What’s Keeping Manufacturers Up at Night?
U.S. manufacturing is experiencing a growth revival, but concern around labor shortages is escalating. In fact, 98 percent of manufacturers this year noted labor issues, including disputes, recruitment challenges and pension issues, as important concerns, up from 97 percent a year ago and 75 percent in 2013. As seasoned executives and C-suite leaders reach retirement age, manufacturers are feeling the pressure to recruit and maintain a steady labor force to keep production strong. This year, 74 percent of manufacturers note risks around attracting, retaining and motivating key personnel and management, up from 69 percent in 2014 and 62 percent in 2013.
Those are some of the findings in this year’s BDO Manufacturing RiskFactor Report. The Manufacturing RiskFactor Report is an annual study examining the most recent corporate filings of the 100 largest publicly traded U.S. manufacturers. The companies studied include food production, transportation equipment, plastics and rubber, machinery, and fabricated metal.
New taxes on employers’ health insurance plans, along with the nationwide discussion around raising the minimum wage, are intensifying the risk of disputes between employers and existing workers. Provisions of the Affordable Care Act, increasing employer obligation around pension plans, and labor organizations calling for companies to pass on some of the benefits of economic recovery could add to conflict between employers seeking to keep costs down.
Strong Dollar Could Stymie Manufacturers’ International Exploration
The dollar’s climb to 12-year highs during the past year has stimulated consumer confidence, domestic spending and U.S. production. Though overall industrial production was up 0.3 percent in June, the Fed reported that manufacturing output was unchanged in both May and June, bolstering concerns that recent economic gains could be losing steam. This could be a result of foreign buyers, many of whom are experiencing a weakening of their home currency, pulling back on purchases of goods manufactured in the U.S.
The Manufacturing RiskFactor Report suggests that manufacturers are taking note of these potential challenges. Ninety-three percent of manufacturers note concerns around international business and expansion, up from 91 percent in 2014 and 87 percent in 2013. Restrictive international trade policies, such as import quotes, capital controls and tariffs, were also mentioned by 84 percent of companies, up from 77 percent in 2014 and 66 percent in 2013.
Analysts predict that as global issues play out in Europe and Asia throughout the remainder of the year, a tightening of U.S. monetary policy could further strengthen the dollar, creating a greater disadvantage for U.S. manufacturers against competitors abroad.
Business Interruptions Expose Weak Links in Supply Chain
For the second year in a row, 100 percent of manufacturers mentioned concerns around supply chains, including disruptions or issues with vendors or suppliers. This comes as no surprise, given that manufacturers weathered a harsh winter and navigated port shutdowns on the West Coast, not to mention the continuance of widespread drought conditions.
Historically, some manufacturers have chosen to rely on a few suppliers, or even just one. As disruptions become more widespread, this practice carries more inherent risk. Over the past two years, mention of business interruptions, including natural disasters, terrorism events or other conflicts, has jumped 28 percent, with 87 percent of manufacturers citing the risk this year.
Cyber Attacks Create a Chink in Manufacturers’ IP Armor
Data breaches and cyber attacks have stormed into the spotlight in recent months after a string of high-profile attacks on large companies and, most recently, the remote hacking of a Jeep vehicle. These concerns are pushing manufacturers to turn inward and examine their own risks around IT systems, evidenced by 86 percent of manufacturers citing risks related to data and cybersecurity this year, up from 78 percent a year ago.
The risks around data and intellectual property are two-fold for manufacturers, as they work to protect not only their own internal proprietary data, but also end users’ data that could be transmitted via their products. These emerging data challenges could also explain the jump in manufacturers’ concern around legal proceedings and litigation, a potential consequence following a data breach, up to 95 percent from 79 percent in 2014.
What’s Next? Heightened Focus on Preparation
As manufacturers re-shore and look to strengthen their domestic business, the manufacturing industry’s resurgence appears promising. Looking forward, we could see manufacturers across sectors investing more heavily in risk management practices around these key areas, including spreading out supply chains, implementing preventative data security measures and joining forces to strengthen science, technology, engineering and mathematics workforce initiatives.
Rick Schreiber, is a partner and leader of the manufacturing and Distribution practice at BDO USA, LLP. He has more than 20 years of public accounting experience in the manufacturing, distribution, retail, technology, and healthcare industries.
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