Each manufacturer will have its own set of risks depending on what resources they bring to the business (capital), what activities they perform with those resources, and what products they sale to the public. Below are some of the manufacturing risks that can be managed by using ChancesR®, our web-based risk management information system (RMIS) with an enterprise risk management (ERM) approach.
Resource Risks in Manufacturing
Manufacturers usually bring large amounts of capital to their businesses in the form of buildings, machinery, equipment and inventory. This creates large property exposures that are best mitigated by the use of insurance. Our Insurance RFP© can help manufacturers to purchase insurance.
Some assets, like inventory and cash (on hand), also have the risk of value loss due to market conditions. This risk could be better mitigated by the use of derivatives like currency swaps, forward and future contracts. Our Hedging Master© allows the client to do physical hedging to mitigate such risk.
Balance sheet exposures, like those above, will stay there even if the manufacturer decides not to make anything. Income statement exposures are the result of doing something with the capital brought to the business (operating capital). The greatest exposures in this category are losses from changes in price and quantity. This applies to revenues and expenses. On the revenue side, it’s all about sales. We’ll just need to manage the risk of our customers buying the quantities that we budgeted at the price that we set. On the expense side, there is a lot more risk involved, and usually is in direct correlation with each cost driver. The main cost drivers in manufacturing are: raw material, labor and energy.
Raw material exposures thru fluctuations in price and availability (quantity) are better mitigated using supply contracts and when possible, forward and future contracts (see our Hedging Master©). Labor rates are usually setup by the markets or the government – minimum wages for example. The main exposure here is with general or skilled labor shortages. The use of staffing agencies can help to stabilize this cost.
Energy prices are very unstable for suppliers operating in unregulated energy markets (like in the case of natural gas). The best tool to mitigate the risk of energy price hikes is buying future contracts in the NYMEX. Our Hedging Master© not only allows the risk manager to do physical hedging directly from the supplier but even calculate total savings (based on real-time gas prices) before placing an order.
Activity Risks in Manufacturing
Manufacturers perform a large number of activities in order to make and bring a product to its customers. These activities can be grouped into departments like procurement, production, marketing and distribution activities; or based on the company’s goals and objectives, into strategic (long term), operational (day-to-day), financial (money), and compliance (government) activities.
As a result of performing these activities, manufacturers experience the possibility of a liability loss as a result of a specific legal claim or suit against the company. One way companies transfer (or mitigate) this risk is by outsourcing the activity (or a set of activities). Our Activity-Based ERM© can help companies to decide if a particular activity is better outsourced (subcontracted) or kept in-house (when the cost savings can not offset the increase in company risk). If the company decides to outsource, the Contractual RM© will help manage the risk of subcontracting and outsourcing.
In addition to using contract risk transfer, companies can mitigate these liability exposures through the purchase of insurance products like Workers Compensation, Employers Liability insurance, Commercial General Liability insurance, Product Liability and others (see our Insurance RFP©).
Another large exposure in manufacturing is loss from business interruption. In addition to purchasing insurance, the company will need to prepare a Business Continuity Plan (BCP) explaining how the company would respond to an emergency (Emergency Response Plan-ERP) and how it would recover from the event (Continuity of Operations-COOP). Our Insight BCP© helps companies to plan for and respond to emergencies.
Product Risks in Manufacturing
Due to strict and absolute liability laws (regardless of how safe a manufacturer makes its products) there is always the possibility that the company may become legally obligated to pay damages.
Product or Service risks have less to do with how the product was made or the service performed but more with who will be using the product or receiving the service. For example: Those with health conditions and children are the consumers of pharmaceuticals and toys respectively. It’s impossible for these manufacturers, their wholesalers and distributors to eliminate the risk of an ill person becoming sicker after taking the drug…or a child getting hurt playing with a toy.