How risk-ready is your organisation? And what is the best way to assess risk and develop an appropriate strategy? Each business faces different risks and directors must carry out risk reviews as part of the board’s risk management duties. BDO has assessed the more common challenges facing Australian manufacturers and has prepared a checklist of questions directors should ask.
Manufacturing is to play a key part in the Federal Government’s investment strategy to help build Australia’s competitive strength and support economic recovery and growth over the next five years.
The industry is well-placed to thrive. Understanding how resilient your business is, and how this compares with other manufacturers, can provide insight and direction into developing your own risk assessment and strategy.
BDO has developed a Manufacturing Resilience Review, a 10-minute tool that provides manufacturing businesses with an assessment of the impact and likelihood of the key risks facing their business. Participants will also be able to benchmark their own risk responses against those of other manufacturers when a new industry report is released by BDO later this year.
When assessing the risk-readiness of your organisation, directors and senior executives should ask themselves the following questions.
Do you have a strategic plan that covers the next three to five years?
Considered a fundamental requirement for many businesses, this is an interesting question for Australian manufacturers. With 87 per cent of manufacturers qualifying as a small business [AMGC, 2020 AMGC Ten ways to succeed in Australian manufacturing, p19] – in other words, fewer than 20 employees –it can be difficult to take a step back to carry out the necessary strategic planning and visionary thinking.
From a director perspective, this is where you can add value. If the management of the company is focused on day-to-day operations, they may not be able to invest the time to understand, for example, what technologies out there can enhance their business.
The move towards digitalisation, big data, automation and new materials (‘Industry 4.0’) will create both opportunities and challenges for manufacturers, which are typically reactive as opposed to forward thinking. High on this list are data analytics and the ability of your organisation to develop KPIs as lead indicators for organisational strategy and reporting, rather than relying solely on lag indicators as a measure of success.
Have you a clear, shared vision around your place in the Industry 4.0 value chain?
We all know manufacturing is undergoing a major transformation; a fourth industrial revolution. The physical is rapidly being integrated with the digital, disrupting the sector with automation, digitalisation and new materials.
Whilst it might seem we’ve been in the digital age for some time, this revolution only really started in the 2010s, and we are still in the early stages of Industry 4.0.
In our Manufacturers’ Guide to Industry 4.0 we have developed a ‘Middle Market Maturity Model’ in which we define a series of ‘levels’ from one to five, assisting you to define where your organisation is at in the Industry 4.0 model, and steps required for the next level. You won’t go from level one to level five in one jump: it’s about making those incremental changes and building them into your strategy so in five years - or whatever time you define - you’re at that level five state.
At BDO we talk about the “three i's” of Industry 4.0 innovation:
Incremental - renovation, not reinvention
Iterative - experiment, fail fast, respond and adapt
Integrated - cross-functional collaboration
A roadmap to Industry 4.0 begins with a plan. The Australian mid-sized manufacturing sector is dynamic and poised to take advantage of significant growth opportunities over the coming years, and for smaller, less-resourced organisations, it is often incumbent on the board to champion this.
As a board, how aligned are your perceptions of risk with those of executives and managers?
Only a minority of manufacturing boards have a risk or audit committee. Like employees in small businesses, directors also need to be agile in their management and wear multiple hats.
According to an ABS survey from 2017 (AMGC_Ten-Ways-Report-2020.pdf, p19), only 11.8 per cent of Australian manufacturers have a written strategic plan, and 31 per cent of them had some kind of plan – but not written down. In the ‘measure to manage’ scenario, without a proper risk matrix containing targeted action items, businesses are unable to manage or report on these risks.
A simple tactic is to ask directors and managers to identify and prioritise what they perceive to be the greatest risks and single points of failure in the business. Examples of this may relate to the supply chain – for example purchasing a significant amount of raw materials from a single supplier, or having the majority of goods delivered to the same port of entry. A disruption at one of those single points of failure would be detrimental to the business. An example of this is the blocking of the Suez Canal in March by the mega-container ship Ever Given for over six days, affecting one of the busiest trade routes in the world. According to shipping experts Lloyd’s List, this single incident cost up to $US9 billion per day.
Development of mitigation strategies that flow from a simple risk identification exercise have the potential to significantly impact business resilience. Should such disruption occur, having some “Plan Bs” to swiftly pivot to can minimise the impact on your business.
Is your manufacturing business resilient?
If you are a manufacturing organisation with a strategic plan that incorporates active risk management, yours is in the minority. Most Australian manufacturing businesses struggle with this.
Manufacturing businesses face common risks and a general lack of resources to manage strategic planning. BDO’s Manufacturing Resilience Review is designed to provide these organisations with a topline risk assessment, based on their individual responses to 10 key common areas of risk for manufacturing.
Inviting other directors, senior executives and managers in your organisation to also participate in the risk review will enrich the feedback, providing for areas of consensus on organisational risk.
Manufacturing businesses are well-placed to thrive, with the current raft of initiatives, grants and incentives on offer. With the right leadership, understanding the sources of risk to your organisation will help put you in the driving seat to develop a resilient manufacturing business.
About Kathy Robertson
Kathy Robertson is a Partner at audit, tax and advisory firm BDO. Specialising in manufacturing and distribution, Kathy has significant expertise in examining areas of liability for boards, directors and senior executives.