Risk Management

Article Dean Dorton

The Manufacturing industry faces challenges and risks that are unique from any other industry. Since manufacturing is a vital spoke in the global economy and an essential component of many other industries, risks to manufacturers tend to have a much larger ripple effect. If risks go unaddressed they can lead to operational and financial losses throughout our economy, not to mention damage to the reputation of the company. It’s important for manufacturers to be aware of the basic and evolving risks they may face and take appropriate steps to mitigate them.

Some key risks include:

  • Supply chain constraints
  • Attracting and retaining quality workforce
  • Cyber security threats
  • Inflation


Our team of Manufacturing Experts have put together a risks overview so you can explore the risks to the manufacturing industry in detail and search for opportunities for growth as we cruise through 2023.

Risk Description
Supply Chain Constraints
Parts/materials difficult to find/long lead times.
  • Acquire logistics companies or develop in-house logistics operations. Greater supply chain visibility and higher quality as well as reducing shipping costs and time due to more streamlined logistics networks
  • Consider new suppliers and sourcing options
  • Relationship management
Attracting & Retaining Quality Workforce
Labor challenges experienced through a shrinking pool of applicants, aging workforce and shortage of highly skilled workers.
  • More favorable working conditions including pay increases and flexible work arrangements
  • Diversity, Equity & Inclusion (DEI) approach to attract more women and racially and ethnically diverse groups
  • Manufacturing companies today have a hard time finding employees who will show up and be on time for work and stick with their jobs
  • Considerable void when it comes to skills and experience – Manufacturers need to work with schools and universities in their communities to ensure that manufacturing focused subjects are being well promoted and taught
Cyber Security
Rise in cyber security incidents across manufacturing companies.
  • Potential effects of a network infiltration include shut down of operations, theft of sensitive customer information, or theft of sensitive banking information
  • Education of employees of potential phishing schemes is paramount to a successful cyber security campaign
Technology
Technology continues to evolve with endless possibilities.
  • Take ERP to the Cloud
  • Data analysis predictive maintenance and use of data analysis to identify anomalies in equipment performance
  • Data decision making around sourcing, production, fulfillment, cost reduction.
  • Controls around Artificial Intelligence
  • Autonomous vehicles in warehouses to move materials and product
  • Robots will change the economics of manufacturing with less time focused on low cost labor positions
Environmental, Social, Governance (ESG)
A sustainability mind-set becomes more of a focal point.
  • Complete visibility throughout supply chain for own compliance and that of their suppliers
  • Manage waste
  • Increase supplier diversity
  • Smart buildings
  • Electrifying fleets
Product as a Service (PaaS)
Diversifying revenue sources has become more important in establishing an indefinite future.
  • Manufactures lease equipment to customers and offer a list of subscription based value-added services
  • Collect equipment usage data from customers
Inflation
Manufactures have to integrate higher priced materials into budget and determine how much to increase prices to customers to absorb these cost increases.
  • Producer price inflation for goods other than food and energy slowed to an annualized 4.2% in the three months ending in December 2022 from 11.5% in the three months ending in April 2022. (Reuters)
  • Manufacturing payrolls increased at an annualized rate of 1.6% in the three months ending in December, down from annualized growth of 5.5% in the three months ending in April. (Reuters)
Possible Recession
Managing through a potential slowdown in the economy will be a focal point of 2023.
  • Sixty-two percent of manufacturers expect the U.S. economy to enter a recession in 2023, according to a survey conducted by the National Association of Manufacturers

Manufacturing Services

Article Dean Dorton

Over the course of the past nine months, many of our clients’ business processes were shaken up, employees shifted to working in isolation, and internal controls became dismembered.

Monitoring an organization’s pulse can be a challenge, but during these unprecedented times it can feel almost impossible. Unfortunately, sitting back and just hoping for the best is not the right response; there are serious money and reputational issues at play, no matter the size of your organization.

Although we live in an ever-changing world, there are three concrete things you can do to protect your organization from potential fraud:

1. Internally communicate

Remote work has the potential to make our teams feel disconnected and isolated. This can lead to various motivations and opportunities for fraud, especially if conditions persist for an extended period of time.

