Insights from AXA Commercial

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Manufacturing: the importance of risk management in establishing resilient businesses

Douglas Barnett, Director of Mid-Market and Customer Risk Management at AXA Commercial and Rob Dakin, Head of Business Resilience at AXA Commercial discuss the challenges that businesses are facing.

24 November 2022

Through the industrial revolution, the UK effectively invented mechanised production and the manufacturing industry as we know it today. But as the 20th century progressed, the UK’s love affair with manufacturing started to be replaced with delivering services.

The UK was once famous for shipbuilding, steel and, in later years, car manufacturing. Today, the mainstays of the manufacturing sector are much more likely to be food and drink, electronics, metals and transport.

While the days of heavy industry in the UK are long gone, with an annual output of £183bn, the UK’s manufacturing sector is still the 9th largest in the world.

Although it may have shrunk markedly since its early 20th-century heyday, the manufacturing sector still accounts for 45% of all UK exports, delivers nearly 10% of the UK’s total economic output and employs 2.7 million people, mainly in Scotland, the North West, West Midlands and the South East.

Manufacturing remains an important sector for AXA Commercial and its supporting brokers, who are seeing that businesses are increasingly seeking an answer to their resiliency conundrum.

“The expectations of what an insurer can provide have increased,” says Douglas Barnett, Director of Mid-Market and Customer Risk Management at AXA Commercial.

“They’re really welcoming face-to-face meetings and the opportunity to have an open discussion. We can’t solve everything, and we can’t insure against everything, but the balance of the broker is really important in making sure the covers are appropriate for the individual business. Then we come in with our knowledge and expertise to make the business more resilient.”

One area where many manufacturers are struggling is with skills and recruitment, as Douglas explains: “The skills gap is a major issue, as a lot of manufacturers have production line jobs and, as such, tend to have a mix of UK and overseas labour. Much of that overseas labour has gone due to Brexit and, to a degree, the pandemic and they’re struggling to replace it like-for-like.”

He explains that there’s fierce competition in the sector and for those who can’t compete, they risk a slowdown (or even a shutdown) in operations exactly at the time where most are looking to increase production after two years of enforced downtime.

Businesses that utilise automation can't relax either, as it’s likely that technology and machinery will require components to be imported from overseas, with undoubted extended lead times.

This issue with lead times highlights the number one issue taxing the minds of most manufacturers - the global supply chain situation.

According to a report from Make UK, 93% of manufacturing firms have experienced some form of supply chain disruption, with 47% saying the impact was catastrophic or major. In addition, a further 38% said they’d increased the number of suppliers in the last two years.

The extreme nature of the situation prompted Make UK’s Director of Policy, Verity Davidge, to call for the establishment of a supply chain task force as the days of the ‘just-in-time’ supply chain model were numbered: “We may now be seeing the era of globalisation passing its peak, with disruption and volatility for global trade fast becoming normal. For many companies this will mean leaving ‘just- in-time’ behind and embracing ‘just in case’.”

However manufacturers seek to manage these issues and keep production moving, any changes made to a supply chain can change the risk profile of the business.

“The approach to supply chain management in manufacturing changes the way we look at the risk. If the insurer fully understands the risk, they can control it, but if something is outsourced it creates new exposures,” says Rob Dakin, Head of Business Resilience at AXA Commercial.

He says that the larger the company, the more likely it is that that AXA’s risk resilience team can survey it personally, but when it comes to smaller (but no less important) businesses the role of the broker becomes much more important.

“We want to support these smaller manufacturers, but we’re more reliant upon brokers providing all the relevant risk information to allow us to write the risk,” says Rob.

“We want to understand how resilient their supply chain is and, if it needs work, we can help them with that.”

He says that supply issues have become so acute that some construction firms are turning to lumber to make up for the acute shortage of steel. This solves the supply issue but creates a new fire risk. Rob says the situation is very similar in the manufacturing sector.

“I’d encourage them to speak to their insurer and ask if the changes make a difference to how the risk is viewed. If you’re switching materials, what’s the governance around that new material?”

Likewise, Douglas says that the level and type of information insurers are looking for before going on cover is quite detailed and reviews should, ideally, take place every three months. That, according to Douglas, is the only way to measure ongoing resilience in an ever-changing world.

“There are so many factors that can influence a company’s resilience, so we’re keen to understand how businesses are responding to supply chain and labour challenges. It tells us much about how a company is run,” he says.

“Has your customer base changed? Have you revaluated it, are looking at it differently? Then they need to look at their supply chain. Where is it, can you change it, can you make it more local? Then we’ll look at what they are doing with employees to maintain operations. Have you got a plan, and can you train some of your employees to do different tasks? All these things are crucial to understand how resilient a company is.”

While times are tough for manufacturers, they aren’t alone and changes to their supply chain, be they enforced or chosen, may act to make the broader economy more resilient.

According to Make UK’s research, 42% of manufacturers have increased the number of UK-based suppliers with a further two-fifths of companies already ‘reshoring’ their pipelines to the UK, a trend that Rob believes will have beneficial effects not just for individual companies, but for the wider economy.

“If more manufacturing supply chains were based in the UK, everyone would be contributing to each other. It’s green, it’s sustainable and it keeps profits in the UK,” he says.

While that change is taking place, the AXA Commercial team is focused on creating the greater resiliency that the manufacturing sector craves, following two years of turmoil.

“Risk management is front and centre now,” says Rob.

“We want to provide the kind of guidance that helps clients think through the resilience of their business and support them in doing that. Our technical managers come from industry, so they understand how these sectors work, what the pain points are and where the solutions might lie.

“We want to move the dial towards resilience, over just paying claims, and for a long time we’ve committed to having a business resilience team to do just that. It’s in a client’s interest to use these services as well as ours. We may not be able to help them with every single risk, but there’s a huge amount of support we can provide and we’re ready to give it.”