March 27, 2024 Addressing Manufacturing Risks to Maximize Profits

Uncertainty is constant for manufacturers. Fortify your business by discovering the six key areas of a risk management program.

Uncertainty is a constant challenge for manufacturers. From supply chain disruptions, regulatory changes, staffing issues and more, this constant variability has created higher risks. Even the most fastidious planners can’t eliminate unpredictability, but doing what you can to manage the associated risk is paramount to help aid in sustainable business growth.

Without proper structure, enhancing risk management can be complicated and time-consuming for manufacturers. However, knowing where to focus your analysis can help teams limit risk exposure, minimize incidents and reduce the potential severity of outcomes. As you start or continue your loss control journey, it may be worthwhile to see if your business insurance provider offers loss control services to help you manage risk.

As the loss control field director at Acuity Insurance, I advise each customer to start a risk management program with an assessment of existing risks that pose an immediate threat to the company’s bottom line. I ask the following questions to help get the business owner thinking about risk management:

• What keeps you up at night?
• What feels most out of control?
• What trends have you seen?
• What aren’t you ready for?

Once you’ve assessed your current risks, you can get a better idea of where you should focus your attention. It’s also important to pay close attention to six areas where the most prominent risks are typically identified.

6 key areas of a risk management program

1. Operational Risks

Start by looking at the effectiveness of your company’s processes and procedures. Start with processes in any area you currently have concerns. Consider things like returns due to quality control; below-industry standards in safety and health; and unacceptable lead times. Once you pick an area to focus on, look for vulnerabilities and potential disruptions. For example, when reviewing your supply chain, ask yourself: Are certain items causing production delays? Are vendors making promises they aren’t keeping? Any factors that can impact your business are worth considering. Identify your vulnerabilities and adjust as needed.

Then move on to other areas. Don’t tackle too much at once or your team may become overwhelmed, leading to a less-than-desirable product. As you solidify policies, processes and procedures, consider how they are being communicated. Ask yourself if the right people know about your expectations.

2. Financial Risks

Given the capital-intensive nature of manufacturing and the complexities of supply chains, financial risks are inherent. Pay particular attention to market risks, such as demand fluctuations, price volatility, credit and counterparty risks, and interest rate fluctuations.

Be sure to work with your independent insurance agent to ensure your business insurance is up to date with the coverages you need to help reduce the impact of some financial losses. Consider specialized coverages like equipment breakdown, product recall, manufacturer’s errors and omissions, and property enhancement coverages to help your business manage financial risk and get back to work as quickly as possible.

3. Compliance Risks

Failure to comply with regulatory changes, industry standards and certifications can be costly. Potential outcomes may include legal consequences, operational disruptions, reputational damage and more. Consider assigning a person, or team, to oversee the monitoring and tracking of regulatory changes. You may be able to use online tools, subscription services and regulatory websites to receive these types of updates directly.

Engaging with relevant industry associations is another way to help manage compliance risks. Staying connected with others in your industry will make it easier to ensure you are informed about the latest developments.

4. Strategic Risks

It’s important to look outside your organization to get a better feel for risks associated with market competition and changes in the competitive landscape. There may be a competitor who is investing in the newest automation technology or a new competitor entering the market. Start by compiling a list of direct competitors and then perform a strengths, weaknesses, opportunities, threats (SWOT) analysis for your business and each competitor.

5. Human Resources Risks

Most people count an organization’s workforce as its biggest asset. That’s no surprise when some studies predict that every time a business replaces a salaried employee, it costs an average of six to nine months’ salary. For an employee making $60,000 a year, that’s $30,000 to $45,000 in recruiting and training expenses. That’s why it’s crucial to hedge off big risks around talent acquisition, retention and succession planning before they negatively impact your company.

Are employees feeling fulfilled, engaged and appropriately compensated for their work? Like many other manufacturers, you may have key company leaders who will be retiring in the coming years and need to look at succession planning. Asking yourself the tough questions now can help to avoid future losses.

6. Driving Related Risks

According to the Network of Employers for Traffic Safety, 379,000 people are injured each year in on-the-job crashes on U.S. roadways at a cost to employers of more than $75,000 per incident.