Now is the right time to establish an ongoing culture of communication within your organization. Start with planning out weekly team meetings with time for open conversations about what is and isn’t working well. The more receptive you can be to honest responses, the more trust you will build inside your company.

2. Re-establish internal control processes

Many of our business functions have permanently changed and responsibilities have shifted around. Now is the perfect time to map out your current control processes in writing (this exercise is sometimes easier said than done). Then, assess each process to see if proper segregation of duties, approvals, and information access are in place for each function.

3. Launch a whistleblower hotline

No matter the size or structure of your organization, implementing an ethics or whistleblower hotline can be one of the best investments you can make to protect your organization against fraud.

The Association of Certified Fraud Examiners found that 43% of detected fraud was uncovered due to a tip. Additionally, fraud losses at companies with a hotline were nearly half the amount of losses experienced by companies without a hotline; a $100,000 median loss compared to $198,000.

Tip hotlines have also had a positive impact on reducing the length of frauds, helping organizations detect fraud an average of six months faster.

In this unpredictable landscape, organizations should make it easy for their employees to report suspected fraudulent activity/theft, misconduct, or unethical behavior, and to remain completely anonymous throughout the entire reporting process. This is one of the most effective and inexpensive improvements you can make to your company.

The Dean Dorton team has streamlined our Whistleblower Hotline service to be an affordable plug and play option for a wide range of organizations. If you haven’t implemented a hotline yet, we would love to talk with you about your options.

Learn More about Dean Dorton’s Whistle Blower Hotline

Dean Dorton is here for you as your organization navigates through these unprecedented times. Contact us if you have questions about adapting and changing to this new landscape.

Nick Lynch, CPA/CFF, CFE
Consulting Associate Director
nlynch@deandorton.com • 859.425.7635

Article Dean Dorton

As school districts prepare for the upcoming school year, new risks warrant attention due to the COVID-19 environment. The following list provides insights into the different functional areas of a school district that require a new view. Overall, school districts need to implement controls to properly navigate through this new learning environment. A benefit to these extra efforts will be new lessons learned that can be applied in the post COVID-19 environment in the future to make the school district even stronger.

Once the COVID-19 plans and controls are established, school boards need to hold management accountable for tracking the effectiveness of the collective COVID-19 program. Internal audit represents an effective resource to provide the school board and associated audit committee comfort that the program is designed and operating effectively. Any COVID-19 program deficiencies should be noted timely and remediated in an efficient fashion. The failure to actively monitor the program will enhance the risk of safety, legal, and compliance issues.

Please let us know at Dean Dorton if we can help you establish, monitor, and test these new COVID-19 controls.

Print the PDF Check-list

Risk Area # Risk (Uncertainty) Description Controls in Place (Y/N)
Finance 1 Adequate funds to manage additional required costs such as personal protective equipment (PPE), sanitizer, additional janitorial, additional bus aids, nurses, and other requirements.
2 Tracking of COVID-19 purchases (coding of transactions including payroll) to maximize federal/state reimbursements.
3 Compliance with Redbook and maintaining effective controls for bookkeepers/school-level business processes.
Purchasing 4 Purchase of adequate, timely, and quality PPE.
5 Modification of key purchasing/disbursement controls due to remote work place.
Human Resources 6 Having sufficient teachers and other resources (bus drivers and aids) to meet COVID-19 plan including social distancing.
7 Onboarding and monitoring new employees in a remote environment; integrating culture.
8 Proper training for teachers to teach in a remote environment.
9 Assessing teacher performance in a remote environment.
Operations 10 Protecting at-risk teachers/employees including bus drivers based on underlying risk factors.
11 Implementation of collective COVID-19 action plan including after school programs/sports and how incidents will be communicated.
12 Parents won’t allow children to return to school due to safety concerns.
13 Providing childcare options for employees including use of current facilities.
14 Creating a COVID-19 benchmark report to monitor operations and results of COVID-19 efforts.
15 Meeting food service requirements.
Information Technology 16 Sufficient technology on both ends to support remote learning for all.
17 Expanded virtual meetings, expanded remote working, remote data entry, remote new
employee testing, reliance on e-documents (risk of authenticity), etc. Expands technology/
cyber risks.
18 IT workload has increased substantially. Potential risks for staff burn out and/or being able to maintain consistent level of service.
19 Tracking of expanded technology equipment including mobile devices.
Legal/Compliance 20 Elevated potential litigation/OSHA compliance.

