Risk management techniques in the manufacturing industry

In the dynamic world of manufacturing, overcoming challenges requires foresight, adaptability, and a robust approach to risk management. From macroeconomic shifts such as inflation and supply chain disruptions to country-specific geostrategic developments, the landscape is constantly changing. Add to this the rising potential of innovations such as artificial intelligence, industry 4.0, and big data processing, and it becomes clear why manufacturing management today requires more attention and expertise than ever before. This article examines the techniques used in manufacturing, both domestically and globally, and offers insights, solutions, and strategies to ensure continuity and stability.

Turkiye’s Manufacturing Sector in Figures

According to data from the Presidency of Strategy and Budget, Turkiye’s manufacturing industry exports amounted to USD 171 billion and imports to USD 162 billion in 2019. According to the 2020 UNIDO “Competitive Industrial Performance Index”, Turkiye ranked 29th among 152 countries, and the share of manufacturing industry value added in GDP was 17% in 2018.

According to the July 2023 Report of the Istanbul Chamber of Industry (ISO), the slowdown in global trade flows in new orders was effective in the contraction of the sector, and the Global Manufacturing Purchasing Managers’ Index® (PMI) was realized at the lowest level of the last seven months.

Due to the Turkish Ministry of Industry and Technology’s Structural Analysis of the Turkish Manufacturing Industry Report, the share of the Turkish manufacturing industry in GDP increased from 16.9% to 22.6% in 2021. Turkiye’s manufacturing industry exports have increased nearly 5-fold in 19 years, reaching 213 billion dollars.

Major Risks Faced in the Manufacturing Sector

The manufacturing sector is huge, encompassing a wide range of processes, technologies and human interactions. Given its complexity, it is inevitably exposed to various risks.

The manufacturing industry, which consists of many sub-sectors, has different risk factors on a sectoral basis. For example, in the metals industry, which employs close to 150,000 people in nearly 31,000 workplaces, general risks such as economic conditions, regulatory changes, marketing strategies, technological breakthroughs, supply chain disruption, as well as sector-specific risks such as energy costs, raw material supply, global metal prices and environmental concerns must be considered. Compared to others, the metals sector is considered to have the highest financial risk. On February 6, 2023, steel trade and production in eastern Turkiye came to a standstill following the devastating earthquake that hit the Iskenderun region and forced the mills in the region to shut down. Especially for Turkiye, the adaptation of producers to earthquake-like geographical conditions will be one of the main risk factors to be discussed in the future.

It is known that the most important financial risks in the Turkish sub-sectors are short-term debt, management of operating assets and profitability. Other key risk factors are listed below.

Supply Chain Disruptions: The ripple effect of a break in the supply chain can be catastrophic. Factors such as geopolitical tensions, trade wars, natural disasters and even strikes can prevent the timely availability of raw materials or finished goods, leading to delivery delays and potential loss of market share.

Macroeconomic Challenges: Inflation and economic contraction can severely impact purchasing power. For the manufacturing sector, this could mean reduced demand, increased production costs and the need for budget adjustments.

Geostrategic Developments: Manufacturing companies, especially those with a global footprint, should be alert to geopolitical shifts. Changes in international relations, tariffs, sanctions, or regional conflicts can affect both the availability of resources and market access.

Technological Failures: As the sector becomes more dependent on advanced technologies and machinery, the risk of technical failure increases. This not only affects production but can also lead to safety concerns.

Quality Control Issues: Production defects or quality degradation can lead to product recalls, lawsuits and significant damage to a brand’s reputation.

Country Specific Risks: It is critical to understand the cultural, political and economic nuances of each country of operation. Factors such as local regulations, labor laws and even social norms can pose risks if not adequately addressed.

Intellectual Property Threats: With increasing global competition, there is an increased risk of theft or infringement of intellectual property, whether in the form of patents, designs, or trade secrets.

In the event of a contraction in the manufacturing industry, which accounts for 80 percent of Turkiye’s industry, a decline in the capacity utilization rate would negatively affect growth and increase production costs as fewer goods are produced with the same capacity. In order to break this vicious circle, studies are being carried out on an early warning system for risk management in the manufacturing sector.

