Sustainability: Operational Risk Management by Any Other Name

May 13, 2012
Manufacturing companies and process plants need to proactively manage all areas of operations that may impact their “social license” to do business in a particular community. Some essential processes, carried out in the name of compliance, help to mitigate and are important to the overall performance of the firm.

Many companies today are exploring how to improve the success of their corporate sustainability initiatives. These companies have ambitious goals for improving performance in energy, water, carbon, waste, employee health and safety, product safety and more. Unfortunately many companies fall short on these goals, and the reasons for failure are pretty common. In general, companies that don’t meet their sustainability goals fail to take a holistic approach to sustainability, fail to integrate initiatives in operational excellence with sustainability, and pay little if any attention to operational risk management.

To start, let’s level set with what is meant by “sustainability.” We at LNS Research (www.lnsresearch.com) define it in the following way: Corporate Sustainability is the set of leadership, business process, culture and technology capabilities an organization establishes to maintain its social license for conducting business in a particular community.

This is a broad definition and leaves room for interpretation, but essentially companies need to proactively manage all areas of operations that may impact this “social license.” The figure below graphically represents the different functional areas of a business that would generally fall under this definition.

We see a lot of companies that attempt to manage sustainability but fail in several different common ways. One of the most common ways is the lack of a proactive approach to operational risk management. Here in this article, we will take a cursory look at what firms are already doing in the way of risk management while reframing what has been viewed as compliance as business improvement processes. We end by advocating the importance of explicitly managing risk.

Compliance vs. business improvement
Nearly all manufacturers are engaged in some types of inspection, hazard analysis and critical control points (HACCP), ISO 9001, and the like. These essential processes help to mitigate risk but are carried out in the name of compliance. In the case of inspections, the traditional ‘produce and sort’ quality control methods fail to prevent hazards from occurring, and only identify hazards at the end of the process. HACCP seeks to identify and plan out hazardous production practices based on science, and designs measurements to reduce those risks to a safe level.

Most manufacturers are merely concerned with the mentioned processes as a way of complying with regulation. They do not embrace the spirit of regulation beyond compliance. Fully embracing this spirit would leave manufacturers with improved business processes and provide them with a framework for developing rigorous risk management systems.

A comprehensive risk management framework must identify risk, quantify risk, prioritize risk and mitigate risk. Most manufacturers do the mitigations, and think of HACCP for FDA regulated industries (e.g. food service, cosmetics and pharmaceuticals) for compliance purposes but fail to go through the entire exercise. Taken together, the framework can seem quite daunting, since each of the capabilities on their own could generate a vast body of work.

Companies must acknowledge how important operational risk management is to the overall performance of the firm, including sustainability. Given that risk touches the entire product lifecycle, from design and manufacturing to sales and service, successful risk management is a proxy for operational risk. It therefore becomes increasingly important for manufacturers to explicitly manage risk and employ people and processes dedicated to this aim.

Companies should always ponder why they do what they do and design and implement processes that address their aims. When companies predict and quantify risk, they will be able to better understand the problem at hand and leverage executive leadership to bring to bear the synergies of people, process and technology. This will put them on a path to operational efficiency, innovation and continued success in sustainability goals.

Matt Littlefield, [email protected], is President and Principal Analyst, LNS Research, a consultancy based in Brookline, Mass.

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