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Manufacturing in the digital era

The integration of technology — both hardware and software — into manufacturing processes and goods being made is rapidly changing the business of manufacturing.

Contributing US$11.7T to the global economy [1], the manufacturing sector has been and remains the life blood of the world economy. This is also true in Canada, where manufacturing represents more than 10% of Canada's total GDP, and employs approximately 1.7M people. [2]

The renegotiation of NAFTA highlighted our country’s reliance on US trade as a means to grow the Canadian manufacturing sector. While its replacement with the US-Mexico-Canada Agreement (USMCA) brought relief and stability to many, Canadian manufacturers would still benefit from expanding their sales and distribution network. Fortunately, with the manufacturing industry undergoing a digital transformation, huge opportunities exists for firms who can embrace it, including access to growth opportunities globally. At the same time, firms should not lose sight of how changes in their operations and products may change their risk and insurance needs.

Digital and global

In the context of manufacturers operating worldwide, companies today are more likely to be a specialist firm, producing single components as part of a global supply chain, rather than entire products. Some manufacturers have abandoned physical manufacturing all together, choosing instead to focus on research and design, leaving the physical creation to others who can do it more cost effectively.

The transformation is far from over. With advances in technology, manufacturing over the next three decades will look very different from today, and will bear no resemblance to how items were manufactured 30 years ago. Emerging technology such as artificial intelligence, advanced robotics, 3D-printing, blockchain, Big Data, and the Industrial Internet of Things (IIoT) are all expected to have profound implications for the manufacturing sector. They will affect all aspects of manufacturing from the products produced, to the materials and the processes used to make and deliver them.
This new wave of change is being heralded as Fourth Industrial Revolution. The fusion of physical and digital operations are expected to propel product innovation and also process efficiency. Technology is already leading to the development of smart factories, which house increased automation, including sensors generating data and analytics, creating insights which will support additional efficiencies and new business opportunities in the future.

Risk implications

The incorporation of technology into processes as well as products will have significant implications for the risk profile and insurance needs of the manufacturing sector.

“Factories are becoming more automated, which makes them dependent on sophisticated equipment. If a part of that machinery breaks down, there may be no way to continue production until it is fixed, or a new machine is made. This creates a business interruption exposure for lost profits during the downtime but, more critically, it means that a business would be in jeopardy of not meeting commitments they made to their clients, contractual or otherwise”. says Derek Reedie, Underwriting Manager for Property at QBE Canada.

The risk-mitigating solution is to have critical parts or substitute machines on hand, or at least having an alternative method to produce or secure that product.

Supply chain vulnerability

Manufacturing business models are evolving with the digitalization and growth of complex international supply networks.

At the same time, new technologies are further integrating businesses into their supply chains. Leaner just-in-time supply chains are making manufacturers more vulnerable to outside events, while digital connectivity between members of a supply chain is a cyber liability risk to be addressed.

"With globalization, having a secure and controllable flow of inputs is a concern for our manufacturing customers, many of whom now rely on suppliers in all corners of the world. When their supply chain is disrupted, the consequences for the manufacturer are now far greater, with lost business opportunities, the cost of work-arounds and contractual liabilities,” says Reedie.

Reedie continues “The contingent business interruption exposure from physical events at a supplier can be mitigated, to a degree, by performing risk inspections at key locations of potential suppliers. Manufacturers should also strive to understand their suppliers’ sources in order to understand how vulnerable their supplier’s supply chain is to physical disruptions”.

Cyber threat

However, threats emanating for non-physical disruptions require a different approach. Angela Feudo, Cyber Underwriter at QBE Canada, explains “ While manufacturers would likely be familiar with contingent business interruption under a property policy, this coverage does not extend to include non-physical events which might disrupt one of their suppliers (eg a cyber breach). While limited insurance coverage is available for this risk, ensuring key suppliers have a breach response plan is highly recommended.

As evidenced by PLANT Manufacturers’ Outlook 2018 Survey, most Canadian manufacturers are concerned about the threat to their business from a cyber event. As a response to this threat, 40% of survey respondents did suggest they have a cybersecurity strategy[3]. The trouble is that, in this same survey, only 16% of respondents confirmed they had a breach response plan. For those unfamiliar with the term, a breach response plan outlines the individuals (including outside lawyers and IT experts) who should be involved following a cyber event to mitigate its effect.

While cyber insurance policies can provide reimbursement for IT forensic costs and loss of profit following an incident, having a breach response plan is still critical. A well managed breach is the best defence against lawsuits and possible regulatory fines, not to mention reputational damage which can result from a cyber event.

The loss/hacking of personally identifiable information has been driving big payouts in many of the publicized cyber breaches. Manufacturers don’t typically hold a large amount of personally identifiable information in their systems so their exposure on this basis is relatively small. However, manufacturers use SCADA systems to control industrial processes and these systems come with their own risks. While not as well publicized, one such is risk is that these systems may rely on legacy equipment, which can be difficult to upgrade.

