Navigating Manufacturing risks in 2023: what to look out for and how to respond

Article by Andrew Curl as published in Australian Manufacturing Technology's (opens a new window) (AMT) most recent magazine.

Post COVID-19 lockdowns, the trading environment has presented significant challenges for manufacturers, exacerbated by labour shortages, global inflationary pressures and the Ukraine invasion. With local weather events, pressure on ports, shipping container shortages and rising energy costs, manufacturers are having to adapt to a new, volatile risk landscape.

Lockton’s new Manufacturing Risk Watchlist tool helps the industry understand some of the top risks facing manufacturers today and highlights some of the impacts and responses to think about.

Top risks at a glance:

1. Employee risks

Organisations are struggling to recruit enough staff to operate at full capacity. This is creating real competition amongst employers.

In addition to better pay and conditions, the most resilient organisations are re-focusing on ‘soft’ employee benefits to add to their attraction/retention strategy. For example, Lockton has seen an uptake in corporate funded private health insurance programs.

Questions to consider:

  • What employee benefits can you sponsor?

  • Are your Employee Care programs best in class?

2. Supply chain risks

Notwithstanding embargos, global shipping and port capacity pressures, the global supply chain is more inter-connected than ever. As a result, manufacturers are increasingly susceptible to supply chain risks. Often, even a small failure in the chain (upstream or downstream) can have significant consequences on the ability to produce.

The most resilient manufacturers have an increasing procurement risk focus across their supply chains, which includes a systematic process of supplier reviews, risk identification and risk treatment.

Questions to consider:

  • Will you have delays in alternative supplier sourcing if equipment cannot be replaced quickly and cost effectively?

  • Is there an increased risk of customer/supplier default?

  • Are Business Continuity Plans up-to-date and adaptable to your changing risk profile?

3. Inflation risks

Numerous factors combine to create an inflationary environment that means insured replacement costs and re-build values are not keeping pace. Fuel prices, labour costs, transport & logistics costs and material price increases are just some issues.

As a result, it is not uncommon for buildings insured values to require an uplift of >20% to accurately reflect re-build costs and importantly, avoid punitive insurance penalties for getting values wrong.

Similar issues are impacting plant, machinery and equipment costs, with a flow on effect of increased lead times. This means that manufacturers might be paying 20% more for key equipment versus two years ago, with significantly extended delivery times.

Questions to consider:

  • Have you reviewed and validated insured values to accurately reflect replacement and re-build costs?

  • Have you reviewed supplier lead time on critical/key equipment? What do delays mean for profit/revenue?

  • Have you conducted a Gap Analysis of your insurance program?

4. Business Interruption Risks

Loss of profit and the additional costs incurred to continue trading following an insured property damage event remains a key risk concern for manufacturers. Inadequate Business Interruption Insurance (BI) cover following a property damage loss can have disastrous consequences for the ongoing viability of a business, particularly if customers go elsewhere, become comfortable with supply from your competitors and are difficult to get back.

Questions to consider:

  • Have you conducted a BI Review to validate insured values, indemnity limits and policy coverage?

  • Have these exposures changed in the current trading environment?

5. Climate change risks

Recent weather events in Australia and the hurricanes affecting Florida are examples of an undeniable increase in Natural Catastrophe events linked to climate change.

The global insurance and reinsurance markets face massive claims costs from these events. Recent estimates suggest the 2022 flooding on the East Coast alone is likely to cost insurers more than $6bn. As a result, insurers are responding by reducing their exposure through lower Nat Cat limits (storm, flood and cyclone), higher deductibles/excesses and increased premiums.

The most resilient businesses are identifying their exposure to these weather-related events and calculating exactly what the impact could be to the balance sheet.

This leads to informed decision making, whether this is through traditional insurance products or alternative risk transfer solutions such as Parametric Insurance.

Questions to consider:

  • Do you know your actual exposure to natural catastrophe events?

  • Is this reflected in your Business Continuity Plan and Supply Chain reviews?

  • With the increasing costs and availability of insurance, have you considered retaining more risk on your balance sheet or sought alternative risk transfer solutions?

6. Reputational risks

Defective products, contaminated products and product recalls all carry significant risks including the cost of managing the events and the ongoing impact of reputational damage.

Resilient organisations are responding by conducting reviews of their supply chain, which extends through to final delivery to customer. These reviews identify potential pinch points and lead to the development of robust disaster recovery plans.

Questions to consider:

  • Have you conducted a review/workshop to assess what happens in the event faulty/defective products are sold?

  • Have you done a mock recall?

  • Are robust plans in place to manage the PR process and protect your image?

7. Technology Risks

The evolution of rapidly changing Operating Technology brings new risk exposures with significant insurance implications for the industry.

Recent cyberattacks have highlighted the vulnerabilities of even the most high profile organisations. However, any organisation is at risk.

Property insurance policies have traditionally excluded physical damage losses arising from cyber events. For manufacturers, this means significant coverage gaps and/or inadequate protection against these risks, resulting in physical damage and business interruption losses.

Questions to consider:

  • Have you reviewed your first and third-party cyber risks?

  • What current insurance protection is in place?

Download now

For the full Manufacturing Risk Watchlist, download here. (opens a new window)