Top Risks for the Manufacturing Industry

Supply chain and labor concerns are keeping CEOs awake at night

Published: Tuesday, June 10, 2014 - 15:30

The manufacturing industry is poised for growth in 2014. Still, the second annual BDO USA LLP analysis of risk factors listed in the most recent 10-K filings of the largest 100 publicly traded U.S. manufacturers found that they will contend with a number of challenges as they work to capitalize on an improving economy and increased capital spending.

Chief among them is achieving a secure and efficient supply chain, a risk cited by 100 percent of manufacturers this year, up from 83 percent in 2013. Manufacturers are increasingly concerned about forecasting errors which could lead to backlogs or shortages, as well as quality issues they may encounter with suppliers. Moreover, 88 percent of manufacturers note risks related to natural disasters, which could cause transportation breakdowns and significant delays.

Significant concerns over additional exposures caused by the global nature of supply chains are fueling the reshoring trend in the manufacturing industry. But according to the “2014 BDO Manufacturing Risk Factor Report,” manufacturers are contending with a number of U.S. labor challenges. In fact, labor was cited by 97 percent of manufacturers as a risk this year, up notably from 2013 (75 percent). The manufacturing workforce is being squeezed as growth fuels more demand for workers, and a greater number of baby boomers are retiring. Moreover, the skills gap among prospective workers is leaving available jobs unfilled.

“Growth in the economy and an increase in capital spending is excellent news for the manufacturing industry,” says Howard Sosoff, manufacturing and distribution practice leader at BDO USA. “But with greater opportunity comes greater challenges. Manufacturers will face intense competition this year as they work to attract new orders and workers, and expand their capabilities.”

The following chart highlights the top 20 risk factors cited by the 100 largest U.S. manufacturing companies:

* t indicates a tie in the risk factor ranking

Further findings in the “2014 BDO Manufacturing Risk Factor Report” include:

Conflict mineral disclosure drives regulatory risks. Manufacturers also report significant challenges when it comes to regulation. Nearly all (99 percent) cite federal, state, or local regulation as a risk factor, and 87 percent note concern over accounting standards and regulations, up from 66 percent in 2013. Manufacturers point to the June 2, 2014, deadline to file disclosures about the use of conflict minerals as a key compliance challenge that could prove costly to their businesses. In addition, an increased focus on internal controls by auditors and regulators is putting added pressure on manufacturers.

Mergers and acquisitions risks rise amid increased competition. Growth in the manufacturing industry is also leading to fierce competition for resources, workers, and speed to market. Ninety-four percent of manufacturers cite competition and consolidation as a risk this year, and as seen by the recent Hillshire Farms and Pinnacle deal in the food-processing industry, many are turning to acquisitions to gain an edge. More manufacturers (89 percent, up from 80 percent in 2013) cite risks related to mergers and acquisitions, a sign that many are looking outside their company to gain access to new technologies, intellectual property, products, and distribution channels to improve their market position.

Intellectual property protection heightens data security risks. High-profile data breaches have businesses in all industries on edge. According to Verizon, the manufacturing industry accounted for less than 1 percent of security incidents in 2013, but nearly one in four of those incidents involved data loss. Although manufacturers store less consumer data than their customers in the retail industry, the protection of intellectual property is crucial, and any loss could threaten manufacturers’ ability to compete effectively. As a result, 78 percent of manufacturers cite risks related to data security this year, up from 64 percent in 2013. Moreover, the protection of intellectual property and rising concerns over security are also likely contributing to the increase in manufacturers citing litigation risks (79 percent, up from 57 percent in 2013).

The “2014 BDO Manufacturing Risk Factor Report” examines the risk factors in the most recent 10-K filings of the largest 100 publicly traded U.S. manufacturers across five sectors including fabricated metal, food processing, machinery, plastics and rubbers, and transportation equipment. The factors were analyzed and ranked by order of frequency cited.

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BDO USA

BDO is the brand name for BDO USA LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to private and publicly traded businesses. BDO remains a family business holding to the ideals of competence, honesty and integrity, professionalism, responsibility and accountability, and dedication. These core values have helped BDO grow to serve clients through 49 offices and more than 400 independent alliance firm locations nationwide. As the U.S. independent member Firm of BDO International Limited, BDO serves multinational clients through a global network of 1,204 offices in 138 countries.