While the benefits of this new digital era are plentiful, the risk landscape has significantly changed compared to, say, a decade ago. As risk exposure evolves, companies may have an easier time managing certain risks, such as workplace safety issues, while others related to data, security, third-party relationships, supply chain, company finances and workforce may be tougher to manage. This shifting environment requires manufacturers to rethink and renew risk management practices to reap the potential rewards of the digital revolution.
Data, Security and Third-Party Risk
Machines, assembly lines, smart sensors, robots and other devices generate enormous amounts of industrial data. Historically, manufacturers have not taken advantage of this wealth of data; however, the advancements in machine learning and artificial intelligence have created a prime opportunity for organizations to capitalize on the information they gather.
Vast data offer significant opportunity, but only if properly secured. For many companies, security has been a primary driver in delaying the adoption of Industry 4.0. A lack of clear security protocols to reduce the threat of industrial espionage, intellectual property theft and production sabotage makes it difficult to fully embrace advanced capabilities. Manufacturers with clear protocols will be better positioned to optimize processes, improve decision-making, secure the environment, strengthen risk-management procedures and ultimately gain a competitive edge.
As factories have become more connected and data-driven, they have also become more intertwined with third parties. Manufacturers, and any third parties they engage with, need to raise the bar in terms of how they protect themselves in an environment where workers, machines, supply chains and organizations are becoming digitally connected more than ever. To best mitigate risks posed by third-party relationships, companies need to understand wireless network access points, protect those access points and monitor and audit third parties.
Supply Chain Risks
Technology is making it easier for companies to rethink and adjust the location of operations and equipment. We expect companies will continue setting up manufacturing operations closer to their customers, with a greater focus on regionalized operations (e.g., “China for China,” a strategy through which manufacturing operations in China sell only into China or Asian markets). We also anticipate more companies will adopt business models using advanced technologies like 3D printing, which can enable automated facilities that personnel elsewhere can control remotely.
The varied operating models that entail owning equipment or operations in multiple locations in a geopolitically sensitive environment will require companies to not only safeguard their operations but also make sure cash and resources are not trapped in these locations—especially cash that could otherwise be repatriated to the United States. Companies can explore proactive treasury and international transfer pricing strategies to ensure regular and timely access to cash and profits generated in these countries, while mitigating cash accumulation and reactive measures.
Smart manufacturing, like traditional manufacturing, requires high capital investments. But what elevates the risk profile for smart manufacturing is the complexity and interconnectedness of the systems, processes, and technologies. Instead of a breakdown in one part of the assembly process, the entire interconnected assembly line could fail if a system goes down. What’s more is those plant systems may be connected to broader operational and financial systems. Inefficiencies in the system may be hard to detect and less obvious than a machine breaking down or defective output. Changing technologies and systems is cumbersome and complicated, so getting the initial technology plan right is paramount to obtain the anticipated paybacks.
Companies will also need to invest in hiring new talent to work with smart machines and invest in retraining talent. This is a significant financial investment – especially in a high-interest-rate environment. While smart manufacturing has the immense potential to reduce waste and resource consumption and increase productivity, it very much depends on the effectiveness of the digital blueprint. In order to have an effective blueprint, companies should obtain input from all relevant departments. Solutions such as digital twins can help simulate builds before such systems are physically implemented, which can eliminate inefficiencies and help teams understand more precisely how those new systems would work.
Despite the benefits, smart manufacturing is not a panacea, and the risk profile can vary significantly depending on a company’s workforce issues. In the roles blue-collar workers used to fill, we see a "new-collar" worker rising in manufacturing; these employees need a specific skill set that is more technologically capable of operating the advanced technologies on the plant floors. In this tight labor market, these skilled candidates remain scarce and high in demand.
In addition to drawing and retaining employees, manufacturers need to have a thorough understanding of the unique workforce issues raised by more automated environments. While automation and other advanced technologies make plant floors more efficient, there is also the inherent risk of limited to no live personnel available to fix a problem. In a completely automated facility, there needs to be sufficient emergency detection systems, because human personnel may not be on site to detect, for example, a fire. Because of automation and digitization, employees may not develop deep expertise on how a machine works and may not be able to troubleshoot quickly and effectively. A shop floor worker today could detect issues by just listening to the sound a machine makes – such domain will hopefully evolve.
Digitization is also having a profound impact on culture as it relates to access, production, learning and participation. Manufacturers need to prioritize a digital culture that equips employees with sustaining values, behaviors and skills, or risk losing the ability to thrive in the digital manufacturing revolution.
With the pace of change and advancements in today’s highly digital world, manufacturers cannot only think about risks that are happening right now, or respond to those that are already in the rearview mirror. Rather, a forward-looking, windshield view is critical to anticipate and focus on the future. With this approach, manufacturers will be able to minimize exposure to the risks identified above, optimize the efficiencies provided by advanced technologies—and ultimately reap the rewards of the digital revolution.
Shruti Gupta has more than 15 years of experience advising multinational clients on their transfer pricing planning, supply chain structuring, global compliance and controversy management strategies. She is a senior analyst in RSM’s Industry Eminence Program, which positions its analysts to understand, forecast and communicate economic, business and technology trends shaping the industries RSM serves.
Katie Landy is industrials senior analyst with RSM US LLP.