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Applying Operational Risk Management to Manufacturing
Posted by Matthew Littlefield on Mon, Mar 05, 2012 @ 01:35 PM
There are many different contexts in which the term Operational Risk Management can be
referenced. If you look at the definition of Operational Risk Management in Wikipedia, much of
it is driven from military applications. It is not until the very end of the entry that definitions more
typical to business and software settings are mentioned.
In this post we will look at how discrete manufacturing and process industry companies should
think of Operational Risk Management and how these principles can be used to reduce risk and
improve performance.
What is Operational Risk Management?
Operational Risk Management is a framework for understanding and managing a company's
operations. Many of the more traditional frameworks that companies have used in the past only
address operational risks implicitly. However, given today's regulatory and competitive
environment, it is important for companies to start looking at risk explicitly in operations.
Traditional management systems, like those promoted by ISO, would include the following:
ISO 9001:2008 Quality Management System
ISO 14001:2004 Environmental Management
ISO 50001:2011 Energy Management System
Complying with these standards means a company has defined roles, responsibilities,
documentation, and action plans for managing performance and continuously improving
operations in each of these areas. In a way, implementing one of these standards can be
thought of as a well proved risk mitigation action, but risk mitigation is only one piece of the
overall Operational Risk Management framework. A complete risk management framework has
multiple risk capabilities and in its most simple form would look something like the following:
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Risk Identification
Risk Quantification
Risk Prioritization
Risk Mitigation
Each of these capabilities on their own can be considered large areas of research and will not
be covered in detail here. What will be considered is the types of risks that are considered
operational risks and should be subject to this management framework. There are differences
by industry, but a good starting point can be determined by examining what types of risks would
be identified as operational in nature. In most cases, this would include the following:
Assets
People
Processes
Products
At first glance, this seems like a very broad list, and it is. To explicitly manage every risk in
these areas would quickly prove overwhelming. So to help narrow this list it is helpful to think
about the Risk Quantification portion of the framework. Risk Quantification is calculated by
looking at the likelihood that a specific risk factor may occur and then the impact to the
organization if it does occur. With this in mind, Operational Risk Management is not going to
look at every possible risk that impacts an asset or employee. Rather, we look at the subset of
risks that are Operational in nature. A list of these risk areas is again industry specific, but a
good starting point is as follows:
Environmental
Heath
Safety
Quality
Compliance
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By limiting our definition of the Operational Risk Management framework to these areas, we
can ensure that the right people are involved in the initiative and it does not become
overwhelming. Although, to ensure a successful Operational Risk Management initiative, it
takes more than just getting the structure and scope of the framework right.
If you would like to read more on this topic, please click the button below to become a part of
our community and gain access to our Research Library.
Tags: Sustainability, Operational Excellence, Operational Risk Management
Comments have been closed for this article.
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