March 2013
By Nuris Ismail and Reid Paquin of Aberdeen Group
The volatility in demand, large investments in capital assets, and the complex nature of operations are all issues that make companies operating in asset intensive industries unique. Manufacturing companies invest millions, if not billions, of dollars in plant equipment. The pressure to get the most out of their current asset base while maximizing productivity is top of mind for most executives. While these pressures are extremely important, organizations cannot forget the impact that operational risks can have to their business.
When asked about which risks had the biggest impact to their organization Aberdeen’s, Operational Risk Management: Getting Ahead of the Risk Curve, found that manufacturers are juggling a multitude of risks, without any single risk as the most dominant. What this means is that it has become extremely challenging for manufacturers to identify and reduce the impact of risk to the organization (Figure 1). Additionally, as the number of organizational and geographic "silos" for risk and compliance information and analysis grows, it becomes virtually impossible to manage risks with homegrown solutions or on a disjointed basis.
Figure 1: Top Risks that Have the Biggest Impact on Business
Source: Aberdeen Group, September 2012
While managing the failure of critical assets proved to be the top risk, executives should not forget the risks associated with non-compliance, environmental, financial, logistical, and supplier issues. If nothing else, last year's Tsunami in Japan was a sobering reminder of the effects an environmental disaster can have on the geographically extended supply chain of a manufacturing company and more importantly, the bottom line. The ripple effect from the disaster created "the perfect storm" in the global supply chain and serves as a reminder that we live in a world of risk.
To identify how the most successful companies are overcoming these pressures, Aberdeen used four Key Performance Indicators (KPIs) to distinguish between the Best-in-Class (top 20%), Industry Average (Middle 50%), and Laggard (Bottom 30%) organizations. These business metrics were used to identify companies that were able to achieve measurable value from their risk management program across their manufacturing operations (Table 1).
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Definition of Maturity Class
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Mean Class Performance
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Best-in-Class: Top 20%
of aggregate performance scorers |
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Industry Average: Middle 50% of aggregate performance scorers
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Laggard: Bottom 30% of aggregate performance scorers
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| Definition for the Key Performance Indicators |
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Best-in-Class companies are performing at 18% higher OEE and 13% less unscheduled asset downtime as compared to Laggard organizations. Not only are the Best-in-Class keeping their assets running, they are maintaining a high level of quality with their products. Achieving such results is helping Best-in-Class companies to improve profitability in the current economic environment, they are overachieving their operating margins by 19%. Establishing a risk culture and empowering the workforce with the information to be predictive decision-makers has been instrumental to achieving Best-in-Class performance.
Change Management
One of the biggest challenges with ORM is managing changes in the operations or plant assets, and how this change can impact the overall risk profile of a facility. Machine operators, plant managers, maintenance personnel, engineers, and third party contractors can all make changes unintentionally. For example, a plant manager might decide to run an asset three times the usual amount in order to meet a production goal (and fail to communicate this change to the safety and risk manager).
Such a change in asset utilization could mean the asset reaches critical temperatures and at a minimum causes unscheduled downtime or, even worse, an adverse event. Open communication allows regular discussion and can serve as the spark that ignites a highly communicative, full-circle, and continuous strategy department. The Best-in-Class understand the importance of having a formalized change management request strategy and have implemented such a framework (Figure 2).
Figure 2: Managing, Approving, and Communicating Change Requests
Source: Aberdeen Group, November 2012
The Best-in-Class have a standardized process to formally request a change in operations whether that change occurs in equipment, manufacturing process, or material changes. Following that, they have a formal process to review and approve that change in the operations. In doing so, they have the ability to ensure that they go through the proper channels to ensure that if the change is made, it won't impact the business. Once a change has been approved, the Best-in-Class are also more likely to make sure that it is communicated across the organization, followed by having a formalized closed loop process. In doing so, the Best-in-Class ensure that change is not only communicated but also implemented and adhered to.
It is extremely difficult, and in most cases with large, dispersed companies, all but impossible to comprehensively address risks on a piece-meal, siloed basis. Companies take many approaches to managing risk efficiently across their organization. Best-in-Class companies have taken a holistic approach by establishing an ORM framework and implementing it through change in business processes and organizational structure. Best-in-Class companies also leverage software tools to automate these business processes, improve visibility into the myriad of risks, and use the information to be predictive and prevent adverse events. To find out more about how the Best-in-Class are successfully mitigating risks throughout their operations, as well as other topics affecting manufacturers today, read Aberdeen’s Operational Risk Management: Getting Ahead of the Risk Curve.
Authors
Nuris Ismail, Research Analyst, Aberdeen Group ([email protected])
Reid Paquin, Research Associate, Aberdeen Group ([email protected])
