Managing risks and threats is not a new concept to company directors. However the current global events, economic landscape and workforce challenges mean businesses are facing more challenges and risks – especially manufacturers.
null

Our Directors’ Briefing “Managing the risk for manufacturers” bought together a panel of guest speakers sharing their expertise and knowledge of the manufacturing sector from their individual perspectives. Tom Pugh – Economist at RSM UK, and Andrew Simmonds - Chartered Safety & Health Practitioner at Gallagher were joined by Adrian Went - Managing Director at Griffon Hoverwork. Together they dissected economic pressures, staff welfare concerns for maintaining productivity and what global trading risks really look like in a manufacturing business.

Short term economic outlook for 2022-23 - Tom Pugh

There really was no more obvious a starting point for Tom and the economic outlook than the 40-year high for inflation. Inflation peaked in April at 9.1% and looks set to rise further in the coming months leading up to the next shift change in energy prices when Ofgem increase the energy price cap in October1. With 80% of inflation driven by the price of goods, fuel and energy it’s not surprising that manufacturers are feeling the pressure more than other industries. Indeed, looking at the manufacturing sector in isolation and reviewing input prices into the sector, inflation is nearer the 22% mark. With output prices growing at a slower rate, profit margins are truly being tested and squeezed.

The good news on the horizon is that these level of price increases aren’t sustainable and as we come out of the effect of the energy price rise annual comparison in 2023 we should see a sharp reduction in inflation rates.

The next big question looked at the chances of a recession in the UK in the next 12 months. Economists are currently placing the chances of a recession at 35% although more recent forecasts and Tom’s own prediction are nearer 40%. The shut off of natural gas from Russia and supply chains pressures from China and the war in Ukraine will be significant in bringing about a recession. However, whilst little growth is expected in the next 12-24 months there is potential we will avoid falling into recession. If a recession does take place, it would likely be a short, shallow period at the start of 2023.

Labour shortages present another significant challenge for businesses in the UK. There are significantly fewer workers in the economy now than there was before the pandemic. Looking at the trend line for employment since 2012, there are currently £1million fewer workers than was predicted for 2022 – so not only do we have fewer in comparison to pre-pandemic but we are far behind where growth had forecast the labour market to be. Manufacturers account for just 7% of the UK economy but 12% of lost workers, showing that they are more affected by the shortage in labour resource than other industries. Illness and early retirement are two main contributors to labour shortages; with no dramatic changes expected to this picture, the advice from Tom to manufacturers is to turn to investment and automation as alternatives to think about rather than just hiring more people2.

Managing staff welfare - Andrew Simmonds

Having heard about the stark labour shortages in the manufacturing sector, Andrew Simmonds placed a spotlight on what’s often an underestimated risk in business; looking after health and welfare of a major asset for any business – it’s staff. With labour shortages affecting many businesses, maintaining staff levels and minimising time off for illness is fundamental to any business continuity plan.

According to a Labour Force Survey between 2020 and 20213 there were 1.7million workers in the UK suffering a new or long-standing work related ill health problem. Of these, 50% were suffering from stress, depression or anxiety that was work related – a proportion that has grown in recent years.

The financial impact of mental health absence weighs heavy on top of the moral and legal duty to look after and protect staff; the average cost to a business of a non-fatal injury is £8,800 a figure which rises to £19,000 for stress, anxiety and depression4.

Andrew advocated the use of Company Employee Assistance Programs to prevent illness occurring and to assist people in returning to work, and leveraging campaigns such as Mental Health Awareness Week to raise awareness in the workplace and encourage regular conversations. Mental Health First Aiders can be crucial in identifying people who aren’t behaving in their normal manner and signposting them to assistance at the earliest opportunity. From his experience this is a big opportunity that manufacturers have yet to fully embrace.

The final note from Andrew was for businesses to ask themselves the question “what if we lose a large group of people, senior managers or key workers – what is our plan?” this should be a significant part of any business continuity plan.

