Time for a reality check. Coming to grips with various risk-related situations in your operations is an important step toward improving the organization’s position and profits.
Few organizations truly understand the risks they face (risks that could potentially cause the company to suffer severe setbacks or even fail). The first thoughts of business-related risk usually revolve around catastrophic failures or events such as explosions, fires or floods. Although quite serious, these types of risks usually can be covered by insurance policies that will at least support continued operations should an event occur.
Equally significant are the risks that cannot be covered by insurance, and often go hidden or ignored until it is far too late. Characterized as “expense-related risks,” they generally fall into three categories.
Risk from direct materials cost increases
Direct materials cost increases are often cited as a reason for financial loss. Few organizations recognize that these costs are controllable and should not pose a risk to the company. The problem is that no one is really trying to control materials costs within the operation. Instead, all of the focus is on controlling the procurement cost.
For example, a dairy products plant unknowingly permitted habitual substitution of more expensive ingredients in recipes; used cleaning methods that led to millions of dollars in contamination losses; incurred losses of entire batches of product because of scheduling problems; and consistently produced overweight products. The net result of these losses increased cost of goods sold by more than 50%.
The distressing fact is that direct materials losses resulting from poor practices, lack of supervision and a failing work culture contribute heavily to rising costs in far too many organizations. Even more distressing, they often go unnoticed.
Risk from scrap, reclaim and rework
Scrap, reclaim and rework represent another significant risk that, while recognized, goes uncontrolled in most organizations. The amazing part of this category of risk is that few people acknowledge it as true loss, even when confronted with the following troubling fact: about one-third of a typical manufacturing or production facility’s footprint, workforce and costs are consumed by this work classification.
The loss of revenue, combined with the potential loss of market share caused by both quality and delivery issues, creates a significant risk. And it reflects something that is absolutely controllable.
Risk from energy consumption
Energy consumption and its associated cost represent another significant risk. Studies conducted by a variety of industry-specific organizations state that energy consumption is 10% to 20% higher than necessary. Most of these losses are attributed to operating and maintenance methods.
For example, one refinery wasted $6.3 million annually to operate its slurry pumps. Instead of limiting the control range of the pumps, the operators constantly varied output from full-open to full-closed—essentially doubling the required horsepower to run the pumps. Compounding the unnecessary increase in power, this mode of operation added $4.0 million in annual pump repair costs.
But there’s more
What does all this mean for your organization?
Not everyone perceives the correlation between these limiting factors and risk, but it is clearly there. The waste and losses detailed here result in a market position that is at risk to competitors who have recognized and resolved them. In a global market where high-quality, low-cost products are immediately available to consumers, inefficiency is a death knell manifesting as lost market share, revenue, operating profit and, ultimately, business continuation.
Get serious. Ask yourself if your losses are putting your company at risk. Organizations that acknowledge the risks of wastes and losses I’ve described—and take positive actions to correct them—can substantially improve their market position and operating profits.MT