Risk Analysis and Assessment Methods

An effective risk analysis and assessment process helps manufacturing businesses not only identify vulnerabilities but also prioritize risk response strategies. Here are some methods commonly used by professionals in this field:

Hazard and Operability Study (HAZOP): This method focuses on brainstorming sessions to identify anomalies in processes or deviations from standard operating procedures. By examining potential causes and consequences, companies can formulate preventive and mitigating measures.

Failure Mode and Effects Analysis (FMEA): An important tool in the manufacturing sector, FMEA assesses the potential failure modes, consequences and probabilities of products or processes. In this way, companies can identify critical areas that need improvement or attention.

Quantitative Risk Assessment (QRA): This approach uses numerical values to measure the likelihood and impact of identified risks. By quantifying risks, manufacturers can more effectively allocate resources to address high-priority concerns.

Risk Matrix: A visual tool that plots the severity of an event against its likelihood. It facilitates better decision-making by allowing production managers to visually identify and prioritize risks.

Scenario Analysis: By envisioning different future scenarios (such as supply chain disruptions or technological failures), manufacturers can develop strategies to deal with a wide range of potential challenges.

Bow Tie Analysis: A graphical representation of the causal relationships between hazards, most significant events and outcomes. It helps to understand how risks can be managed by providing a comprehensive view of barriers and controls.

SWOT Analysis: Although often associated with business strategy, SWOT (Strengths, Weaknesses, Opportunities, Threats) can also be applied to risk assessment, allowing manufacturers to capitalize on their strengths and address their weaknesses.

The Importance of Effective Risk Management Strategies

In a complex industry like manufacturing, an effective risk management strategy acts as a compass, guiding a business through unforeseen challenges and uncertainties.

Business Continuity: Manufacturing businesses rely on an uninterrupted flow of operations from the procurement of raw materials to the delivery of finished products. Effective risk management ensures minimal disruption, ensuring that business operations continue even when unforeseen events occur.

Financial Stability: Unanticipated risks, if left unaddressed, can lead to significant financial losses. Proactively managing these risks protects the bottom line by preventing cost overruns, litigation or potential fines.

Reputation Protection: In today’s age of instant information sharing, any slippage in the production process, whether it’s a quality issue or supply chain disruption, can damage a company’s reputation. Through effective risk management, businesses can mitigate or avoid these potential public relations nightmares altogether.

Operational Efficiency: Identifying potential bottlenecks or vulnerabilities allows manufacturing firms to streamline their operations. By addressing risks in advance, companies can optimize their processes for maximum efficiency.

Strategic Decision-Making: With a clear understanding of potential risks, company leaders can make more informed decisions. Whether it’s entering a new market, investing in new technology or changing a production line, an approach that assesses risks leads to better results.

Safety and Compliance: The manufacturing sector often involves complex machinery and equipment. Prioritizing risk management ensures employee safety and compliance with local and international safety standards.

Long-Term Growth and Flexibility: Companies that prioritize risk management are better equipped to adapt and grow in the face of change. They can more easily identify opportunities and pivot when needed, ensuring long-term success and flexibility.

Technological Innovations and Risk Minimization

The rapid pace of technological evolution poses a dilemma for the manufacturing sector. While innovations offer incredible opportunities for optimization and growth, they also bring new risks.

The Ministry of Industry and Technology’s 2023 Industry and Technology Strategy outlines a roadmap for a pioneering high-tech and value-added Turkiye in a digitalizing world, with a strategy consisting of high technology and innovation, digital transformation and industrial drive, entrepreneurship, human capital and infrastructure.

A study on the general outlook of the Turkish manufacturing industry shows that domestic firms are mainly concentrated in low and medium-low technology-intensive sectors, while foreign firms are concentrated in medium-high and high-technology-intensive industries. As a natural consequence of this, innovation activities in the Turkish manufacturing industry are mostly driven by foreign firms rather than domestic firms. Foreign direct capital inflows and domestic R&D expenditures also lag behind developing countries and the world average.

Adopting technological innovations can change the game for risk minimization in the manufacturing world.

Artificial Intelligence (AI) and Machine Learning: AI-driven tools can predict machine breakdowns, optimize supply chains and even anticipate market demands. By analyzing large amounts of data, these technologies provide insights that can address potential risks in advance.

