A risky business

Posted on 2 Mar 2011 by The Manufacturer

Tim Astley examines key risks for manufacturers and how to address them in the latest in a series of blogs from Zurich.

Manufacturers face risks on a daily basis but which ones are the most important? Based on our experience with small businesses to large corporations, we’ve identified the top five risks. Let’s take a look at each one in more detail:

Emerging Markets

With long term growth in mind, businesses are becoming more dependent on the developments in emerging markets such as the Far East, Brazil and Eastern Europe.

Entering and succeeding in new markets is challenging, even for the most experienced operators! The difference between growth conditions in established markets and those in the leading emerging countries gives rise to a fear of protectionist measures eg. in the form of currency or trade restrictions. Growth bubbles might burst also and this could result in a need for rapid reappraisal of strategies.

Whether as customers or suppliers, manufacturers must keep abreast of macroeconomic issues and factor-in the potential for rapid changes in a sometimes unpredictable climate.

Regulation and compliance

Any business operating in the EU will be familiar with the apparent increase of regulation, some of which has unintended consequences.

A good example is the REACH legislation (2007), introduced to improve knowledge of chemicals, their properties and uses. Compliance is a complex matter though, which has led to serious re-evaluation of supply relationships, with implications way beyond the initial scope of the legislation itself.

The key difficulty for manufacturers is uncertainty and change or increased requirements for compliance with industry codes and standards. Organisations need to think from a strategic perspective, recognising where change or excessive bureaucracy can create unwanted changes.

Green concerns

This is a topic that continues to seek greater attention. In a Zurich sponsored survey by CERES (2010), organisations expressed concern over the potential impact on their competitive position caused by increased energy prices for operations, changes in demand for products/services in response to climate regulation or physical impacts on consumers caused by climate risk.

Organisations have shown concerns over both their own impact on the climate and on the impact climate change can have on their ability to operate.  So, knock-on effects of reputation damage associated with green transgressions must also be accounted for. In addition, there are risks associated with ever more radical perspectives being taken by pressure groups or even governments themselves.

Mergers and alliances

As economic growth returns acquisition aspirations are likely to increase. It is notoriously difficult to ensure that such arrangements can succeed and thrive. Reliance on other organisations for outsourced services together with the cost pressures which drive a slimming-down of the supply-base demand greater appreciation of the agenda, needs and culture of partners.

Merger and acquisition planning does not always include a rigorous approach to risk management but executives need to pay attention to this aspect and adopt a more formalised approach to risk when planning expansion/collaborative ventures.

Supply chain

In 2009, the World Economic Forum referred to the threat of ‘over-optimised’ supply chains. This neatly describes the position many companies find themselves in following years of cost-based rationalisation, outsourcing and de-stocking (not to mention that supply chains are stretched geographically as well).

Economic recovery brings significant supply chain challenges; where once capacity was adequate, downsizing and closure of suppliers have led to squeezes that are manifesting themselves in all industries, from engineering and automotive to electronics.

Organisations must adopt more of a broad-based risk approach to supply chain management and recognise and address the influences beyond cost, quality and delivery that affect their ability to function profitably. They should also pay more attention to the potential for collaborative supplier management in order to preserve key relationships.

The key is to understand how significant these risks are to your business and know how to tackle them before they become major issues. We’ll take a further look at supply chain risk, one of the top concerns for manufacturers, in my next blog…

Tim Astley is a Strategic Risk Consultant from Zurich Risk Engineering