For more information on how the coronavirus is impacting businesses across multiple industries, visit our COVID-19 resource page:

COVID-19 Resources

Article Dean Dorton


Assessing your business to be ready for a comeback.

I don’t want to be the guy who is always trying to make lemonade when life throws a lemon. I also do not want to minimize the severity of the COVID-19 pandemic. However, I do have to point out that the COVID-19 pandemic presents many businesses a unique opportunity to restart in a stronger position than they were in prior to the pandemic. The business environment that will exist once the effects of COVID-19 are diminished and social restrictions are lifted may be different from what you were accustomed to. Businesses need to start preparing to capitalize on new opportunities to grow and strengthen their operations. Businesses that have the self-awareness, proper team, and clear focus can position themselves to thrive as the world finds a new normal. Here are ten ideas to make your business better.

10 Ways to Make Your Business Better PDF
1. Be honest about your business strategic strengths and weaknesses

Where does your business thrive? In what areas should your business deliver world class / best-in-class service? Where is your business only average, or below average? Were staple revenue streams showing some signs of decline?  What pain points have you felt for years but have never dealt with (those will still be there post-pandemic)? Are there additional revenue streams, products/services that need to become a focal point? Is your overall business being handicapped by under performing segments? If operations have been idled due to the pandemic, consider the possibility that some segments of your operations should be closed indefinitely. Businesses should use this economic slowdown to understand the points of leverage they have over their competitors and those that will be differentiators post-pandemic.

2. Understand the business environment and what has changed

The post-pandemic business environment may look very different from the pre-pandemic business environment. The world made a very rapid adjustment to social distancing. Millions of workers have been logged into their workspace from home for weeks now, many for the first time ever, and many are surprised to find they like it. Flights have been grounded forcing the sales-force and consultants to interact with their clients and teams virtually. The one-on-one interaction that many businesses were accustomed to has been replaced by telecommuting. Businesses may find that they no longer need the corporate office space that was once idolized, nor do they need the robust retail space to serve customers that have grown even more accustomed to online retail.

Businesses reliant upon gathering of individuals (hospitality, entertainment, travel, food service, sports to name a few) need to be aware that social distancing has forced customers into their homes for significant amounts of time, with limited trips of any kind, and an inward focus on natural community to meet many needs. Also, the realization that many basic goods and services can be met online (think telehealth, religious services from the family living room, Google Classroom and food delivery) has fostered a consumer “cocooning” effect. Consumers have accepted being restricted to their home. Also, expected post-pandemic health anxiety (avoidance of handshaking, large groups, unnecessary business travel), as seen in post-pandemic China, further adds complexity to the consumer environment businesses will face.

3. Understand your opportunities – customers/services

After doing a thorough analysis of your business (pre-pandemic) and giving consideration towards what the post-pandemic business environment will look like, businesses need to carefully examine their opportunities. How can they re-engage with both existing and new customers? Businesses seeking to enhance their value and market share need to align their obtainable strengths (the differentiators that set them apart from competitors) with the opportunities that will be in high demand post-pandemic. Understanding opportunities in the post-pandemic economic may mean:

  • Shifting from physical presence to an online retail presence
  • Reassigning team members to emphasize new or different services or products
  • Recruiting people to the business with skill sets that have never been required
  • New strategic alliances to protect the supply chain, secure access to capital
  • A marketing shift to create a new public persona

Businesses must also consider that the economy may re-open in stages. Each stage may have its own opportunities and life cycle. Businesses must consider its timing as it pursues post-pandemic opportunities and plan accordingly.

