As manufacturers around the world rethink their business models, they must contend with growing risks in various areas, from technological change to the nature of their supply chains.

According to the IMF, sluggish growth in 2019 was largely due to “the sharp and geographically broad-based slowdown in manufacturing and global trade”. Against this gloomy backdrop, manufacturers are evolving their business models – and facing greater risks as a result.

Joe Healey, investment research analyst at The Share Centre, groups these developments into three areas. First, he points to structural change. 

“We are in a time of great transition, with new technologies such as AI, self-driving vehicles, and robotics all in the mix,” Mr Healey says. 

There is a skills shortage in these areas, he says, representing the second area of risk. Finally, there is a surging appetite for various raw materials. For example, he points to increased cobalt demand, prompted by the greater use of batteries. 

“Around two thirds of cobalt is found in the Congo, a region known for instability,” he says. “Apple has been buying cobalt directly and stockpiling it.”

The risk of involving new suppliers in a business is clear. According to the most recent quarterly Global Supply Chain Risk Report by Dun & Bradstreet, risks in the manufacturing sector for supplier criticality increased by 6.7 per cent and global sourcing by 10.6 per cent. 

This challenge is being experienced by PMC, a UK sound system manufacturer. 

“We’re living in a global supply chain and that means everything is at risk. We try and forward-buy [raw materials] to stay ahead,” says the company’s Chief Executive Tim Ireland.

“We did quite a bit of that last year ahead of [the original Brexit deadline of March 29, 2019] but we unwound that situation afterwards because we didn’t know what was going to hit us.”

“We’re living in a global supply chain and that means everything is at risk” - Tim Ireland, PMC chief executive

Ben Elwes, a fund manager at investment firm Sarasin & Partners, doesn’t extensively invest in manufacturing, but puts the challenge down to end market influences. 

“There’s a big sea change occurring for a lot of these companies that have to look at themselves and redesign products that are fit for purpose but fit into the industries and sectors that will see growth going forward,” says Mr Elwes. “That’s a big challenge.”

PMC has felt the impact, suffering from weak retail demand in 2019. Mr Ireland is seeking to regain control by managing risk in the global supply chain. 

“I wouldn’t say we are moving away from Far East sourcing, but with some critical components we try and ensure the supplier is within a day’s travel.”

Manufacturers around the world are being forced to re-evaluate their supply chain risk. 

“Logistics costs, the overall ease of doing business, and the presence of corruption – among other issues – can affect the attractiveness of potential locations. We have found that manufacturing growth in a number of countries, that have very attractive direct costs, is stunted because of weaknesses in these areas.”

AJ Thompson, chief commercial officer of IT consultancy Northdoor, notes that supply chains in Europe are enormous, while the General Data Protection Regulation (GDPR) creates a shared responsibility across companies. 

“It won’t take much for a supplier to be breached and businesses can easily be brought to a halt and fail.”

Comprehensive supply chain risk management is therefore critical. Mr Healey gives two examples.

“In the UK, ASOS had a really poor 2019 and that was down to supply chain management. They had internal software malfunctioning, meaning orders weren’t reported and led to an inventory error with half their value being lost,” Mr Healey says. 

“Meanwhile, in Germany, Adidas have really strong supply chain management, having pioneered robotics and digitalisation. They went up 45 per cent last year, their well-managed supply chain allowing them to service their clients well and quickly. It’s the best way to run a business.”

Around the world, the cost of doing business has soared. Manufacturers have borne the brunt, with the US sector alone spending $215 billion on regulatory red tape in 2018. With widespread increases in safety regulations, greater focus on product quality and developments in labour laws, margins are being squeezed. 

Many companies are scrabbling to meet increasingly stringent employment standards and expectations. For example, compulsory pension contributions are becoming commonplace, while a new cohort of workers takes a different approach to working life, demanding greater flexibility from their employers. Meanwhile, regulations on the standards and production of goods are tightening.

“Compliance is an area that’s growing and there’s a much higher emphasis on product safety now to ensure their legitimacy,” says Joe Healey, investment research analyst at The Share Centre.

There is also a big focus on traceability, Mr Healey adds; for example, several factories have been shut down as a reaction to coronavirus. On a wider scale, the green transition is “the biggest movement”, as highlighted by hardening regulations on emissions in the automotive space.

“We’ll see a lot more pressure from governments on this in the coming years,” he says. 

Ben Elwes, a fund manager at investment firm Sarasin & Partners, isn’t heavily invested in manufacturing. However, he notes that management teams are tackling regulatory demands through compliance investment, much of which feeds into better IT systems and customer relationship management controls.

“Regulation across the industry is forcing change,” Mr Elwes says. “For smaller companies it’s more onerous as it means a higher level of IT spend.”

“Compliance is an area that’s growing and there’s a much higher emphasis on product safety now to ensure their legitimacy.” - Joe Healey, investment research analyst at The Share Centre

Manufacturers are also grappling with factors they can’t control, namely geopolitical events that have serious ramifications for international trade. Brexit is a key example. Tim Ireland, chief executive of UK-based sound system manufacturer PMC, is downbeat on the potential impacts for his business.

