NOV. 01, 2020
A high-level look at manufacturing
Manufacturing is a broad industry and generally includes businesses that take materials or components and transform them into products. Often, manufacturing firms operate out of factories, plants and mills.
Manufacturers vary in size and may include everything from a small operation that hand-assembles products to an international organization with factories around the world. For a context of scale, middle-market manufacturing organizations are those with revenues between $10 million and $1 billion.1
Manufacturers may produce a final product or a component for another manufacturer. Other manufacturers, such as contract manufacturers, do not create products they sell themselves, but rather produce a product for other organizations. In these instances, the contract manufacturer is either involved in the design of the product, or work is completed to a customer’s specifications.
Manufacturers do not fall neatly into one NAICS code. This is because manufacturing encompasses a wide variety of industries and products. The following are some NAICS codes manufacturers may be categorized under2:
Industry outlook and trends
According to the Bureau of Labor Statistics (BLS),3 there are:
- 3,233,406 manufacturing businesses
- 12,850,000 manufacturing jobs
Additionally, according to the most recent data, revenue for all manufacturing reached $2.3 trillion and accounted for 11.6% of U.S. economic output in 2018. Manufacturing continues to be a cornerstone of the U.S. economy; however, a number of high-level economic, employment and technology trends continue to influence and disrupt the sector.
Overall economic conditions
The United States’ shift to a service-based economy, coupled with the cheaper cost to create goods in other countries, has certainly reduced the country’s dominance as a leading manufacturer. In fact, while Deloitte predicts continued U.S. manufacturing growth in 2020 based on the Oxford Economic Model, it could slow to just 1.3%, which is lower than it was in previous years (2.7% in 2019) and lower than initial 2020 projections (2.0%).4
While it’s common to see headlines about manufacturing jobs moving overseas, the United States still accounts for 18.2% of the world’s goods. However, China is not far behind and accounts for 17.6%. And given that goods are often cheaper to produce there, this trend is likely to continue. 5
Recent tariffs have created a great deal of uncertainty for U.S. manufacturers. While the general intent of tariffs is to incentivize companies to produce products domestically, they can also increase the cost of raw materials and components, according to the Federal Reserve. 6
It should also be noted that other countries have added tariffs on imported U.S. goods, which has hurt sales for some manufacturers. While there is debate on whether or not tariffs are a good thing, there is no doubt they affect manufacturing operations. This has, in turn, created uncertainty in the industry and negatively impacted the confidence of some U.S. manufacturers – even those that don’t export products. 7
According to the BLS, the unemployment rate for manufacturing was 2.7% at the end of 2019. This is below the overall U.S. unemployment rate of 3.6%. Given this relatively low rate, there is a serious shortage8 of workers in manufacturing, and businesses are finding it difficult to attract and retain skilled workers.
There is no singular cause of the labor shortage, but there are a number of contributing factors:
- With manufacturing jobs, there is a commonly held assumption that the work is physically taxing, dirty and repetitive. The reality is that careers in manufacturing often pay well and are becoming more specialized and technical.
- Robots, automation and specialized software are becoming more common in manufacturing operations. While this technology streamlines workflows, it can also displace workers and reduce the number of available full-time jobs.
- The manufacturing workforce is aging, and as employees reach retirement age or exit the job market entirely, the skills and knowledge gaps continue to grow in tandem.
The manufacturing industry has long been one to embrace new technology. The following are some examples of new and innovative solutions impacting the sector:
- Internet of things (IoT) – More and more, manufacturing organizations are leveraging IoT devices. For instance, some manufacturers are installing sensors on individual pieces of equipment. That equipment then promotes interconnectivity and easy access to real-time data. With more data at their disposal, manufacturers can make their supply chains more efficient, leading to significant savings.
- Predictive maintenance – Downtime can be very costly for a manufacturer. To avoid it, manufacturers have traditionally used preventive maintenance that is based on set schedules, not the actual condition of the equipment. Predictive maintenance is a more robust solution and monitors equipment performance using IoT devices to determine when maintenance is needed. This can reduce the amount of unneeded maintenance and other related cost drivers.
- Renewable energy – Social responsibility is driving more manufacturers to embrace renewable energy sources, such as solar, hydro and wind. One benefit is that renewable energy sources can reduce a manufacturer’s dependency on more traditional sources, which are susceptible to shortages, price fluctuations and other negative trends.