4. Know your team

Most businesses are only as good as the team they employ. To maximize identified strengths or potential strengths, to navigate the post-pandemic business environment and to capitalize on upcoming opportunities businesses must have a strong cadre of team members to support the mission. Businesses must identify the key roles that will be crucial for their success, identify the skills required for those roles, and do an inventory of their organizational structure to identify any roles or skills that are lacking. Businesses also need to consider opportunities to shift pre-pandemic responsibilities between team members to capitalize on under-utilized skills or abilities. Businesses may need to consider outsourcing non-essential activities such as accounting, human resources, and marketing to free internal resources and gain access to external resources. Lastly, businesses need to consider their succession plan.  Do you have a plan in place to transition key roles and responsibilities if needed? Is your business protected from the unexpected loss of a key team member?

5. Know your needs – Evaluate your supply chain

Consumers have benefited from the global economy since the Reagan presidency. The global economy brought global supply chains which emphasized efficiency above all else. The COVID-19 pandemic has revealed the risks assumed by over dependence on global supply chains. Businesses will likely reconsider the emphasis on efficiency and explore options for supply chain reliability and control through domestic options. This may lead to re-shoring of international manufacturing as losses in the short term are outweighed by the risk of efficiency. This creates opportunities for local industries that have been impacted by the import economy but will require businesses reliant on international suppliers to manage costs and supply chain relationships.

6. Know your community – Key relationships

To be stronger in the post-pandemic economy, businesses need to identify those external relationships that will be key in helping the business succeed. This includes financing relationships, key stakeholders, significant vendors, legal counsel, tax/accounting, human resources, real estate and on and on. Businesses should be proactive in communicating any strategic initiatives with its key relationships to ensure alignment. This may include replacing some relationships with new participants, adding new types of relationships, and having difficult conversations with a relationship that needs to bring more value.

7. Prioritize your marketing plan

Most business’ marketing and sales funnels have been smudged, if not erased. Marketing efforts will need to be rebooted. Businesses should not assume customers will automatically return. Businesses should not assume prospective customers are exactly where they were in the sales cycle pre-pandemic.  Marketing efforts need to be tailored to a new business landscape sensitive to an economy that has been quarantined for many weeks. In some cases, businesses will need to work to re-build awareness of its services and products, especially new services or products. As always, the timing of the marketing strategy will be essential.

8. Plan for next time

The medical community has identified an unsettling trend. From 1900 to 2000, the World Health Organization identified 4 pandemics (including AIDS/HIV, which is ongoing). Since 2002, the World Health Organization has identified 5 pandemics (excluding AIDS/HIV, including COVID-19 which is ongoing). Businesses need to be prepared for future situations such as the COVID-19 pandemic. Factors to consider when building such a contingency plan:

  • Team member safety
  • Access to cash or capital
  • Continuity of services
  • Communication protocols
  • Inventory / supply stockpile
  • IT infrastructure integrity/security
  • Data availability

9. Establish the vision for what the business will be

It may be hard to see beyond the imminent threat of the COVID-19 pandemic, but successful businesses see beyond the dark horizon and envision what can become in the long term. This vision will serve as a guiding star as short and mid-term challenges are navigated. The world is changing more rapidly than it ever has. Future growth and opportunities come from seeds that are planted today. All business analogies ultimately point towards Apple, so consider Apple 20 years ago. The dotcom bubble was crashing and the Apple computer business was failing. While the traditional Apple business was in a pinch, the leadership of Apple was envisioning the iPod and iPhone, which would go on to alter life as we know. If you struggle to cast a vision for your business, start with a perspective of gratitude for the fact that your business is surviving and build your vision from there.

10. Communicate… then communicate some more

If a mighty tree falls in the woods with no one to hear, does it make a sound? I have no idea. I do know that a business with a great plan but a failure to communicate it effectively has set itself up for loss. As businesses build their plan and formalize their identity for the post-pandemic era, they must communicate effectively. Key team members and strategic partners must understand your business’ intentions. Short, mid and long-term plans need to be communicated to provide guidance in the day-to-day and to provide stability over the mid and long-term time frames. Communicate how business is going to be different going forward. Communicate new cultural guardrails and expectations. Empathize with team members as they adjust to a new normal but be rational about the facts of the situation and the opportunities ahead. Instill confidence in team members by letting them be part of the long-term plan.