“We have attended a few government department roadshows on how things may change to do with trade tariffs and the like,” he says. “So there has been some guidance, but it was all too little, too late.”

Mr Ireland expects higher costs after Brexit, “because I don’t see how we are going to negotiate a better deal as one country against a bigger economic body. At best I think we’re going to get the same deal, but I hope I’m wrong”.

Brexit is an example of the increased protectionism impacting supply chains around the world. Sarah Rathke, partner at law firm Squire Patton Boggs, is an expert in supply chain risk. She sees current geopolitical movements as a serious macro trend.

“We’ve shifted suddenly from being a regulated global economy to being one where there are significant influences of nativism and protectionism, which is not something we’ve dealt with before,” she says.

“We’ve shifted suddenly from being a regulated global economy to being one with significant influences of nativism and protectionism” - Sarah Rathke, partner at law firm Squire Patton Boggs 

While the US was once a rock in terms of normalising international trade and regulatory compliance, the country has become “more of a force of chaotic discord”, Ms Rathke says. Meanwhile, China is transitioning, and has the capacity to suddenly switch directions.

“We are being whipsawed by a number of rapidly changing, and sometimes conflicting, geopolitical trends. This is causing major disruption in trade,” Ms Rathke adds.

New trends in the global supply chain could also cause disruption. The traditionally cheap manufacturing regions of Asia and Latin America have become more expensive due to increases in wages and other employment reforms. This has forced manufacturers to look for other savings in their supply chains; for example, Mr Ireland says there could be opportunities to bring manufacturing back to the UK, “as going east is no longer the automatic saving it was and going forward there could be complications with things like tariffs”.

However, this raises the challenge of finding the right staff capable of setting up the manufacturing process, he says.

“Work ethic is important, too. With manufacturing you can be expected to put a shift in for eight hours without looking at your phone, which has become increasingly hard for some people!”

This “reshoring” concept has become particularly evident in Europe. Between 2014 and 2018 85 per cent of jobs reshored to the continent were in the manufacturing sector, with half of those from China alone.

Ms Rathke suggests that companies find a good policy shop to partner with if they want to invest in long-term strategy.

“I really think that will be the future,” she says. “The best thing [manufacturers] can do now is understand how far and exactly where their supply chain reaches and consciously map these risks. They need help from their policy experts to really understand where we are in history and what is likely to happen next, because everything is so unprecedented right now.”

While businesses are vulnerable to geopolitical trends, Mr Elwes says there are signs of confidence at a company level, especially in geographies that could benefit from currency movements.

“With a weak sterling, if you’re importing components you’re basically importing inflation and that becomes very difficult to pass through to the customer,” he says, pointing towards a strengthening pound at the end of 2019 as giving much needed respite to some manufacturers. “Of course, it works both ways and if you’re an exporter your products will become more expensive as sterling rallies.”

However, most companies have coped well, he adds.

“We have seen a lack of investment and it’s a case of managing inventory supply and being careful that nothing is stuck in the supply chain. All of this has been much better managed, partly because of IT. It will take a while [for investment to recover] but towards the back end of the year one would hope that would start to return.”

When managing a global supply chain, uncertainty comes with the territory. Geopolitical tensions, regulatory change, trade disputes and the damaging effects of cyber-threats are just a few of the significant risks facing the manufacturing sector.

Take electric car manufacturer Tesla, for example. As the trade dispute between the United States and China snowballed throughout 2018 and 2019, rising import tariffs forced the company into a difficult position. With its new factory near Shanghai not yet complete, each car sold in China needed to be imported, exposing them to 25 per cent tariffs. The only solution was to pass those costs on to consumers until it could start selling domestically built cars.

Tesla’s experience in the midst of the US-China trade dispute is just the tip of the iceberg when it comes to operational risks. Given the high stakes for companies operating on the global stage, it’s imperative that companies put in place strategies and systems that can prioritise and manage risks and allow them to adapt to a constantly changing environment.

How things can easily go wrong

In the past decade alone, manufacturers have faced a barrage of trials and tribulations. From the 2008 global financial crisis, to a slowing global economy, environmental changes, and the ebb and flow of political uncertainty, there has been no shortage of disruption.

Given the outlook for the global economy, it appears the turbulent times are set to continue. The International Monetary Fund estimates global growth for 2019 fell to its weakest level since 2008-09, at 3 per cent, due to a slumping manufacturing sector forced to grapple with lower demand and higher costs. The main drivers of this were the ongoing trade dispute between America and China as well as weaker productivity, a slower Chinese economy and Brexit uncertainties.

Manufacturers can be forgiven if they have a cautious outlook. Along with the vagaries of the global economy, there are dozens of factors that could threaten their operations, including regulatory change, financial concerns, intellectual property disputes, transportation and logistics challenges, geopolitical events, technological problems and the effects of climate change.

Typically, risk management is a manual and time-consuming process that is seldom cohesive across an entire business. Part of the problem is when companies think of risk, they often view it in a fractured manner. Sometimes it is simply viewed in terms of insurable and non-insurable risks, ensuring on the one hand they are adequately covered in the case of an adverse event, while also acting strategically from a governance and compliance perspective.