- 3D printing – While 3D printing technology is nothing new, it’s becoming faster and allowing manufacturers to make prototypes more quickly. Furthermore, 3D printing can create products on demand. Previously, firms would have to build molds and warehouse them. Depending on the manufacturer’s volume, physical storage of these molds can be significant and costly.
- Robotics and automation – Robots have been used in manufacturing since the 1960s, so they aren’t new. But advances are making them more affordable, efficient and versatile. As the labor shortage in manufacturing continues, expect robots to be used more prevalently.
Insights on major lines of coverage
Exposures, precautions and lines of coverage that may apply in the manufacturing industry.
Flammable liquids – Property exposures vary depending on the product being manufactured and what processes are needed. Often, flammable liquids (e.g., paints) may be involved. Processes such as flammable liquid spraying also present potential hazards.
- Precautions: Proper storage of flammable materials is critical. This may require flammable storage cabinets for small quantities or flammable storage rooms for large quantities.
Hot work – Processes involving metal fabrication often include welding, cutting or brazing. These types of hot work can ignite nearby materials or even structures.
- Precautions: A hot work program should be in place to limit flammable materials where hot work is performed.
General fire hazards – There are numerous processes and materials that create fire risks.
- Precautions: Automatic sprinkler systems can keep a fire in check until the fire department arrives. Sprinkler systems must be designed for the hazard class, maintained, inspected and turned on at all times.
Injury risks – Workers’ compensation exposures vary greatly depending on the type of manufacturing being performed. Some common concerns:
- Musculoskeletal disorders and injuries can occur from repetitive tasks or tasks requiring exertion.
- Machines are particularly hazardous and can cause severe injuries, including amputations or death.
- Processes may involve chemicals or fumes, which can harm employees if exposure levels are too high.
- Processes that create loud noises can cause permanent hearing damage.
- Precautions: A written and practiced safety program should be in place. Elements that are especially critical to account for due to the potential for catastrophic accidents include machine guarding, lockout/tagout and hazard communication. These programs require extensive training for employees as well.
Commercial motor vehicles – In general, auto exposures vary depending on how the manufacturer ships their product. Some manufacturers operate a commercial motor vehicle fleet to deliver product to wholesalers and customers. For those that operate their fleet, they have many of the same exposures as an over-the-road trucking company. They also have additional DOT and FMCSA compliance concerns. It should be noted that operating a commercial motor vehicle fleet may prove challenging for most manufacturers as it is outside their core competencies.
- Precautions: Manufacturing companies operating a commercial motor vehicle fleet need to ensure drivers have valid licenses and acceptable driving records with regard to violations and accidents. Additionally, they should consider using GPS and telematics with their fleets to monitor unsafe behaviors. Above all, drivers should be trained on defensive driving techniques.
Passenger vehicles – For manufacturers that don’t transport their own product, auto exposures may be limited to passenger vehicles that may or may not be owned by the company. Additionally, it’s common for the maintenance department to have a shop truck for getting parts.
- Precautions: Manufacturing companies need to ensure drivers have valid licenses and acceptable driving records with regard to violations and accidents. Above all, drivers should be trained on defensive driving techniques. For drivers using their own vehicles for company purposes, the company should ensure adequate insurance is in place.
Products liability – This can be very high depending on what the manufacturer is producing. Products that are defective or used improperly can cause property damage or injuries. Even if the company is not producing a final product, any component failure on one of its products can lead to liability concerns.
- Precautions: Manufacturers can use a number of controls to limit their liability. Some best practices include:
- Start with a properly designed product and ensure it meets existing safety standards.
- Have a quality program in place to ensure that the product is manufactured to specification. The program should also account for any components secured from third parties.
- Make documentation a priority, keeping design specifications and product orders on hand. Any changes to these specifications must be documented. Procedures and instructions can help ensure that products are manufactured in a repeatable way. Additionally, documentation can help defend a manufacturer in the event of a products liability claim.
- Have a product recall program in place. This helps manufacturers respond to defective product incidents and limit potential harm
Premises: Premises liability is fairly limited, because most manufacturing facilities are not open to the public.
- Precautions: If tours are given, visitors must be kept out of hazardous areas and away from chemicals, machinery and material handling equipment.
Recommended lines of coverage: general liability, product liability, equipment breakdown, inland marine, property, workers’ compensation, commercial auto and cyber liability