Top 5 risks for middle market manufacturing

By Erin Terpack, Head of Manufacturing and Technology, U.S. Middle Market, Zurich North America

Midsize businesses often feel the impacts of risks differently than larger organizations due to resource constraints, such as fewer financial and human resources. They can also have limited scale compared to large enterprises that often have operations spread across different regions or even countries, providing diversification that reduces the impact of localized risks.

Alex Wells, Head of U.S. Middle Market, Zurich North America, spoke with Fortune about the top risks for midsize companies. He listed economic uncertainty, cybersecurity threats, supply chain disruptions, talent acquisition and retention, digital transformation and natural hazards among those risks.

In my role as Head of Manufacturing and Technology at Zurich North America, I talk with business leaders in the manufacturing sector all the time. Manufacturing is a dynamic and essential part of the economy, but business leaders — especially in the middle market — face increasing economic, physical and digital risks. Here are what I see as the top five risks facing middle market manufacturers in 2024.

1. Supply chain risks and managing inventory

If the COVD-19 pandemic taught business leaders anything, it was that supply chain disruptions are a serious risk. Manufacturers, in particular, are often dependent on a secure flow of components and products from Asian suppliers, many domiciled in countries hit by the earliest lockdowns due to the coronavirus pandemic.

Even the most local of businesses are dependent on goods or parts from other regions. A supply chain disruption can not only harm a company in the moment it occurs, but also have long-lasting impacts including customer dissatisfaction, reputational damage and loss of market share. In short, such disruptions can impact a company’s ability to maintain profitability and stay competitive in the market.

With the increasing globalization of businesses, manufacturers often rely on suppliers from different countries to provide raw materials, components and parts. This can create issues such as longer lead times, transportation delays and higher costs due to import/export regulations and customs duties. These challenges can disrupt production schedules and affect the overall efficiency of the supply chain.

Insurers have responded by offering dependent property coverage, which can provide coverage when a physical loss or damage to a third-party supplier or customer prevents that third party from supplying goods to or purchasing goods from the policyholder.

Manufacturers are often faced with a lack of visibility and transparency across the supply chain. Many manufacturers work with multiple suppliers and subcontractors, making it difficult to track and monitor the movement of goods and materials at every stage. This can lead to inefficiencies, delays and increased risk of counterfeit or substandard products entering the supply chain.

To counter the risks associated with supply chain disruptions, some manufacturers are buying supplies in bulk to ensure they have the materials on hand when they need them. While this business strategy is designed to protect manufacturers, it also presents a new risk in terms of a potential property loss. A warehouse or storage facility filled with raw materials or critical parts can compound a loss from a fire or flood at that facility.

Manufacturers today need to be agile and responsive to these changes. They can start by performing an in-depth assessment of existing sourcing and contingency plans in the event of a major disruption. Zurich Resilience Solutions offers Supply Chain Risk Services that can help manufacturers make their supply chains more resilient.

2. Cybersecurity risks

Businesses of all sizes are potential targets for cyberattacks. And while cyber breaches at the world’s largest corporations get the lion’s share of the headlines, midsize businesses share the same vulnerabilities. Indeed, midsize companies may be at greater risk. Most do not possess the same cyber defense infrastructure and expertise of larger organizations.

Cyberattacks on midsize companies are increasing even as these businesses continue to underestimate their risks.

Most often, a network intrusion is intended to steal and misuse customer or business information for financial gain or to cause simple mischief. Email attachments containing malicious code can launch malware designed to invade and corrupt data. Ransomware locks access to network data until a typically large ransom is paid. An attack on and enterprise resource program running highly specialized equipment used by a particular industry — such as CAD equipment used in construction or diagnostic medical equipment used by hospitals and clinics and made by just one or two manufacturers — could disrupt an entire business segment at once.

Manufacturers are especially vulnerable to a cyberattack. The growth of the Internet of Things (IoT) in manufacturing is one of the most serious, potential exposures. Reliance on web-connected devices can dramatically expand an organization’s “attack surface,” especially when new components are added to the production and control environment. The infection of Industrial Control Systems (ICS) by malware can shut down manufacturing processes, corrupt data and cause physical damage to vital production equipment.

Manufacturers should be aware of the cyber risks they face, especially from increasingly sophisticated cybercriminal threats. Networks need to be evaluated and assessed to determine whether undetected breaches have already occurred. Network monitoring resources and advice can help intercept and prevent future cyberattacks.

Insurance solutions can provide an essential defense against the financial impacts of cyber risks. To that end, Zurich bolstered its cyber risk services in 2023 when it acquired SpearTip, a cyber counterintelligence firm that helps protect clients against cyber threats through proactive and response services.

3. Skilled labor shortages

The skilled workforce shortage in the U.S. is affecting most industries, but manufacturing has been among the most impacted. About 1.4 million manufacturing jobs were lost during the COVID-19 pandemic, but the industry was already facing a potential labor crisis — a projected 2.1 million unfulfilled jobs by 2030 resulting from a lack of skilled labor, according to a study by the Manufacturing Institute.

The industry has begun to make strides in attracting workers, but there’s a shortage of almost 600,000 stable manufacturing jobs waiting to be filled in manufacturing businesses nationwide, according to Forbes.

