Operational risks: How to reduce losses in production operations
Maxim Komel, Managing Partner, DuPont Sustainable Solutions
As published in “Metal Supply & Sales Magazine”, October 2017
Operational risk management helps companies allocate resources and funds efficiently to minimize risks that are critical for their business. Because of this work, investments in equipment maintenance can be reduced by 10-20 percent while maintaining or even improving reliability.
The key objective of a business is to generate profit for its shareholders and, as a general rule, to increase capital in the long run. Here, the number of probable and possible losses in a value chain becomes greater with larger businesses and with equipment that remains in operation for longer periods of time.
One of the key questions arising within top management is where to invest resources: in performance improvement or in reliability enhancement?
Investment priorities are defined by business models and depend on the path that is chosen to develop its competitive advantage, such as process, cost, quality or flexibility (customization). The main challenge involves getting the entire organization focused on performing the “right” actions and on eliminating those actions that do not add value to the current business model.
Pursuit of short-term performance can generate losses and may require additional expenses in the future. For example, reduction of maintenance budgets without due consideration for equipment reliability criteria will produce only passing results. Later on, however, it can bring about the need for additional investments, e.g. in unscheduled repair or even in replacement of equipment or productivity if it declines before its time.
Losses can occur when equipment is misused or is defective due to mistakes of production or maintenance personnel, when process conditions are not adhered to, when feedstock or material compositions change, or when products get damaged in transport. In other words, there are lots of risks within a company that affect execution of the initial plan designed to increase profit.
In complex and large-scale production processes, the probability of losing profit or of using available resources inefficiently becomes higher.
The primary reason for losses are errors of operations personnel who fail to notice malfunctions or deviations in a timely manner or to respond to changes in production processes. Even when means of automation and labor-saving tools are available, human factors must be accounted for because it results in unplanned losses, downtime, or equipment accidents.
There’s a good reason why petroleum and petrochemical companies where risks of losses are high (up to and including destruction of assets) pay significant attention to operational risk identification. Experience has proven that many companies know how to identify risks and to develop risk mitigation measures at the level of corporate management. For this purpose, companies hire risk managers who gather and summarize information in main business lines and functions.
In the most advanced companies, the culture and competencies of risk identification and analysis are cascaded to the level of work floor personnel. Such companies have managed to incorporate risk identification mechanisms in routine work of shift crews.
Why is it needed?
Any production process contains the cost part. To ensure equipment upkeep and to reduce risks of losses or downtime, investments of money and time are required. How can one ascertain that the use of resources and funds is optimized, enabling the desired balance of performance and reliability?
How can investment initiatives be identified? These objectives are extremely hard to achieve without engaging production personnel in risk identification and analysis.
Investments can be optimized only through purposeful activities of work floor personnel intended to meet production targets in an efficient manner and to reduce risks of losses or accidents. Simply put, when area or shift supervisors understand not only their shift production targets but also the risks associated with not meeting these targets, their actions are focused on maintaining a balance of reliability and performance.
How can this be done?
First, one needs to determine what impact these risks can have on meeting the production targets and performance improvement objectives. At the level of work floor and area personnel, a clear understanding must be established of what is critical and what is not.
Let’s consider an example of how risks that can affect strategic goals of a metallurgical company are identified at a workshop level.
Let’s assume that one of the company’s strategic goals is to improve performance of available assets without additional capital investments.
Based on this strategy, blast-furnace shop identified its key objectives as follows:
- production is to be increased by 10 percent per year using improvement ideas and reducing blast furnace turnaround time;
- equipment upgrading capital costs are to be reduced by 5 percent.
In order to determine negative events potentially affecting completion of workshop’s targets, its personnel, together with representatives of maintenance and HSE departments, identified and assessed the main risk, i.e. the risk of destruction of blast-furnace assemblies due to explosion of air-gas mixture caused by operator errors during blast furnace shutdown for turnaround. Probable negative consequences that were identified included failure to complete turnaround on time and capital costs required to rebuild equipment.
Secondly, control mechanisms need to be adjusted when changes occur in equipment or when deviations in production processes take place. Most losses and accidents are associated with changes that were not accounted for or that were not authorized.
An example of change that impinged on operations of a metallurgical company shop is as follows: a crane brake system part was replaced with an off-spec spare part. As a result, the brake system failed causing a ladle with 100 tonnes of liquid steel to fall.
Thirdly, personnel need to be taught risk identification and analysis methods, and a mindset of zero tolerance to critical risks must be fostered.
Production companies often use the “What if?” technique that envisages participation in the assessment process of several experts who operate equipment, perform its servicing and maintenance, together with safety professionals. The group reviews various risk scenarios for specific equipment or process by repeatedly asking the question “What will happen if...?” The results are risk assessment that accounts for existing protection measures, and the required risk-mitigation measures.
To enable continuous support for personnel in risk management methodology, a group of methodology experts is to be set up at the company’s site.
The above-mentioned measures can be implemented at an average-size site within 12 or 18 months. In this period, production culture can be changed and work floor personnel can be engaged in activities intended to reduce operational risks and to improve performance.
Most Russian companies have implemented corporate risk management systems than enable control over strategic risks, such as decline of product prices, volatility of Rouble exchange rate etc., whereas operational risks in these systems get consolidated at corporate levels into one high-level risk, e.g. “Breakdown of critical equipment”. This format is convenient when reviewing the completion of key corporate risk-prevention programs but it does not assist in managing at workshop or area levels. Effectively, there is a risk management process in place; however, it remains unclear what shop personnel should do to manage risks.
Operational risk management is often seen as a separate process that is not integrated in key company processes including budgeting, production planning, performance monitoring etc. As a result, funds for risk management are not budgeted for, risk objectives and reporting are considered outside of the main process of goal-setting and performance analysis. Therefore, risk management does not become part of operational activities. Instead, it turns into a sideline activity and becomes an extra burden.
When a clear and well-established process of operational risk management is not available, employees who identify risks often become responsible for all phases of risk management: identify, evaluate, generate action items, seek and substantiate funding, and execute measures to eliminate these risks. In doing so, they must break through existing procedures unaided, only to gain attention of various groups and get budgets allocated or revised, or plans aligned. This type of environment does not help engage employees in the company’s operational risk management activities or in promoting new production mindsets.
How can these barriers be eliminated?
One needs to find out what risk identification procedures exist at the level of shop floor personnel. How does site management learn about critical risks in workshops, what measures need to be implemented to prevent risks, and who is responsible?
Reviews of operational risks and risk mitigation execution need to be included in the agenda of existing committees and councils at site, workshop, and area levels. This measure will enable the following:
- Evaluate the impact that risks have on completion of production targets, and determine how critical these risks are.
- Allocate needed resources.
- Act to prevent risks in a timely manner.
Communication channels need to be established to help line personnel report critical risks and obtain resources needed for execution of risk-prevention measures in a timely manner.
Changes need to be made to existing processes of planning, budgeting, and performance monitoring. Work format of site leaders and business-line leaders need to be changed too. This is required to initiate processes of financing and execution of risk-management measures in a timely manner. Once risks get identified and evaluated, roles and responsibilities need to be assigned in such a manner that detected risks would not rest solely on the shoulders of the shop floor personnel who identify them.