2023 Top Risks in the Manufacturing and Distribution Industry

In assessing the global risk landscape for manufacturing and distribution organizations in 2023 and 2032, familiar themes emerge: global supply chain challenges; the economy; and labor costs coupled with succession challenges and the ability to attract and retain top talent. Other issues, though not ranked among the top five risk concerns for these organizations, still represent significant priorities, such as organizational culture, operating successfully amid shifts to hybrid work environments or remote work arrangements, and resistance to change in these and other areas that could impact the organization’s ability to achieve its long-term objectives. It’s also important to note that most of these risk issues fall under the umbrella of ongoing innovation and transformation efforts as manufacturing and distribution organizations continue to go through the growing pains of Industry 4.0.

Overview of top risk issues in 2023

Organizations in the Manufacturing and Distribution industry group reflect trends in their assessment of the risk landscape for 2023 similar to that of most other organizations worldwide. They view the risk landscape to be riskier for the next 12 months compared with their perceptions in last year’s survey for 2022. Ratings for three of the top five risk issues for the industry group have increased year-over-year, with the fifth-ranked risk issue being new to this year’s survey: uncertainties from reliance on international markets for key elements of the supply chain creating significant challenges. And within the top 10 risks, just two show a year-over-year decline: uncertainty surrounding the core supply chain and concerns about expectations among the workforce to work remotely impacting the organization’s ability to retain talent. In addition, whereas just one risk issue ranked at the “Significant Impact” level in 2022, this year there are three risk issues at that level, with the fourth falling just below 6.0.

Not surprisingly, supply chain concerns continue to represent the top risk issues for board members and executives in the industry group. In fact, two supply chain-related risk issues in the survey both land in the top five for 2023. Uncertainties surrounding the organization’s core supply chain making it difficult to deliver products or services at acceptable margins is the top risk issue, similar to 2022, with uncertainties from reliance on international markets for key elements of the supply chain (as noted earlier, a new risk issue to this year’s survey) also in the top five.

Pandemic-driven supply chain issues have been well documented. While from a global, cross-industry perspective, some supply chain challenges are slowly becoming less intensive, critical short- and long-term challenges for manufacturing and distribution organizations remain, from access to critical raw materials to often fragile logistics. These issues directly impact customers of manufacturing and distribution organizations and, as a result, the bottom line.

At the same time, whereas two years ago the focus was on pandemic-related supply chain issues, today the focus is more on effects on the supply chain resulting from geopolitical issues, including but not limited to Russia’s war on Ukraine and China-U.S. relations. These developments and the uncertainty they create are contributing to the staying power of supply chain risk as the top concern for this industry group. Moreover, as we discuss in more detail below, uncertainties surrounding the organization’s core supply chain still ranks as the second-highest-rated risk issue for manufacturing and distribution organizations looking a decade out to 2032.

Building resiliency and innovation into manufacturing and distribution supply chains by leveraging re-shore and near-shore decisions and enabling data transparency across the supply chain will help move these organizations from reactive to proactive by adopting a stronger risk mindset with regard to their supply chain management. Many manufacturing and distribution organizations continue to grapple with how they manage their supply chains, perceiving and operating it as a cost center — i.e., cost of goods sold — as the dominant measure driving decisions and behaviors. However, manufacturing and distribution organizations, more than ever, will benefit from a more holistic approach to managing their supply chains. The geopolitical events cited earlier have brought into clear focus the shortcomings in fragility of cost-focused supply chain risk management models and the need to restructure them to become more flexible, responsive and reliable. Manufacturing and distribution companies that successfully construct and implement such a holistic supply chain model will afford themselves the opportunity to maintain business operations and customer satisfaction in the event of future business interruptions, both large and small.

A final note regarding the focus on supply chain costs: Keep in mind that when disruptions strike, a just-in-time inventory strategy fails to provide an accurate tabulation of the cost of goods sold. It does not account for expenses related to business continuity management, logistics adjustments, delays and unhappy customers, and long-term damage to brand reputation and the customer experience. It also tends to neglect the significant value derived from designing and operating more reliable and resilient supply chains. Indeed, a focus on resiliency and optimization can pivot the view of supply chain from a cost center to a revenue driver.

