If Henry Ford and Andrew Carnegie were alive today, those titans of industry might scarcely believe how much manufacturing has evolved in 21st Century. From the early days of automobile assembly lines and mass-produced steel, manufacturers of all kinds today are using new processes, parts and professional skills —each of which is creating new sets of risks.
A prime example of this evolution is a steel mill outside Vienna, Austria. The partly automated facility can produce 500,000 tons of steel annually with only 14 employees. Twenty or more years ago, that same level of production would have required at least 1,000 employees. The workers who use high-end technology to monitor the manufacturing processes are highly trained. On modern assembly lines in Detroit and around the world, computer-controlled, multitasking robots complement employees.
In addition to wider use of automation, technology and skilled workers, innovative manufacturing processes are reshaping the physical plants. Storing large stocks of inventory and raw materials, once common in industrial manufacturing, is no longer necessary, thanks to just-in-time inventory management. The footprint of manufacturing facilities has become smaller, enabling equipment to fit into previously unused locations, such as urban environments. Proximity to other structures and businesses in such locations can alter the risk profile of manufacturers.
Another major difference in just the past two decades is that manufacturing has become digital. Machines are connected as never before. Manufacturers of all kinds are producing and holding more data, and less of it is on paper. From sensitive employee information to intellectual property and trade secrets, manufacturers are attractive targets for cyber criminals.
Evolving and emerging risks
The nature of manufacturing itself is changing. In contrast to years past, where manual tasks made up the majority of production processes, current manufacturing focuses more on equipment monitoring and statistical analysis. There is greater reliance on equipment in production processes. Many products now have embedded electronics, part of an ongoing trend toward customized, higher-end goods, which tend to be more profitable than mass-produced items.
Connectivity has introduced its own new set of risks and opportunities to manufacturing. The ability to control sophisticated machinery remotely increases manufacturers’ flexibility and can reduce their cost structure. At the same time, cyber risk has emerged as a big exposure that smaller and midsize manufacturers may have never even considered before.
People tend to think of cyber risk as an external threat perpetrated by malicious actors, such as hackers. In fact, increased connectivity in the manufacturing industry means that even inadvertent actions can damage equipment and disrupt production. One example a CNA insured recently faced was a fire caused by a remote servicing technician who instructed a machine to open a valve that should have remained closed. The resulting property damage might not have happened if the technician had been on site and able to physically inspect the system.
Manufacturers need to think strategically about managing risk. They should adopt a thoughtful approach to reduce cyber risk, no matter where it originates. In the past, system complexity may have been sufficient to deter malefactors, an approach known as “security through obscurity.” Not so anymore. An example of how sophisticated and persistent hackers have become in infiltrating systems: a casino reportedly was breached recently through an electronic thermostat on an aquarium.
As risks emerge and evolve, the claims picture in manufacturing is becoming more complex. With fewer workers performing manual tasks, and manufacturing sites becoming safer, there is a potential shift in loss drivers. In workers compensation, ergonomic injuries might supplant falls, cuts and burns, but safety needs ongoing attention even as workers’ roles change. Cyber liability may become a key loss driver for the manufacturing industry. The implications for property damage, bodily injury and product liability arising from cyber events are not yet clear. Greater reliance on equipment means that breakdowns are especially detrimental to manufacturers’ operations. Business interruption is becoming even more complicated in connected environments. What all this means will vary for each manufacturer, but it’s important for every business to understand its risks and how to mitigate them, through loss control and appropriate insurance coverage.
Managing manufacturing risks today
Manufacturers should recognize that they are facing risks that previously didn’t exist or may have had less severe consequences. Fire, for example, is no longer the principal risk in most manufacturing. Advances in fire safety and material handling have reduced much of that risk, though fire remains a major danger to people and property. Manufacturers should assess their risks with a goal to identify and minimize sources of downtime, whether due to worker injury or equipment breakdown. Consulting experienced insurance and risk management partners with specialized knowledge in loss control, underwriting and claims is a smart move that will pay big dividends in productivity and profitability.