilience to disruption increases as distribution and production activities can be rerouted to other sites.

Business continuity plan has been tested successfully at the Skelmersdale Logistics Centre. A regular test programme has been introduced across the Group.

4

Quality control

Trend

Owner

Chief Executive Officer

Description

Many of the key components and products supplied by the Group are for industrial use, often in hazardous environments. These components and products must be fit for purpose to ensure that their reliability, performance and safety is of the necessary standard. Failure in this quality will cause damage to the Group's reputation and customer relationships, and potential legal consequences.

Mitigation

The majority of the Group's products are sourced from reputable 'brands' in the UK and Europe. In addition, for exclusive brands sourced from China, the Group has quality control specialists who regularly visit suppliers' manufacturing sites to ensure that high quality standard operating procedures are being adhered to.

The majority at Group sites comply with ISO 9001 ensuring quality standards are maintained through all its operations.

Continual testing procedures are in place for both components and manufactured products.

Employees involved in assembly processes are qualified with the relevant industry body and continue with regular internal and external training.

5

Breach of regulations

Trend

Owner

Chief Operating Officer

Description

Inadvertent breaches of regulations could lead to prosecution and significant fines. Regulations impacting the Group include: Health and Safety at work, Control of Substances Hazardous to Health; packaging waste regulations.

Mitigation

The Group engages external specialists as required to make sure internal procedures and policies are in place to provide compliance with the regulatory frameworks.

There is an ongoing review of relevant national and international compliance requirements.

Health and safety procedures being standardised across the Group with target for full compliance by the end of 2019.

6

Inability to effectively manage and control IT hardware and software changes

Trend

Owner

Chief Executive Officer

Description

A part of our strategic focus is to reduce the number of process systems operated by the Group and also operate from a single accounting environment. In order to create this position, the Group will need to identify, plan and implement a number of hardware and software changes that will require a significant amount of project management skill and resource.

A part of our strategic focus is to reduce the number of process systems operated by the Group and also operate from a single accounting environment. In order to create this position, the Group will need to identify, plan and implement a number of hardware and software changes that will require a significant amount of project management skill and resource.

Mitigation

Under the leadership of the Head of Business Process, in 2018 and early 2019 the central services function added full-time skills in User Acceptance Testing and Project Management. In addition, the Group is planning to transition towards software applications that are widely used in both the industry and the Group already, in particular Sage 200, and reduce the use of software systems that do not have a wide support framework.

In addition, the Group has also engaged external support from reputable consultants with a view to defining an internal "Standard Practice Instruction" covering project management best practice generally and have introduced the main components defined by this process to all current IT change projects.