Overall economic conditions, including ongoing inflationary pressures, represent the second-highest-ranked risk issue for the industry group, moving into the “Significant Impact” risk category for 2023. Given the ongoing concerns regarding inflation and potential recessionary trends, which directly impact costs for materials and transportation, leadership within manufacturing and distribution organizations are keeping a close eye on the markets and potential impact on their organizations and global supply chains in the coming year.

Labor, talent and skills also are critical areas of concern for manufacturing and distribution organizations. To no surprise, anticipated increases in labor costs jumped significantly in score year-over-year, after seeing a slight drop between 2021 and 2022. This risk jumped from ranking seventh in our 2022 study to third this year and is rated at the “Significant Impact” level. Increases in wages resulting from the so-called Great Resignation, together with the current inflationary environment, have had a major impact on manufacturing and distribution organizations' margin management.

Closely related to risks regarding the cost of labor, organizational succession challenges and the ability to attract and retain top talent continues to be a concern for these organizations. It has consistently ranked in the top five list of risks over the past several years, due in great part to the historical labor and skills shortages across the Manufacturing and Distribution industry group. Factoring in the upskill in talent needed for manufacturing and distribution organizations to succeed long-term in Industry 4.0, the so-called fourth Industrial Revolution, as well as the ongoing challenge of attracting top talent to manufacturing and distribution locations often situated away from more desirable urban centers, it is very likely this risk issue will persist in the industry group for the foreseeable future. Underscoring this point, as noted below, challenges with the ability to attract and retain top talent is the top-ranked risk issue for the industry group in 2032.

A number of critical risk issues fall just below the top five but remain highly relevant, one of which is the risk of not being sufficiently resilient or agile to manage an unexpected crisis. Manufacturing and distribution organizations have experienced successive waves of uncertainty over the last several years. While these events have elevated organizational resiliency, they also have fostered an environment of constant change that has created fatigue among management and employees alike. Being “agile” is not just related to the IT organization and environment, but also whether the organization is truly “business agile” as a way to respond to significant events proactively versus reactively.

It is interesting to note that three of the top 10 risk issues for manufacturing and distribution organizations relate specifically to culture. The world has shifted. As a result, board members and leadership within these organizations are seeking to understand whether their culture and people are shifting with it. Such changes are not new in the industry group. Since evolving from operating in a farming economy to an industrial machine economy, these companies have had to reinvent their business models and cultures historically. They now face greater demand for hybrid and remote work models, emerging technologies (including AI and machine learning), ESG and DEI programs, and other initiatives that directly affect the organization’s culture.

Overview of top risk issues in 2032

Interestingly, the 10-year outlook in this year’s survey is significantly riskier than this same outlook from last year’s study. Whereas in the 2031 view from last year’s survey there were no risk issues rated at the “Significant Impact” level, all of the top five risks for 2032 are ranked at this level.

In comparison with perceptions for 2023, there are some similar themes in the risk outlook for a decade out. Familiar risks including succession challenges and the ability to attract and retain top talent, supply chain challenges, and resistance to change in the culture are perceived to be significant concerns for 2032.

The notable difference is seen in two of the top five risk issues that relate to technology: specifically, the adoption of digital technologies requiring new skills, and the rapid speed of disruptive innovations enabled by advanced technologies outpacing the organization’s ability to compete. Whereas these two risk issues are ranked 11th and 22nd, respectively, for 2023, they land in the top five for 2032. They also appeared in the top five in last year’s study, though we see significant jumps in risk scores in this year’s study. This is a strong indicator that while innovation, transformation and the adoption of digital technologies may not be as much of a near-term concern for boards and C-suite leadership within manufacturing and distribution organizations, they do represent a significant concern over the next decade from the standpoint of ensuring the long-term success of their organizations. At the same time, leaders within manufacturing and distribution organizations likely have concerns about managing the technical debt that has accumulated over time from retaining and maintaining legacy systems. These systems inhibit innovation and growth initiatives to implement new applications, cloud-based systems and a host of emerging technologies.