Skilled labor shortages pose a significant risk for manufacturers. A lack of skilled workers available to keep production running smoothly can impact the overall efficiency and profitability of manufacturers. Skilled labor shortages can make it a challenge to meet production demands and deadlines. This can result in delays in the manufacturing process, leading to a backlog of orders and dissatisfied customers. Reduced productivity can also lead to increased costs, as manufacturers may have to pay overtime or hire temporary workers to compensate for the shortage.

When manufacturers are forced to increase the workload for their employees, those employees can end up working longer hours with increased physical strain. This has led to an increase in worker injuries. Manufacturers often must hire less-skilled workers to fill positions, which can affect worker safety and lead to injuries and costly workers’ compensation claims.

We have witnessed a rise in the frequency of claims, due largely to the significant turnover in the industry and the challenge to train new workers. We all have a vested interest in worker safety, which is why Zurich works with customers to bolster their training programs to help reduce the frequency and severity of injuries.

In addition to the physical toll, the labor shortage also has a mental toll on workers. Many workers are stressed and anxious about the increased workload, which can affect their mental health and well-being, potentially leading to an increase in accidents and injuries.

Private industry employers reported 2.8 million nonfatal workplace injuries and illnesses in 2022, up 7.5 percent from 2021, according to the U.S. Bureau of Labor Statistics. This increase is driven by the rise in both injuries, up 4.5 percent to 2.3 million cases, and illnesses up 26.1 percent to 460,700 cases.

To address skilled labor shortages, manufacturers will need to invest in training programs, offer incentives to attract new talent and adopt technologies that can improve efficiency and reduce reliance on manual labor. Worker safety must be at the forefront of any business strategy.

4. Transportation costs

U.S. business logistics costs grew to $2.3 trillion, a 19.6% year-on-year increase over $1.9 trillion in 2021, according to the Council of Supply Chain Management Professionals’ 2023 State of Logistics Report.

Whenever gasoline prices rise, the average consumer takes notice, because a small increase could take a big chunk out of one’s weekly budget. But rising fuel prices and other transportation costs also have a significant impact on manufacturers, affecting their competitiveness, profitability and overall operations. In a global economy, where supply chains are spread across different regions and countries, transportation costs play a vital role in determining the success or failure of a manufacturing business.

Because of rising transportation costs, many manufacturers are looking to third-party trucking contractors to deliver goods. This arrangement can offer several benefits, such as cost savings flexibility, but it also comes with inherent risks.

One of the primary risks of hiring a third-party trucking contractor is the lack of control. Unlike in-house drivers, contractors may have different standards, training levels or work ethics. This can lead to inconsistencies in delivery times, damaged goods or even complete delivery failures. Since these contractors work independently, businesses have limited oversight and influence over the drivers’ behavior on the road. This can lead to issues like reckless driving, traffic violations or accidents, which may result in legal liabilities and financial losses for the hiring company.

Manufacturers are also open to general liability exposures from third-party contractors, who could suffer an injury on the premises. That’s why it’s important to implement safety protocols for visitors and contractors to help reduce the risk of injuries.

Manufacturers will need to carefully analyze their transportation costs and explore strategies to mitigate their impact, such as optimizing supply chain networks, using and properly vetting alternative transportation modes, or leveraging technology to improve logistics and inventory management.

5. New technology risks

Robotics have been a part of the manufacturing environment for decades. But today technology is advancing at warp speed — and manufacturers need to keep pace.

Integrating autonomous technology, artificial intelligence (AI) and lights-out manufacturing into the manufacturing process offers numerous benefits, such as increased productivity, efficiency and cost savings, but there are several obstacles that need to be overcome.

One significant challenge is the high cost associated with integrating autonomous technology and AI into existing manufacturing systems. Implementing these technologies often requires substantial investments in equipment, sensors, software and training. Midsize manufacturers may find it difficult to afford these expenses.

Another challenge is the lack of skilled workers to effectively operate and maintain these advanced systems. Autonomous technology and AI require a workforce with a deep understanding of these technologies and their integration within manufacturing processes.

Integrating autonomous technology and AI also introduces new cybersecurity risks. Manufacturing systems connected to the internet can become targets for cyberattacks, potentially leading to intellectual property theft, production disruptions or even physical damage. Ensuring robust cybersecurity measures to protect these systems is crucial but can be challenging due to the constantly evolving nature of cyber threats.

Manufacturers who integrate robotics, including collaborative robots that work side by side with employees, in their facility should talk with their insurance provider to determine if they have adequate mechanical breakdown coverage, which can help pay for the repair or replacement of mechanical parts or systems that fail due to normal wear and tear or unexpected damages.

Risk management, resilience and growth

Of all the things manufacturers must manage, the most important may be risk. Managing risk in the manufacturing industry is critical for sustaining operations, protecting assets and ensuring long-term success. By addressing labor, supply chain, cybersecurity, transportation and technology risks, manufacturers can increase their resilience, maintain a competitive edge and meet the evolving demands of customers and the market.

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I’m fortunate to have had the opportunity to work with middle market manufacturing businesses over my 25-year insurance career. I’m in awe of how this industry has evolved over that time. I vividly remember my first onsite visit to a metal bender in Cincinnati, Ohio, in the late ‘90s. While these operations still exist and are vital to our economy, watching how advanced manufacturing has transformed this industry is riveting. We will always be faced with challenges; the key is how we approach them and who we have walking alongside us to help us conquer those obstacles. I’m here along with my talented colleagues to walk alongside our agents, brokers and customers to realize continued success amid the challenges that arise.

Learn more about Zurich North America’s Insurance for Manufacturers.