Industry Views

Industrials and Manufacturing

Key Issues for the Industry Currently Reflected in the Risk Selection

The manufacturing industry encountered a perfect storm of interrelated risks in 2021 that are reflected in the rankings of survey respondents. These include a scarcity of materials, business interruption, supply chain and disruption failures, and cyber attacks. Meanwhile, demand for products increased rapidly as the economy began to rebound from the pandemic.

Supply chain challenges can no longer be considered shocks. Events around the world that occurred in a matter of months include pandemic-related disruptions; the Suez Canal blockage, which alone cost around $9 billion every day; and the closure of the Yantian terminal in Shenzhen, among others.

Uncertainty in managing inventory had been growing even before the pandemic as geopolitical tensions affected trade between the U.S. and China. The U.S. has also faced trucking strikes, while Brexit has caused transportation shortages and increased costs for U.K. and European firms. Finally, the semiconductor chip shortage has wreaked further havoc for many manufacturing industries.

Surprises in the Top 10 Risks Selected

While cyber risk had been gradually moving up in the risk profile of the manufacturing industry during the past several years, it jumped to number five this year from rank 16 in 2019 due to a rapid escalation of ransomware attacks targeting major manufacturing companies. The industry is now on full alert to protect itself from cyber risk to an extent that was unimagined even three to five years ago. We expect cyber risk to remain a top five risk indefinitely.

Failure to innovate or meet customer needs dropped to number 12 in the risk rankings from number eight in 2019, although this may reflect the industry’s general acceptance of the Internet of Things (IoT), which entails the interconnection of unique devices within an existing internet infrastructure. IoT is becoming more widespread in the manufacturing industry; it makes the industry’s list of top trends year after year due to its adaptability and ongoing innovation. IoT has enabled manufacturers to make informed, strategic decisions using real-time data and to achieve a wide variety of goals including cost reduction, enhanced efficiency, improved safety and product innovation.

Most Underrated Risks

Failure to attract and retain talent is a critical risk that warrants much more attention. The labor shortage in various countries has impacted many industries as the economy has recovered from the pandemic. The manufacturing skills gap, which is predicted to leave 2.1 million jobs unfilled by 2030, could cost the U.S. economy as much as $1 trillion as companies compete for talent and reevaluate their manufacturing footprint to secure a steady labor force.

Climate change, at rank 32, is underrated in manufacturing, an industry that accounts for roughly one-third of global greenhouse-gas emissions, especially from construction staples like steel and cement. That makes manufacturing more polluting than either the power sector or the transportation sector, which receive far more attention in policies and investments. And the manufacturing sector is set to grow, as the global population climbs and countries develop further.

Challenges the Industry Will Face in the Next 3 Years and What Organizations Can Do to Address Them

This sector has done well to embrace new technologies and ways of working, but the future looks more challenging. Trucking companies that transport equipment are subject to increasingly sophisticated cargo theft methods, with rogue individuals posing as motor carriers to hack into computer systems to uncover location information and steal valuable loads. Theft from within businesses, including property theft and funds, is also on the rise. The handling of fuel and the disposal of hazardous waste continue to present manufacturers with unique challenges: Leaks or spills result in significant clean-up costs, diminished reputation and fines from state and federal regulators. Catastrophic losses can increase quickly when litigation leads to jury awards and judicial decisions that often exceed manufacturers’ expectations — and their coverage limits.

The overlapping business interruptions caused by the COVID-19 pandemic, including supply chain disruptions and cyber attacks, are unlikely to be resolved any time soon. Manufacturers are already stepping up efforts to better understand the financial impacts of these risks while looking for new approaches to risk control and risk financing to insulate themselves from future industry challenges.

Annualized volatility of commodity prices averaged 10 to 20 percent during the four years prior to the COVID-19 pandemic, with annual price swings of up to 70 percent of the average in a given year; the pandemic added to this volatility. The industry outlook is heavily dependent on progress in containing the COVID-19 pandemic, on policy support measures in advanced economies and on production decisions in major commodity-producing nations.

For years, supply chains have focused on reducing inventory levels and cutting costs by embracing lean, just-in-time management in their logistics plans. These efforts negatively impacted the resilience and agility of supply chains. The pandemic exposed weaknesses in contingency planning and risk mitigation strategies across the world. From the initial scarcity in personal protective equipment to the ongoing shortage in microprocessors, challenges emerged in linking suppliers of goods on one side of the planet to sources of demand on the other. As a result, companies are growing more risk-averse with their global manufacturing footprints.

How New Challenges Will Require Companies to Change Their Approaches to Risk Management and Mitigation

Effectively managing cyber risk is a good example of how manufacturers need to increase internal collaboration among functional departments — manufacturing, cyber security, IT, supply chain, legal and risk management — and adopt new approaches that did not exist two or three years ago. The industry needs to learn from these successes, and companies need to refresh their enterprise risk management approaches to tackle fresh challenges.

Current Top 10 Risks

Predicted Future Risks

By 2024

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