Managing the risk in manufacturing: A case study - Adrian Went

Personal and practical examples of these risks impacting a manufacturing business were presented by Adrian Went. Adrian presented 3 areas where risk manifests in his business; global operations, volatility in marine manufacturing and the risks bought on by recent events.

Griffon Hoverwork manufactures hovercraft for customers around the world bringing with it a risk for staff in travelling to high-risk areas. Examples provided by Adrian included evacuation plans for staff trapped in a naval base being attacked by Al Qaeda. Intelligence and security briefings are critical to managing this risk and protecting staff as well as using lessons learnt methodology after each event.

Moving into the managing revenue volatility risks, Adrian highlights the ship and marine sector as more volatile than others; standing at 40% compared to 22% for all UK industrials5. Indeed, in the last 10 years Griffon Hoverwork have seen annual revenue vary between £5m or over £30m dependent on contracts. This places further pressure on the company with an ever changing staff profile for restructuring and recruitment which has ranged from 59 staff to 280 staff over this time period.

Adrian concluded with a round-up of how four recent risks have impacted the business: COVID-19, supply chain chaos, recruitment, and inflation. Re-contracting staff to work from home where possible has proven to be a benefit and aided management of overheads through more flexible use of short term leases for factory and office space. With lead times no shorter than 4 years, managing supply chains, inflation and foreign exchange rates is a significant challenge. Adrian finished with the reflection that the business has at times made more money from foreign exchange trading than the years spent building a hovercraft.

The whole webinar and additional insight from the Q&A session that followed the presentations can be found here, simply register to watch the webinar on demand at your convenience.

Views from our audience*:

What do you think is the likelihood of a recession in the UK in the next 12 months?

  • More than 50% - 56.3%
  • 50/50 – 33.3%
  • Less than 50% - 10.4%

What is the biggest risk facing your business this year?

  • Inflation and rising costs – 42.6%
  • Supply chain pressures – 35.2%
  • Recruitment & retention – 24.1%
  • Cash flow – 18.5%
  • Cyber crime – 7.4%

What is your business confidence level for the second half of 2022?

  • Very confident, we’ve got a good order book and my business is in good shape – 24.5%
  • Fairly confident, we have a good plan in place – 65.3%
  • Not very confident but hopefully we’ll manage – 6.1%
  • I’m pessimistic about the economic forecast for my business – 4.1%

*Poll was conducted during the webinar of which 54 participated

Sources

1. https://www.ofgem.gov.uk/publications/price-cap-decision-potential-impact-increased-wholesale-volatility-default-tariff-cap
2. Datasets from RSM UK’s own data forecasting
3. HSE Health and safety at work summary statics for Great Britain 2021
4. HSE Health and safety Executive Cost model
5. Management information, S&P Capital IQ Note: Volatility is calculated as standard deviation UK based companies with turnover between £10m - £100m.

Disclaimer

The opinions and views expressed in this article are those of the contributors and are for guidance purposes only. Gallagher is a risk management, insurance and HR/benefits consultancy and will be sharing their views in that capacity. This webinar is not intended to give legal or financial advice, and, accordingly, should not be relied upon for such. This should not be regarded as a comprehensive statement of the law and/or market practice in this area. In preparing this webinar we have relied on information sourced from third parties and we make no claims as to the completeness or accuracy of the information contained herein. It reflects our understanding as at the date of the webinar but you will recognise that matters concerning COVID-19 are fast changing across the world. You should not act upon information nor determine not to act, without first seeking specific specialist advice. Our advice to our clients is as an insurance broker and is provided subject to specific terms and conditions, the terms of which take precedence over any representations in this webinar. No third party to whom this is passed can rely on it. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to fullest extent permitted by law. Should you require advice about your specific arrangements or circumstances, please get in touch with Gallagher.

Stay connected with the company that’s connecting the dots with what’s happening in the industry and around the world
Related Articles