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Background | Risk Management

The quickening pace of technological advances presents significant challenges to risk professionals as well. Analytical tools and predictive modeling capabilities enable manufacturers to extract more meaning and direction from massive data sets. Cloud computing enables manufacturers to more fully benefit from robust IT capabilities. This is without having to maintain related software, hardware, and infrastructure in house. Social media allow for easy posting and sharing of information, but those capabilities may also spur crises. Technological advances, in general, place greater emphasis on data security and other vulnerabilities.  We have read about the challenges faced by the manufacturing industry

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Defining what characteristics can set a company apart competitively—today and in the future—is critically important for risk management. Competitiveness drivers such as innovation and talent management are priority business risks, indicating leading practices in these areas may set a company apart. Additionally, risk management and data analytics—areas where internal audit and risk executives are making significant investments—were also classified as competitiveness capabilities.

Supply Chain Risk

Supply chains are highly complex and continuously exposed to a variety of internal and external risks. Also, if not managed carefully, it can result in potential adverse impacts to manufacturers’ sales and brand reputations. Manufacturers should build resiliency into supply chains to address critical vulnerabilities proactively. Also, they should balance risk and costs to prevent or recover quickly from risk-related disruptions.

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Implications of the skills gap in manufacturing can also pose a material impact on manufacturers’ growth and profitability. Internal audit can play a key strategic role in assessing programs. Programs like recruiting and retention initiatives, HR IT systems, and deployment of data analytics capabilities to monitor trends are designed to mitigate the anticipated talent shortage and skills gap risk.

Risk management is an ongoing, cyclical and continuous process. There are four fundamental approaches:

Identify
Asses and Evaluate
Take Action
Review and Report

Risks of the Manufacturing Industry

The following is a non-exhaustive list of risks commonly faced by manufacturing company. The general approach remains the same for all types of risks.

It is not the role of the board or its designated committee to directly manage and specifically address each of the risks the company faces. The members of the board or the relevant committee should be aware of the risks. They should satisfy themselves that management:

  • Designs and implements risk management policies and infrastructure that sufficiently address the relevant risk issues,
  • Ensures the effectiveness of the risk policies and infrastructure,
  • Reports on these issues to the board or the committee.

Reputational Risk

Beyond the specific legal framework associated with each of these areas of risk, the company and the board should keep in mind the threat of reputational damage associated with these risks.Moreover,  the company’s brand image and reputation can directly impact its profitability, sales and a variety of other important strategic areas. Reputation and image can be materially harmed by negative attention in the media, publicity stemming from adverse litigation, shareholder activism, protests and boycotts by special interest groups, and the general threat of customer dissatisfaction, all of which may ensue from a failure to oversee and manage risks properly.

Not every risk, of course, will be relevant to every company, and the significance of various risks will also vary from company to company. Accordingly, risk identification is an important starting point for construction of a comprehensive risk management and risk oversight system. Senior executives should devote time and attention to considering the most significant risks that face their company and educate the board or appropriate committee with respect to these risks in the context of periodic reviews of the company’s risk management structure.

Other risk areas include:

Intellectual Property
Fraud
Bribery
Business Continuity Management

Even incremental improvements in risk management can lead to significant value enhancement. Also, modest improvements in addressing strategic risk may mean the difference between a quarter or a year where performance dips, versus a longer decline that becomes difficult to reverse.

Improved risk recognition and response enables a manufacturer to retain a long-term focus on differentiating its products on elements besides price, and on revenue enhancement, rather than cost-cutting measures. Thus, the enhanced ability to recognize and effectively address strategic risks can give a manufacturer a competitive advantage, an advantage that enables it to not only survive but thrive amid change.

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