Deloitte and MAPI study highlights pressing need to evolve manufacturing risk management

A new study, “Understanding Risk Assessment Practices at Manufacturing Companies,” uncovers complex business risks and disruptors facing manufacturers, and a pressing need for the industry to evolve its risk assessment capabilities.

The study, jointly conducted by Deloitte and the Manufacturers Alliance for Productivity and Innovation (MAPI), looks at how manufacturing companies are assessing and responding to risks today and in the future. Fielded in June of 2014, the survey reflects the responses of 68 members of MAPI’s Internal Audit and Risk Management Councils, and the majority represent companies with annual revenues between $1 billion and $10 billion. It finds that the current operating environment demands a more analytical, agile, and clinical view of risk to effectively address the complexity and velocity of critical risks and disruptions to their businesses.

“Our research shows that risk management is a true differentiator in performance, but it needs to be aggressive,” said Brian Clark, partner, Deloitte & Touche LLP, and co-author of the study. “Companies could invest more in these capabilities, and in many cases they should. You can’t put chips on every number on the roulette table. But you can understand risks to which you are most vulnerable, and use that to drive how you place your bets.”

Between customer expectations and intellectual property theft, the need to address risks that are unknown is more important than ever, Clark said. “It’s easy to react to known risks. That’s a trap manufacturers can fall into, since the core difference between 1985 and 2015 is velocity,” he said. “Many of the same risks are present, but the speed of onset is very different. You can’t slow down the velocity of consumer sentiment, and you can’t deny the velocity of progress and miss out on an opportunity.”

Clark said the current environment makes it important for a broader cross section of employees in an organization to be aware of risks. Collective knowledge is where the solution lies, he said, more so than any one person’s actions.

“It’s a journey, not a destination,” he said. “It’s not about annual reviews, but an ongoing discipline. For successful companies, this is part of their DNA and how they assess opportunities.”

Survey respondents ranked competitiveness drivers such as innovation and talent management as 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.

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–such as recruiting and retention initiatives, HR IT systems, and deployment of data analytics capabilities to monitor trends–designed to mitigate the anticipated talent shortage and skills gap risks.

Survey respondents indicated a variety of successful and ineffective assessment practices. Successful practices include: interviews, periodic presentation of specific risk topics to the board committee tasked with governance, and integrating risk assessments into the strategic planning process with business units. Least-effective practices include: risk questionnaires or surveys that are too long or sent to too many people, accepting canned or repetitive risk mitigation responses, and risk assessments that are too narrowly focused.

About 70% of respondents say they perform annual or semi-annual risk assessment events. According to the survey, these events generally consume less than 500 hours of time and predominantly focus on the global organization and evaluating the impact and likelihood of risk events.

“Companies right now need to get as sophisticated in their monitoring of risk as they are in taking risks. If they can match the two disciplines up, there is tremendous value,” Clark said. “It’s an exciting time for an old, staid industry, but the manufacturing industry is going to be incredibly exciting over the coming years.”