"Some manufacturing plants still run on outdated computer systems (such as Windows XP), which can’t be upgraded when critical security are released. This is a significant risk as known vulnerabilities can be easily exploited by hackers. One option to mitigate this risk is to ensure that production equipment is completely segregated from the corporate IT network", says Feudo.

When systems are often completely cut off from the internet, it is easy to discount the risks inherent in their use. Unfortunately, such systems can be compromised by an employee, possibly intentionally but it could also happen inadvertently, for example through the use of an infected USB flash drive.

As manufacturers increasingly connect their systems to others who share their supply chain, new risks arise. Feudo explains ”Digital connections in the supply chain mean that hackers could access your systems by first infiltrating one of your suppliers or anyone else connected to your digital supply chain.”

To mitigate this risk, manufacturers should ensure that any supplier they open up their network to maintains the same network security standards that they use, at the very least. As an additional level of protection, companies can purchase Cyber Business interruption insurance, which indemnifies them for losses attributable to a total or partial interruption of their computer and telecommunication systems as a result of the cyber event.

Greater Product Liability Risks

As the Internet of Things (IoT) expands, manufacturers who incorporate technology into their products face new liability exposures as well.

For the uninitiated, the Internet of Things refers to a developing network of physical objects or machines with imbedded sensors and other technology that allows them to communicate with one another. Typically, hardware and software is embedded into products at different tiers in the supply chain. The trouble which is already surfacing is that ordinary functionality testing may not be adequate to reveal security flaws in the end product, which creates a weak spot that could be exploited by hackers.

One of the scariest examples which has surfaced thus far is the discovery that some non-autonomous vehicles can be hacked. In a story published in Wired magazine, hackers not only gained control of a vehicle but they were able to shut it down while it was driving in traffic, all while the hackers were sitting comfortably on a couch, in front of a laptop[4].

Where the end product fails due to an issue with the technology imbedded within it, who is liable? Richard Newman, Casualty Underwriting Manager shares his views. “In Canada, when a product fails, all parties who are deemed to have contributed to the failure can be held jointly and severally liable. This means that a manufacturer whose product is found to be 1% responsible for the failure can end up paying 100% of the costs being claimed, if they are the only party with the funds to pay. The concern is creates from a risk perspective is that a company with minor culpability in an accident can be called upon to pay out big sums when companies with greater responsibility cannot afford to do so.”

With technology evolving so quickly, many new questions around product liability are being asked. Perhaps most discussed is how the integration of driverless cars onto roads our will shift the liability burden away from automobile insurers and back to the product manufacturers. These vehicles are being built around technologies such as radar, light detection and ranging (LIDAR), ultrasonic and infrared sensors and specialized software to classify objects. While insurance premiums today are heavily influenced by the individual driver, with autonomous vehicles, insurance costing in the future may be based on the manufacturer and, even more specifically, the computer software or components that a vehicle relies upon.

People risks

The evolution taking place in the manufacturing sector is leading to a shake-up in the make-up of the workforce, with greater emphasis on highly skilled workers, including designers, researchers, programmers, engineers, technicians and tradespeople.

Today, Canada's manufacturing sector faces skills shortages that are expected to grow as the population ages. “Skilled and qualified people are an important and increasingly scarce asset. In order to attract and retain talent, it has become critical to protect employees and provide a safe and attractive work environment,” says Newman.

Manufacturing isn’t the dark, dirty and dangerous sector that some people perceive it to be. However, with manufacturers in competition for technical talent with other industries, like construction, utilities, oil and gas, and professional services, it can be difficult to attract people to the industry, particularly young people.

What should help to create some appeal is that, with greater automation, there should also be a gradual reduction in the frequency of workplace accidents and also less exposure to causes of disease. As an example, the new generation of robots can be deployed to work side-by-side with skilled workers, learning from them and assisting them in complex tasks.

Reliance on fewer and more highly skilled people should mean that workplace absenteeism, resulting from injury or stress, is reduced. Yet with changes in practices and processes, manufacturers should be prepared for other injuries, such as musculoskeletal disorders (like carpal tunnel syndrome or back pain) to become more common. In addition, mental health issues (such as stress or depression) will continue to exist. Employers should be prepared to accommodate and support impacted workers so they can successfully return to work sooner.

Value of insurance

It’s a new dawn for the global manufacturing sector. Companies that can embrace advanced manufacturing technologies and analytics will benefit from
lower production costs, quicker product development times, and the ability to continually innovate to meet changing customer demands.

Canada’s manufacturing firms have access to the talent, research and technology needed to become digital manufacturing leaders. The companies which do succeed in this new era are likely to be the ones that accept risks in an informed and managed way.

QBE is prepared to be your insurance partner, helping you understand your risks so that you can embrace the future. And, as the industry evolves and adapts, so will we.