It’s no wonder risk management in manufacturing industries occupies the full-time efforts of so many leaders and armchair analysts. The numbers are persuasive. Due to the rise of the Internet of Things (IoT) and automation trends, the manufacturing vertical is anticipated to enjoy the highest compound annual growth rate (22%) leading up to 2027, according to a new report.
But those promising numbers are weighted by an equally sizable series of risks. As the industry recovers from COVID-19 interruptions, it’s critical to reexamine where manufacturing organizations are vulnerable and what leaders need to know to be prepared.
Where Manufacturing Faces Significant Risks
Many risks in the industry overlap — there is little simple about manufacturing risk management — but these are vital categories facing leadership teams today.
1) Supply-Chain Interruptions and the Trouble with Just in Time
Of course, most of the risks to the manufacturing industry tie back to their effects on the supply chain, which can be affected by local events and circumstances from fires to third-party security exposure to, of course, COVID-19. “Just in Time” manufacturing, long a welcome trend that prioritized supply efficiencies and cost savings left many producers vulnerable during 2020 shortages.
The shortage of semiconductor chips has been an ongoing challenge for manufacturers this year, and it could last for years, Intel has warned. The vulnerability of this critical supply chain, which has affected consumer electronics, auto manufacturing and more, has led to calls for diversification of production. Intel has already announced it will be building two semiconductor plants in the southwestern United States.
2) The Long Haul to Addressing Workforce Shortages
Workforce shortages and unpredictable staffing have frustrated manufacturers for the past year. Though the industry wasn’t affected as strongly as hospitality, manufacturers are still struggling to return to pre-pandemic staffing levels.
Beyond COVID, a skills gap plagues the industry. A 2021 study by Deloitte and The Manufacturing Institute found that the gap is anticipated to leave 2.1 million jobs unfilled by 2030 and cost the U.S. economy up to $1 trillion. The study recommends increased engagement with the potential talent pool, revamping work-life balance and other strategies but warns manufacturers to “work quickly” to engage the new generation of potential employees.
3) Unpredictable Status of Trade Tariffs and Sanctions
Anyone watching the tennis game of international tariffs and trade sanctions can hardly be blamed for experiencing a slight neck strain. The U.S. tariffs on imported steel and aluminum are at the forefront of many manufacturers’ minds. The Wall Street Journal reported on a consortium of U.S. manufacturers who wrote to President Joe Biden asking that the tariffs be lifted: “The manufacturers say the tariffs make their companies less competitive at a time when U.S. buyers, facing red-hot domestic demand, are paying 40% more for some steel products than their European peers.” The tariffs currently remain in place, but keep watching.
The tariff volley continues in other regions. Recently, Canada announced a sizable tariff on certain furniture products imported from China and Vietnam. The European Union is considering a levy that would account for the carbon emissions inherent in imports, Bloomberg reported.
4) Global Urgency over Cyber Security
Governments worldwide are raising the alarm about the increasing rate of cyber attacks and breaches — both intentional and accidental — affect organizations in every public and private industry. A recent factor is the increased remote workforce during COVID. An AT&T report found that 55% of at-home workers were targeted by a cyberattack, and companies are particularly vulnerable when remote employees connect smart home devices to company resources. Meanwhile, 1 in 10 pharma manufacturers are highly susceptible to ransomware.
(Concerned about cybersecurity? You should be. Read more: “10 Must-Know Cyber Security Best Practices.”)
5) Ever-Changing Compliance Requirements
Depending on the scale of its target markets, an organization could be responsible for adhering to laws and regulations from the local to the global level. Staying aware of regulatory changes and putting in the work to stay compliant is expensive, but noncompliance is even more costly. A benchmark study by the Ponemon Institute found that costs for maintaining compliance for a company are around $5.47 million, while noncompliance costs — fines, business disruption and losses in productivity and revenue — equal around $14.82 million.
(Read more about compliance in the industry: “Understand and Simplify Regulatory Compliance in Manufacturing.”)
6) Brand Reputation Vulnerabilities
In an era where a P.R. nightmare can begin with a seismic event like a recall or a pebble rippling the water with a customer’s (or employee’s!) social post, every organization’s reputation must be proactively strengthened and defended. A Manufacturing Global piece advocated for starting reputation building from within. ”For conversations with external stakeholders to be a success,” it noted, “reputation must also be nurtured at every level within the business itself, from call centre staff to the board of directors.”
7) Third-Party Exposure to Risk
“A man is known by the company he keeps.” This idiom captures the risk assumed by any organization that relies on a vendor, supplier or host, and third parties are another source of exposure, whether they affect the supply chain, cybersecurity or brand reputation. Advocating for automation, J.D. Supra’s piece on third-party risk noted the complexity of managing third-party relationships: “It quickly becomes nearly impossible to use manual processes, like spreadsheets and emailed questionnaires, to manage the potential risk a large set of suppliers creates.”
Why Manufacturers Are Using Governance to Manage Risk
Manufacturing risk management requires constant vigilance on many different fronts. For organization leaders to prevent and mitigate these risks and others, they require good governance tools and processes to manage complexity, simplify communication and decision-making, and provide real-time, relevant data. So many organizations are learning that current methods of governance are no longer working effectively or are exposing their systems and information to cyber and other types of risk. Hence, it’s time to evaluate systemic change in governance processes, partners and tools.
Next Steps to Successfully Mitigate Risk in Manufacturing
Staying on top of risk management in manufacturing requires the right tools and expertise to ensure good governance. Diligent can help organizations that need tools for board and leadership collaboration, operational governance, analytics insights, or a customized combination, not only to see where manufacturing’s risks lie but take steps to avoid them. Read more about risk management best practices.