Industry 4.0: Often referred to as the fourth industrial revolution, Industry 4.0 encompasses smart manufacturing processes. This includes IoT-enabled devices, real-time data analytics and connected machines. Interconnectedness enables better monitoring, instant feedback and rapid adaptation, significantly reducing operational risks.

Big Data Processing: With the ability to analyze large data sets, manufacturers can identify patterns, trends and anomalies. This helps to make informed decisions, identify potential risks and formulate strategies to counter risks before they escalate.

Robotics and Automation: Automated systems reduce human error, ensure consistent quality and can operate in environments that can be hazardous to human workers. This not only minimizes risks but also increases efficiency.

Blockchain in Supply Chain Management: Blockchain technology provides transparency and traceability in supply chains. By keeping an immutable record of every transaction, manufacturers can easily trace the origin of materials, ensure the authenticity of parts and protect against counterfeit products.

Augmented Reality (AR) and Virtual Reality (VR): These technologies can be used for training, maintenance and product design. By providing immersive experiences, they ensure that workers are well prepared and machines are well maintained, thus reducing risks.

Cyber Security Solutions: As manufacturing becomes more digitally connected, the threat of cyberattacks increases. It is essential to implement robust cybersecurity measures to protect private data, ensure operational continuity and guard against potential breaches.

Successful Risk Management Practices

Based on the practices of successful manufacturing companies, here are some risk management practices that have proven their worth:

Holistic Risk Assessments: Successful businesses take a holistic view of risk rather than a silo approach. This involves understanding risks from the shop floor to the boardroom ensuring that every potential threat, whether operational, strategic or financial, is considered.

Continuous Monitoring: Risks are not static; they evolve. The best manufacturing firms invest in monitoring systems that provide real-time feedback, enabling them to instantly adapt and respond to changing risk environments.

Cross-Functional Collaboration: Risk management is not the responsibility of just one department. Successful practices involve collaboration across departments, from production to finance, HR to logistics. This ensures a comprehensive understanding and mitigation strategy.

Employee Training and Awareness: Employees are at the heart of every manufacturing business. Regular training sessions, workshops and awareness programs ensure that employees are equipped to recognize, report and address risks.

Scenario Planning: By simulating various risk scenarios, companies can prepare for a range of outcomes. This proactive approach ensures that businesses have contingency plans in place, reducing response times during crises.

Stakeholder Engagement: Engaging with stakeholders, including suppliers, customers and regulators, helps to better understand external risks. By encouraging open communication, manufacturers can anticipate changes and adapt accordingly.

Regular Audits and Reviews: Periodic audits of processes, systems and controls help identify vulnerabilities. Regular reviews ensure that risk management strategies are current and effective.

Embracing Technology: As mentioned earlier, technological advances offer powerful tools for risk minimization. Leading Turkish manufacturers are leveraging technologies such as artificial intelligence, big data and Industry 4.0 to mitigate potential risks.

Create a Feedback Loop: Encouraging feedback from all levels of the organization ensures that risk management remains a dynamic process. The views of ground-level employees can often shed light on risks that may be overlooked at higher levels of management.

Customized Insurance Policies: Protecting against the unforeseen with customized insurance policies ensures that businesses have a financial safety net. This can cover everything from equipment failures to liability claims.

The beauty of these applications lies in their adaptability. Whether it’s a Turkish company producing luxury goods for a niche market or a large-scale manufacturer meeting global demands, these strategies can be adapted to fit unique needs, providing flexibility, continuity and growth.

With its complex processes and interdependencies, the manufacturing sector stands at the crossroads of enormous opportunities and equally important challenges. Applying sound risk management techniques, harnessing the power of technological innovation and adopting successful practices are crucial steps in ensuring a resilient and prosperous future.

But beyond strategies and tools lies a fundamental principle: adaptability. The world of manufacturing will continue to evolve and with it the nature of risks. Embracing change, fostering a culture of continuous learning and staying informed will position companies not only to mitigate risks but also to use them as a catalyst for innovation and growth.

Creating an excellent risk management plan will enable them to take on more risky business. While a risk-taking attitude can bring companies greater rewards, risk management plans can help control risks and mitigate their consequences.

If you are a manufacturing business and would like to create a continuous and stable strategy by applying risk management techniques specific to your industry, contact us.