The methods of managing risk haven’t changed much for manufacturers and distributors in the last decade. Risk managers still include some combination of risk avoidance, risk control, risk transfer and risk retention to construct a company’s overall risk management policy. What has changed, though, is the range and nature of risk common to activities in this sector that now operates globally and is transitioning to the interconnectedness of Industry 4.0.
Industry 4.0, the industrial internet of things (IIoT) and smart manufacturing, marries physical production and operations with smart digital technology, machine learning and big data to create a more holistic and better connected ecosystem for companies that focus on manufacturing and supply chain management. While the categories of risk remain essentially the same in this decade as in the last, (i.e., operational, financial, environmental and reputational), many of the possibilities within and affecting each category could not have been imagined even 10 years ago. Examples include:
- A change in just one country’s trade policies can have a global supply chain impact.
- The fluidity of global trade – tariffs and renegotiated trade deals, for example – and global disruptions (e.g., the coronavirus) can impact the ability of a company to fulfill orders within contracted cost and timeframe.
- Safeguarding corporate reputation and brand value is a much different risk scenario now in the age of social media than at any time prior.
- Security risks, once primarily physical, now include cyber breaches. Product and service risks around safety, health and the environment may include the impact of the legalization of marijuana.
- As companies are increasingly being held accountable for the actions of their suppliers, vendor risk has become a significant concern.
As in years past, managing risk can be expensive, and today the cost of NOT managing risk can be catastrophic. The pace and reach of change in production, commerce and communication make it absolutely vital for companies to reassess their programs for managing risk not annually but on a continuing basis. With that in mind, discussed below are several risks facing manufacturers and distributors that may not have been on your radar screen when your risk policies were designed and implemented, including your efforts to mitigate your company’s risk with insurance.
The legalization of marijuana in some states, and the potential for a change in national law, contributes to a new and growing industry risk. Drug testing doesn’t measure onsite impairment levels and is impractical to conduct daily. Obviously, an employee working with manufacturing machinery while impaired can be a threat to himself and his employer. The threat of loss of limb or life is very real. However, as marijuana impacts people differently, it is challenging to train supervisors to identify a worker whose ability to perform job duties is impaired under the influence of cannabis.
Beyond onsite workplace danger, a conflict between federal and state laws puts the employer in a tight spot. What’s an employer to do when a drug screening turns up evidence that a candidate or an employee has used marijuana? Can the individual still be fired? As the rules evolve and jurisdictions pass stronger protections for marijuana users, it depends. But, whatever the decision, emerging laws and court rulings make it clear that organizations must assess how they approach their employees’ permissible marijuana use and make changes to their policies and processes to stay in compliance.
Automation and AI – the Safety Factor
Automation has become increasingly common in production and manufacturing of everything from food and small machine components to cars. There are many guidelines and requirements for owning and operating automatic equipment and for assessing the risks involved in such operations, which can help employers ensure a safe work environment for their workforce. OSHA’s list of potential sources of hazard can be divided into two categories – mechanical/physical factors and human factors. Machines/robots are programmable and most of their actions (if unaffected by malfunctions and other mechanical failures) can be easily predicted. Humans are fallible and can miss or ignore necessary steps despite physical safety precautions. This is why it’s important to create a culture of safety and provide human-factors training to any workplace that has humans working alongside robots.
Automation and AI – the Cyber Factor
One of the biggest risk factors for many manufacturers is a lack of investment in cybersecurity, which is especially troubling as the move toward connected Internet of Things (IoT) technology becomes more prevalent in the industry. Connected vendors, contractors and customers introduce more entry points along with the increased cyber risk. A complex combination of platforms and systems of varying ages contributes to security challenges. Hackers are becoming increasingly sophisticated and are able to access confidential information, steal money and lock users out of their accounts. Without proper security protocols all organizations are vulnerable to cyber attacks. An effective approach to cybersecurity will include several steps, including (1) identification of assets at risk, (2) creation and implementation of procedures and controls, (3) user training, (4) development of incident response and recovery plan guidelines, and (5) securing cyber liability insurance to limit financial, legal and reputational damage. Proactive protection should feature real-time monitoring of the environment and maintenance of capabilities to respond rapidly to potential threats or vulnerabilities
Talent Pool and Generational Shift in Workers
Millennials (those born between 1981 and 1996) are poised to make up 50% of those working by 2022. Generation Z (born after 1996) will comprise 20% of the labor pool by 2025, according to statistics published by the Pew Research Center and Inc.com. With more and more Boomers retiring, they’re taking with them long-held beliefs, workstyles and, in many cases, vast quantities of “tribal knowledge” – knowledge that is valuable to companies and not easily transferable. It is often exclusive technical, product or process information that is stored inside someone’s head. It is rarely recorded in a structured way on web documents or paper.
The influx of Millennials and Generation Z and outflow of Boomers is taking place at the same time as the Fourth Industrial Revolution. This combination of generational and technology changes is destined to leave a knowledge gap, a skills gap and perhaps a cultural challenge ahead. The competitive advantage goes to companies that find ways to pass down this expertise and successfully navigate the generational shift. Practical strategies might include using video (think YouTube) to capture critical institutional knowledge and creating mentor/mentee models (think projects) allowing multigenerational workers to learn from each other.
Product liability doesn’t fall into the “emerging risk” category but does meets “the more things change, the more they stay the same” test. While there are new challenges, it’s important to not forget things that have always been important. According to the National Law Journal’s top 100 verdicts of 2018, the most frequently awarded lawsuit was related to product liability claims, primarily involving manufacturing companies. The 18 verdicts represented $5.9 billion in jury awards. Even if not at fault, a claim can cause significant loss, including damage to your reputation and market share. Your insurance broker should help you understand the specific product liability risk you face based on the products you manufacture and who the end users are. They should then recommend risk management and control measures to minimize your exposure. An insurance broker serving as a partner will also work with you to develop a response plan should you suffer a product liability claim.
How manufacturers assess and respond to risk, including how often, can position them to be more successful. By knowing how the risk landscape is changing, manufacturers can better prepare for and manage their exposures. Competent and well-designed risk management practices should be ingrained in all levels of the company. Better risk management is ultimately a competitive advantage.
Patrick Buck, a VP and Risk Management Advisor with CBIZ Insurance Services, provides high-level advisory and consultative brokerage services to help clients manage their risk profile and finance risk mitigation through insurance and other methods such as captives. You can reach him directly at email@example.com and 301.784.2375.