These are indeed interesting times, but these are times that businesses can use to add value to their future operations. Businesses that engage the new environment, are sensitive to their current and future customer needs, and that can be agile enough to deal with the challenges the restart will bring should be positioned for long term success.

We would be thrilled to talk to you about your business. If you would like to brainstorm more about how to strengthen your business for a successful post-pandemic relaunch, please contact Justin Hubbard at jhubbard@deandorton.com.

Article Dean Dorton

What does a compliant, secure business look like? The reality is that a compliant, secure business is going to look different based on industry, size of business, type of regulatory environment the organization operates in, and the organization’s risk appetite.

Each organization has the ability to lay the groundwork for future compliance and security. Simple steps facilitate the building of the desired culture. These include:

  • Development of a defined organizational chart.
  • Written policies and procedures for key processes and controls to facilitate consistency and continuity.
  • Routinely educating staff and leadership on the current regulatory environment for your industry.
  • Identifying the key risks to the organization’s continuity and business model.
  • Defining the organization’s risk appetite by specifying what level of risk is acceptable and what level of risk is too high.
  • Defining the information technology environment in which the organization will operate.
  • Identifying disrupters which may materially impact the operational effectiveness of the organization.

Each of the above elements become part of the whole picture of the organization, and are the foundation upon which a compliant organization should be built.

One area which many organizations fail to consider when establishing the above building blocks are the cyber risks to the organization. As technology becomes more prevalent across all industries, and networked devices become the norm, there is an increased risk of cyber incidents.

As noted in the 2018 IBM/Ponemon Cost of Data Breach report, the average cost of a data breach in the U.S. is $7.91 million, but can vary widely depending on the industry in which you operate. As an example, the cost of a single breached healthcare record is at its highest point ever – $408 per record. The cost includes items such as legal fees, incident response, notification costs, loss of reputation, loss of business, remediation costs, etc.

The reputational harm; harm to your clients or customers and other distractions caused by a cybersecurity incident, can devastate the operations of any organization. Cybersecurity is about maintaining the confidentiality of sensitive information, whether that be healthcare data, manufacturing trade secrets, student, or donor data.  Cybersecurity is not just about confidentiality, it is also about maintaining the integrity of your information and maintaining system operations.

Looking to learn more?

Join us for our annual Board Oversight and Risk Management seminar on Wednesday, October 3, 2018 at the Olmsted in Louisville, Kentucky. During the seminar, you will gain a firm grasp of common financial and operational risks that companies and nonprofit organizations are confronted with daily. You’ll learn what you need to do, beyond insuring against the risks, to properly identify and navigate the most serious risks threatening you and your organization. This seminar is ideal for executive nonprofit and private company board members, corporate executives, senior compliance and risk officers, and in-house counsel.

Register Today

For more information on how to build a compliant business, while integrating cyber security and fraud considerations, contact Shawn Stevison or Gui Cozzi at 502-589-6050.

As originally featured in Louisville’s Business First

Article Dean Dorton

For the professionals and companies in the restaurant and convenience store industries, how are you adapting to the changing environmental landscape? A lot is at stake with these new developments; Losing customers to more environmentally friendly competitors, balancing escalating compliance costs with cost savings opportunities, and the need for research and development to identify ecofriendly products are large obstacles that come along with the small changes in order to make a difference.

McDonald’s, Starbucks, Souplantation, and Ted’s Montana represent examples of chain restaurants that are making the transition to “go green.”

McDonald’s has historically set the trends for the restaurant industry, which gives them an advantage when it comes to impacting the industry’s various environmental efforts. McDonald’s plans to reach its environmental goals through energy efficient kitchen equipment, LED lighting, sustainable packaging, recycling in restaurants, and investing in sustainable agricultural practices. In 2018, the chain discontinued the use of foam cups and is now committed to having all of its packaging from renewable, recycled, or certified sources by 2025. The first major steps towards its goals will start in 2019, as the chain will replace all foam packaging globally, and replace plastic straws throughout restaurants in the United Kingdom and Ireland. In addition, select McDonald’s locations in France, Sweden, Norway, Australia, and the U.S. will begin to test plastic alternatives, and Malaysia will only offer straws to those who request them.