To manage risk, consider reducing the frequency of exposure by only making deliveries in a 10-mile radius and hiring a trucking company to make the rest of your deliveries. Creating training and driver qualification programs can help your employees learn safe driving techniques and give peace of mind that you’ve chosen employees with safe track records by prequalifying them. Purchasing vehicles with excellent crash test ratings can help keep your drivers safe and reduce the severity of financial fallout if an accident occurs. By controlling your risks, you can minimize the cost of insurance claims, improve working conditions and boost your bottom line.

Whether you’re working to establish or optimize your risk management strategy, this list is a great place to start. However, there are other ways to safeguard your bottom line. Few are more important than protecting one of the most important assets in manufacturing: your equipment.

Leveraging the power of preventive maintenance and predictive maintenance

Facilities and equipment are an organization’s second-biggest asset, after its workforce. Leveraging preventive maintenance (PM) and predictive maintenance (PdM) to enhance internal maintenance strategies can help you minimize downtime and keep your operation running smoothly.

What’s the difference?

• PM refers to basic procedures that focus on replacing and maintaining equipment per original equipment manufacturer recommendations or other standards. Much like a car requires routine replacements for its oil, oil filter and air filter, your equipment requires similar attention.
• PdM, sometimes referred to as condition-based maintenance, is a method that can analyze the actual condition of a piece of equipment to determine maintenance needs and then reduce or eliminate the possibility of an unexpected failure or breakdown. Essentially, PdM helps your teams know when an item requires repair or replacement prior to failure. By proactively catching potential failures weeks or months ahead of time, PdM can provide cost savings of 8% to 12% over PM models and up to 40% cost savings over reactive maintenance, according to the U.S. Department of Energy’s O&M Best Practices Guide. When implemented effectively, PdM can reduce downtime, increase productivity and minimize costly breakdowns — strengthening the efficacy and profitability of your business.

If you want to optimize maintenance procedures and extend the life of the machinery that drives your business, PM and PdM strategies can yield beneficial results that can keep your daily operations running smoothly.

How to implement PM and PdM

If you currently don’t have a formal equipment maintenance program, start with a basic PM program. First, take inventory of your organization’s equipment. Then take note of guidance provided by equipment manufacturers, including recommended maintenance intervals. Create procedures for the expected time intervals and tasks, including any associated safety requirements, such as lockout tagout. Lastly, make sure your company has a way to assign and track work orders. This can instill confidence that someone is tasked with ensuring routine maintenance is completed properly and in a timely manner.

To effectively implement PdM, it’s important to understand the critical components of the equipment for which your teams are responsible. Once you identify these essential components, establish a baseline by using tools and equipment that indicate when a part is in good working condition. This baseline will allow your facility to measure those indicators at predetermined intervals and document any deviations that may impact future equipment performance. This allows you to effectively identify when deteriorating parts need to be replaced, which can prevent catastrophic failures that can result in hours, days or even weeks of costly downtime.

Effective risk management is a team effort

From assessing and addressing key risks to successfully implementing PM and PdM strategies, risk management takes time and effort. That’s why it’s wise to enlist the help of a risk management professional to perform thorough, and unbiased, analysis. Risk managers are responsible for identifying, analyzing and mitigating organizational risks. At Acuity, our customers receive support from our loss control professionals at no extra charge. These representatives help manufacturers like you develop safety policies and procedures that can help safeguard your workforce and the integrity of your business operations.

The manufacturing industry is filled with uncertainty, but knowing how to identify risks before they become problems can help you ensure a prosperous future.

About the Author:
For more than 20 years, Gwendolyn Luscavage, CSP, MS, has helped organizations such as United Parcel Service, Levi Strauss, Liberty Mutual and now Acuity Insurance achieve safer, more profitable operations. Gwendolyn is a Certified Safety Professional^® (CSP^®), has her master’s degree in safety from Indiana University of Pennsylvania, specializes in manufacturing, and is the past president of the American Society of Safety Professionals Nicolet Chapter.

Certified Safety Professionals and CSP are registered trademarks of Board of Certified Safety Professionals, Inc.

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