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Operational risk on a broader scale: 3 ways to turn vision into action

11.12.14_risk_management_and_operations_in_harmonyEarlier this week, Advisen’s Front Page News, a valuable daily collection of news related to risk management, directed me to a very useful article from American Machinist: “4 Things Plant Managers Need to Know About Operational Risk.” As the title of the article indicates, author Paul Leavoy’s piece is geared to operations management at manufacturing and heavy-industry firms; however, as I read the article, it occurred to me that Mr. Leavoy was shedding light on a challenge risk managers in any kind of firm often face: demonstrating to their operations colleagues that risk is not an “abstract, top-management priority that doesn't clearly relate to their roles or the boots on the ground they are responsible for.”

Mr. Leavoy does a nice job of making clear how risk can be pervasive in operations and how significant adverse events often have their origins, as he writes, “on the plant floor, in an underperforming asset that was poorly monitored, a fall hazard that wasn't properly identified, or a piece of heavy equipment that had under-maintained machine guarding.”

The article then explores “four things every plant manager ought to know about the often over-convoluted realm of operational risk management.” No matter the industry, most risk managers can probably identify four or more things they’d like their operations colleagues to be more knowledgeable about.

In my experience, plant managers like the ones in Mr. Leavoy’s hypothetical scenarios have “gotten religion” and generally think about risks that are embedded in their factories and assets. However, many do not contemplate their operational risk on a broader scale. This is what I’d like to explore further.

I’ve taken three of the article’s “four things every plant manager ought to know” and described the next steps to catalog, quantify and prioritize the risks identified. In most cases, as we’ll see, risk management information software can speed the process along and make it more effective, too.

  1. Risk is all around you, the article asks plant managers to understand. But what then? How would a plant or safety manager identify and then focus on relevant risks that may have adverse effects? 

    Safety management software or risk management information system (RMIS) with a safety component can capture all incidents and respective investigations. Analysis of the data then helps managers focus on risks that could become a severe adverse event. At a macro-analysis level, assessing frequency and severity can easily be performed at the plant, shift, department, worker, and even at the machine/process level. 

    Risk managers and their operations colleagues can also drill down and leverage data obtained by accident investigations to conduct micro-analysis of specific incidents. This will lead to a root-cause analysis, and corrective actions will be recommended to support the efforts to minimize or ultimately eliminate the respective risk. The RMIS can then monitor those corrective action steps; record its costs to correct; and allow for the tracking of its impact on the reduction in risk. In kind, any missed steps or latency in action automatically alerts the manager, who can elevate the need for attention to the matter.

  2. The “smallest” risk can become the biggest organizational disaster, the article says. What’s to be done about it? I wholeheartedly agree with Mr. Leavoy that operational risks identified at a plant level are generally not “isolated” incidents and therefore need to be analyzed across the enterprise. The business intelligence tools in a RMIS system will help identify risks that occur at a plant level and similar risks across all operations. 

    Also coming into play are enterprise risk tools that identify, prioritize and monitor those risks that have enterprise applicability. Fortunately, enterprise risks generally have the attention of senior management and the board level to ensure action is taken to mitigate the risk and adverse effect on the organization.

  3. Effective operational risk management equals improved profitability, the article says. How can risk managers and operations management get there? Knowing the total cost of risk (TCOR) is paramount. And to know TCOR, the corporate risk manager needs to record all the cost elements of their global risk program (most of which arise from operations, of course). The value of TCOR is significantly enhanced when the risk manager pushes this information down to the location level and the operation managers understand the financial impact on the organization.

    Here, too, a RMIS software can assist in assessing the effectiveness (or lack thereof) of a risk prevention program. By factoring in the reduction in risk or exposure achieved, the risk manager can begin to equate TCOR to dollars “saved” (as compared to previous years) and dollars not paid out to potential adverse events that had occurred or had a higher probability of occurring prior to implementing effective operational risk assessment and control.

While it is a challenge to bring risk management and operations into harmony, there are many companies that I come into contact with that have achieved it. Mr. Leavoy illustrates the right methods and mindset for making it so. His article and this post (I hope) show what can be done and how. What are your thoughts?

Ken Ancona is a territory vice president with Ventiv Technology. Contact Ken at Ken.Ancona@ventivtech.com

RMIS Guide


Nov 12, 2014

 | Originally posted on 

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