Joining in the efforts, Starbucks focuses on a “green” building initiative, wanting to build all new company-owned stores in order to achieve LEED certification. The design approach within the stores provides opportunities to meet various environmental goals, including recycling and reducing waste. These efforts have been seen in Starbuck’s use of eco-friendly cups, along with a trial run of paper straws in 54 outlets throughout London and Manchester. The road to ecofriendly changes came after a New Jersey Starbucks employee launched a petition urging the company to make a shift from plastic materials. On an annual basis, Starbucks uses more than one billion straws and plans to fully eliminate the use of plastic straws at all locations by 2025.

With environmental awareness spreading throughout the industry, Souplantation achieves its ecofriendly goals with its recycling and composting program, energy efficient ice machines and lighting, and avoiding the use of Styrofoam packaging. In result of its efforts, Souplantation was named the largest green restaurant chain by the Green Restaurant Association.

Likewise, Ted’s Montana Grill has made it a priority to evolve into an ecofriendly chain. Locations are equipped with LED lighting, solar power, water efficient appliances in bathrooms, paper straws, bamboo skewers, and the use of a non-paper option that is both recyclable and compostable. The chain has also made efforts outside of the restaurant industry to partner with Bonneville Environmental Foundation and fund water restoration certificates to offset their annual water usage. Joining several other restaurants, Ted’s has now taken part in a recent common action among the industry; the banning of plastic straws.

 

Banning Plastic Straws
The action taken against plastic straws has now evolved into cities taking the initiative to distance its people away from the use of the straws because of how detrimental they are to our earth. Seattle implemented a ban on disposable plastic straws, spoons, forks, and knives on July 1, 2018. The ban only applies to restaurants and those found in violation will be fined up to $250. Additionally, Rafael Espinal, a New York City councilman, recently introduced a measure that would ban plastic straws in food and beverage places. The bill would give New York City restaurants and food shops two years to find an alternative to plastic straws. After the two years, the food places would be fined $100 for each instance in which plastic straws are discovered.

However, the shift from plastic to paper creates cost concerns for restaurants. Sharokina Shams, Vice President of Public Affairs at the state arm of Washington, D.C., discussed how consumers are not aware that with this change, restaurants face a long list of cost increases in wages, workers compensation, payroll taxes, and rent for commercial buildings. “I think it becomes one more cost increase in a long list of other increases that businesses are having to contend with right now,” she explained.

Despite the extra costs, Bon Appétit has transitioned its food service company to paper straws in all of its cafes, indicating it doesn’t mind the extra cost because it knows it is helping the environment. Their customers have since voiced that they felt that they were contributing something positive to the world by participating, and restaurant owners explain the 25 percent increase in costs by changing to paper straws and 35 percent increase for the environmentally friendly cups and lids will offset each other by their cost effective measures that are already in place.

Many companies are looking into an alternative for the plastic straw, with some ideas including silicone, glass, or metal. The cost difference between paper and plastic straws varies from two to six times the cost. Also implementing alternatives beyond paper, are a small smoothie shop in Malibu looking into bamboo and cardboard straws and 7-Eleven providing its Slurpee customers with the option of purchasing an edible straw for $0.49. This candy straw is similar to licorice, stiffens when inserted into the cold Slurpee, and is said to outsell 7 all other non-chocolate candies.

One c-store industry expert commented on the holdback that the lack of choices brings, “You would think the beverage industry would be working hard to come up with an alternative material. No plastic straw… huge impact.” These small changes are resulting in large strides towards a sustainable environment, but there is still a long way to go for industries to find a way to fully “go green” while still fulfilling consumers’ needs.

Are you going to be a leader in this movement or lag behind your competition? Please contact Bill Kohm at bkohm@deandorton.com or your Dean Dorton advisor if you would like to discuss how our risk management services can help you manage through these environmental issues and other risks that impact your business.

Sources

NPR
The Washington Post
Souplantation
Squadle
Ted’s Montana Grill
ABC
NorthBay Business Journal
New York Post
Fort Meyers Beach
Forbes