The UK‘s manufacturing sector has been central to the UK trading its way out of the recent economic downturn – driving innovation and overseas trade and employing an increasing number of people. There has also been a huge number of mergers and acquisitions taking place in the sector. This upturn in the sector has increased some business risks, as well as introducing new ones, writes Peter Cant, head of Reading risk practice, JLT
While there has been some growth in the sector, this has come after some very challenging years. Survival has meant the need to develop their business offering, including exploring new overseas markets and product innovation. All of these strategies bring with them new risks, particularly around supply chains and subcontracting.
Last year JLT Specialty conducted a detailed study of the sector by interviewing key decision makers within some of the UK‘s advanced manufacturing firms.
The findings clearly demonstrated how operational and strategic developments are creating new challenges. For example, as companies become more globally spread and interconnected they have to prepare for the impact of changes to overseas governments, legislation, regulation, tax regimes and economic policies in multiple locations; and many managers expressed a desire for greater advice in this area.
Diversification and innovation are leading businesses to enter areas of business risk not previously encountered – the desire for insurance cover simplification and a real concern over more complex supply chains and the associated risk was also articulated.
With innovation seen as a key driver when diversifying into new products and markets, advanced manufacturing businesses have maintained or increased their research and design (R&D) investment. This reflects the commitment to make innovation a key aspect of their strategy to offset the effects of the downturn and place them in a better position for the improving economic landscape. The main reasons for this investment are to respond to supplier demands for cheaper products, often supplied on a faster turn-around from order to delivery than previously demanded.Those firms operating in innovative technology sectors are putting innovation at the forefront in anticipation of being able to attract new clients and break into new markets.
This constant focus on R&D reflects the clear need for manufacturing businesses to invest in order to maintain their positions within the highly skilled, high-tech niche markets they operate in. This is seen as a key part of their strategy for future growth, especially in the face of the emerging economies growing manufacturing influence.
“Investing in new products and looking to new markets involves risk – we‘re essentially investing in completely new products and going into new markets we know nothing about.“
Many firms have found their desire to innovate conflicting with a new breed of risk aversion in the procurement process, with customers pushing for better payment terms, lower down payments and higher insurance cover. This tension between their need to invest in R&D in order to innovate and a reluctance from customers to expose themselves to any financial risk, as they push for lower costs, is a key challenge for management teams across the sector.
When it comes to insurance the key message to brokers from the companies interviewed for the study was ‘make it simple‘. Historically, the complexity of risks clients face has been reflected in the complexity of insurance products available, for example, quite often there are grey areas and potential overlaps between professional negligence and product liability insurance. Managers have been understandably confused about what policy to use in the event of a particular claim. If a financial director has got risks that they‘re not confident of transferring off their books then they‘ve got real concerns.
Finally, complex supply chains have amplified because of the recession. Manufacturers have faced an ever shrinking pool of suppliers and also have the need to look for cheaper sources further afield in Asia, especially China. This has created new risks of over-dependence on single suppliers, traceability of components and product quality – problems that have potentially severe implications for brand reputation, as well as the operational response to potential product recalls.
JLT Specialty has a long history of arranging insurance for the manufacturing sector and advising clients on the issues we‘ve talked about here. We are delighted to be involved in the first edition of the manufacturing 100 project and sharing our insight on the insurance and business risk implications of this new landscape.
Contact me if you‘d like a copy of our manufacturing sector research report, details below.
Details: Peter Cant