Companies gain better control over manufacturing, reduce the likelihood of product recalls and make valuable improvements to worker and customer safety

On other occasions risks are only identified and controlled at the departmental level, with no single authority responsible for overseeing risks across the business.

But all this does is to exacerbate the fact risks are being placed into silos, raising the possibility that a risk event in one area of a business can inflict serious damage across the entire enterprise. This is why a different approach is essential.

Integrated risk management, transparency, collaboration and accountability

Managing and mitigating these risks through a single approach, which allows for integration across departments and automatic monitoring on an ongoing basis, not only helps to create efficiencies, but also reduce the impact of negative events should they arise.

Quite often each department within an organisation will identify and assess the specific risks they face. The danger is these risks are managed manually on a department-by-department basis in isolation from the broader business objectives. Instead, what needs to happen is these risks need to be aligned with the company’s broader corporate and business objectives so it can have the best chance of success.

The way to tear down those silos is to take a two-prong approach. Create a risk governance committee responsible for making sure everything is aligned and integrated. Leverage technology for a holistic view, which enables collaboration between departments, monitors and addresses any changes, ensures compliance, and makes it easy to update policies and revise workflows.

Companies that adopt these measures gain a holistic understanding of how risks affect their operations, assets and brands, and how they can be mitigated and optimised to run smoothly. It also helps them to measure their organisation’s risk tolerance at the highest level and ensure this is aligned across the company.

When an organisation has a full view of its strategic and operational risks, it makes it possible for the risk team to manage their processes while providing those at the executive and board level full visibility into the company’s risk posture. It enables executive teams to understand how it is affecting the wider organisation, while risk managers and safety teams drill into the root causes and identify the broad implications.

The direct result of an effective risk management solution is companies gain better control over manufacturing, reduce the likelihood of product recalls and make valuable improvements to worker and customer safety.

Trade relations

Manufacturers worldwide had to deal with increasingly fractious global relations in 2019, a risk that will continue in 2020.

“Still one of the biggest things to overcome is global economic trade relationships,” says Tony Hague, chief executive of PP Control & Automation. “We’ve got strong political egos getting in the way of general global economic welfare.”

The trade war between the US and China impacted global trade last year, though the two countries have now signed phase one of a trade agreement. Meanwhile, the UK has officially left the EU and entered a transition period that will last until the end of 2020. It will need to negotiate trading deals with Europe, while the US and China will also want to be on good trading terms with London.

In its paper “Predictions 2020: Europe”, market research company Forrester points to trade opportunities, including Beijing’s “Belt and Road” initiative. This means Chinese firms will invest more in Eastern Europe, Italy, and Portugal.

Technological advances

Automation, advanced robotics, virtual reality and augmented reality can ultimately benefit manufacturers, but overcoming implementation challenges could be difficult. Research by McKinsey & Company found that artificial intelligence (AI) and advanced deep learning techniques could account for as much as $3.5 trillion to $5.8 trillion in value annually. In addition, McKinsey also reported that AI and automation have the potential to stem the decline in productivity growth in the US and Europe since the 2008 financial crisis, potentially lifting it above 2 per cent annually over the next decade. 

The risk is that manufacturing falls behind other industries in terms of integrating technology. Mr Hague believes there is a lag in adoption of new technology, particularly among UK SMEs in the manufacturing space. However, this isn’t the case everywhere.

“Germany is a good example of where they have done a very good job in terms of SME level investment,” Mr Hague adds.

Data and security

The proliferation of data means manufacturers are increasingly exposed to cybersecurity risks. According to law firm Irwin Mitchell, a typical medium-sized manufacturing business will host several terabytes of data at any one time. It also points to a UK government report that says there are around 6.4 billion data-communicating objects in the world, which is forecast to increase to around 20 billion in 2020.

Ensuring the security of all this data is critical, particularly as data can now be held in a variety of ways, leaving companies and their employees potentially open to attack.

The IBM X-Force Threat Intelligence Index 2018 identified manufacturing as one of the top five most frequently targeted industries in 2017, accounting for 13 per cent of security incidents and 18 per cent of attacks. The report noted that few manufacturing sector incidents were disclosed publicly. This means that while cybersecurity incidents may well be on the rise, they are not being disclosed by manufacturers.

Labour shortage

The manufacturing industry has an abundance of jobs, but there are not enough skilled workers to fill them, leaving the industry with a labour shortage. Automation and advanced technology, rather than reducing manufacturing jobs, has actually created more.

This shortage of workers is particularly problematic in the US. A 2018 study by Deloitte US and The Manufacturing Institute found that the “skills gap” may leave an estimated 2.4 million positions unfilled between 2018 and 2028.

In Australia, a shortage of skilled workers means manufacturers are having to recruit from overseas to fill positions, according to the Future Manufacturing Council discussion paper “Trends in manufacturing to 2020”. The paper notes that about half of workers in the manufacturing sector do not have a vocational qualification.