Middle-Market Manufacturers Confront Inflation, Supply Chain and Talent Risk

As manufacturing returns to North America, confidence in the performance of the sector, particularly among middle market manufacturers, is strong—even in the face of a possible recession.

The middle market is key to understanding broader business resilience, as 200,000 U.S. middle market businesses represent one-third of private sector GDP, employing approximately 48 million people.

Although increased production in the U.S. by major semiconductor and automobile manufacturers, like Intel and Ford, make headlines, overall manufacturing capacity and demand hit recent highs, according to Deloitte’s 2023 manufacturing outlook. The Big Four audit & advisory firm projected a 2.5% GDP growth in U.S. manufacturing in 2023.

The optimism is affirmed in the Chubb and the National Center for the Middle Market (NCMM) report, a survey in which more than three-quarters (76%) of middle-market manufacturers project overall performance improvements this year.

The good news is tempered by a range of obstinate risks. Finding the right skill set is considered a challenge by nearly half (49%) of the respondents to the Chubb/NCMM survey. To counter the potential decreases in productivity and sales, 46% of employees are working longer shifts, the survey found.

Other risks as U.S. manufacturers onshore facilities include the impact of unpredictable natural disaster exposures and inflation on the costs of rebuilding damaged or destroyed buildings and other assets. Seventy percent of manufacturers in the Chubb/NCMM survey said the replacement costs of covered assets has changed due to inflation.

Ongoing supply chain issues are another concern, with 41% of respondents reporting a supply chain disruption in the second half of 2022.

As middle market manufacturers choose the optimal geographic location for new plants domestically, they need to balance traditional factors like logistics, available raw materials, proximity to customers and government policies against the risks of climate-related natural disasters, supply chain bottlenecks, talent needs and undervalued asset replacement costs. Let’s break these exposures down on a risk-by-risk basis.

Talent. Skilled trade jobs in manufacturing nowadays call for expertise in cutting-edge automated and digital technologies, due to the integration of information technology systems and operations technology systems in the Industrial Internet of Things. If these skill sets are unavailable in a particular region, expensive upskilling and reskilling are needed to assure appropriate use of automated systems and machinery. Otherwise, an inexperienced worker can make a mistake that contributes to possible product defects, results in injuries that trigger worker’s compensation exposures/claims or prompts a system shutdown potentially disrupting manufacturing output and business continuity. 

Natural Disasters. Recent events like the deep freeze in Texas, severe flooding throughout California, and Hurricane Ian, the costliest ever weather disaster in Florida, must be balanced against the positives of locating a plant in these regions—such as taxes in Florida and Texas and all three states’ proximity to ocean-going container ports. Although Ohio, Maryland, Illinois, Minnesota and Michigan are the safest states—and parts of North America such as Canada, Mexico and Latin America are considered safer from natural disasters—site selection decisions also need to account for access to raw materials and markets, available skilled labor, logistics and government regulations.

Supply Chain Resilience. The continuity of manufacturing operations depends on a resilient supply chain. Plant location can significantly impede the speed by which manufacturers both receive supplies and provide finished goods to customers. Therefore, the ability to prepare and recover from unexpected supply chain events—such as natural disasters; a prolonged outage of a gas, water, or electric utility; and/or a sudden change in competition, market trends and geopolitical relations—is a crucial consideration.

Asset Replacement Costs. The cost of repairing and replacing damaged or destroyed buildings has increased since the pandemic erupted in 2020. As the global supply chain unraveled and inflation took hold, prices for construction material and labor swelled. In many cases, the costs of repairing and/or replacing assets are undervalued for insurance purposes, meaning the policyholder has inadequate limits of financial protection to cover the expense.

Against this backdrop, insurance carriers have a deep knowledge well of valuable insights. Many insurers have generated vast underwriting and claims data across many decades that can support manufacturers to better understand, analyze and quantify natural disaster risks on a geographic basis. That expertise can be used for things like enhancing the resilience of buildings with sensor-driven smart technologies that better predict and prevent damage from flooding and fires.

Insurer-provided data can also be useful in discerning available skill sets on a regional basis and help evaluate the impact of inflation on the costs of rebuilding damaged or destroyed buildings by adequately valuing the asset replacements costs.

As we observe a resurgence in North America manufacturing, managing and absorbing transitional risk will safeguard productive outcomes.

Erik Olsen is SVP Property Center of Excellence Leader in Risk Engineering Services, Chubb. Mike Williams is the EVP Manufacturing Industry Practice Leader in Underwriting, Chubb.