Managing risk in a manufacturing renaissance

Michael Beaumont, group manager account engineering at FM Global, explains four keys areas of risk mitigation for manufacturers.

COVID-19 has exposed critical gaps in our domestic capability to remain resilient as a nation and weather global storms. From questions over Australia’s capacity to ramp up production domestically when needed, to the viability of “picking winners”, the conversation around manufacturing has reached a new level.

In late September, the Prime Minister announced a multibillion-dollar manufacturing strategy which he said would be the centrepiece of a five-year plan to create millions of jobs, growing and re-shaping the Australian economy as it recovers from the pandemic.

Advanced manufacturing will be the focus of the manufacturing revival strategy. John Pollaers, chairman, Australian Advanced Manufacturing Council, describes advanced manufacturing as “using advanced technology to make manufacturing simpler”.

While the next generation of advanced manufacturing is likely to look different from the assembly lines of the past, the risks and challenges industry must consider to ensure any new operations are resilient from the outset, whether they are starting from scratch or retooling existing operations, are both similar and different.

Michael Beaumont

As one of the world’s largest commercial property insurers, using an engineering-based approach to reduce risk for our clients, FM Global has decades of experience in supporting manufacturing businesses in managing risk. Here are several key risk areas that must be kept front of mind by those beginning or re-tooling operations towards advanced manufacturing.

Cyber risk

In many ways, a cyber-attack can be similar to a pandemic in its impact. It can severely impact multiple locations at once, disrupting them or taking them completely offline.

Data shows that manufacturers are increasingly falling prey to cyber attacks. According to a Deloitte study, Cyber risk in advanced manufacturing (2016), 40 percent of manufacturing firms experienced a cyber-attack in 2019. Out of them, 38 percent of them suffered over $1 million in damages.

We advise that those managing cyber risk in the manufacturing sector must focus on three key areas – physical security, industrial control systems and information security.

Physical security has often proven to be a common reason why manufacturing is a soft target. Globally, almost two-thirds of the physical security deficiencies we’ve found have been in this sector.

Meanwhile, many industrial control systems were designed and installed before the cyber-threat was truly appreciated and understood, and as such security was much less of a concern than efficiency. For those existing manufacturers adding more advanced technological capabilities on top of these existing legacy systems, this should be a high priority concern.

With any further push towards greater automation, cloud computing, data analytics and other technologically- driven trends within the factory, the complexity manufacturers face from a cyber risk perspective will increase, as this further tightens the relationship between Information Technology and Operational Technology (IT and OT).

Similarly, cyber vulnerabilities may also be further exacerbated by the more widespread culture of remote working, since more people are looking to control operations and access systems remotely, potentially blurring the line between IT and OT even further. Intellectual property also looks set to become a more attractive target for cyber attackers in an advanced manufacturing environment.

Boards and leadership teams looking to ensure their businesses are protected effectively must implement products, processes and educational initiatives taking each of these risk areas into account. These should be reinforced with appropriate insurance coverage based on a holistic view of cyber risk.

Equipment breakdown

Equipment breakdown is another key risk for all manufacturing operations. For those establishing new operations, or re-tooling existing ones, understanding how newly introduced pieces of equipment work, the risks each represents, and an appropriate maintenance schedule, will be critical.

There’s a strong case for adopting online monitoring of certain pieces of equipment – rather than time or a process-based maintenance program – as evidence increasingly shows that equipment failures can occur randomly throughout the life of a piece of equipment, contributing to unplanned downtime.

By allowing businesses to gain a more accurate picture of the health of their critical equipment, online monitoring can enable manufacturers to replace parts in a planned way, reduce maintenance outages and minimise unplanned downtime.

Supply chain risk

The reality is that while we can bolster manufacturing in Australia through targeted interventions that will add economic activity and jobs, while increasing local resilience, reliance on external, global suppliers is a fact of business.

For any new or evolving manufacturer looking to establish resilient and productive operations, building resilient supply chains should be a key priority. Coronavirus has made clear the fragility that can exist within supply chains but this was clearly an issue long before COVID-19.

On average, companies worldwide experience supply chain disruptions that last a month or longer every 3.7 years, even prior to the pandemic, according to a recent McKinsey report, Risk, resilience, and rebalancing in global value chains (2020). A single prolonged production-only shock would wipe out between 30 and 50 percent of one year’s earnings before interest, taxes, depreciation, and amortisation (EBITDA) for companies in most industries.

With so many factors to consider as they re-shape the supply chain to navigate disruption and meet evolving customer and stakeholder expectations in 2020 and beyond, it’s never been more important to take a data-driven approach to strengthening supply chains.

Some resources that can help include the FM Global Resilience Index, which ranks countries according to 12 key drivers of resilience, and our Natural Hazard Maps. Insights can also be gained via exercises such as supplier engineering visits, risk analytics and assessments of your core supplier’s own business continuity plans.

Knowledge is power – in this case, the power to preventatively minimise your chance of a serious disruption to your manufacturing output, reputational damage and lost market share.

Management of change

The management of change will be critical to any new or existing manufacturing looking to move into advanced manufacturing. Without it, any organisation, including manufacturers, are likely to experience significantly more disruptions.

Following the ‘Seven Rs’ – from ‘who raised the change?’ to ‘what is the reason for the change?’, ‘what are the risks involved?’ and ‘what is the relationship between this and other changes?’ – can bring some discipline to change processes and reduce the likelihood that new additions to the manufacturing plant will lead to costly problems down the line.

With Australia on the brink of a manufacturing resurgence, placing emphasis on these risks and approaches will ensure that the sector is resilient and ready to support the country’s next phase of growth.