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3 Things To Know About Operational Risk Management

The manufacturing industries, with their many moving parts, are particularly susceptible to risk at any number of stops in the supply chain.

Mnet 174205 Industrial Facility December 2016

If you’re like most people, you probably don’t think much about risk until the roll of the dice comes up in somebody else’s favor. This puts risk squarely in the “be proactive” column of your to-do list. The manufacturing industries, with their many moving parts, are particularly susceptible to risk at any number of stops in the supply chain.

So what types of risks are we talking about here? Your mileage may vary, but entities in the manufacturing space can usually count on at least one, and probably a combination, of the following types of risk:

  • Supply chain risks
  • Compliance and legal risks
  • Operational risks
  • Reputational risks
  • Financial risks
  • Safety risks
  • Other third-party risks

Given the several ways you might be blindsided by unforeseen and unplanned-for risk, it definitely pays off to fully understand and invest in risk management efforts.

The Benefits Of Risk Management

Risk management done poorly is linear and not very helpful. You perform your routine, you run into a snag and then you launch an internal audit to help figure out what went wrong. It’s reactive.

But realizing the benefits of risk management requires you to become proactive and agile. Like Socrates’ “unexamined life,” no company is complete if it isn’t actively improving itself and anticipating how well it’s likely to get along in the future, when any number of outside factors or the world itself might be dramatically different than they are today.

Here are three key benefits of taking risk management seriously.

1. Understanding Risk Helps Realize Profit Goals

It probably goes without saying risk of any kind can compromise today’s profits, but what about your long-term profit and growth goals? Nobody dreams of treading water — but if you’ve been tolerating risk for a while now, it’s possible you’re holding yourself back from the greatness you really envision for your organization.

Unsurprisingly, the world’s “best-in-class” companies know about this benefit of risk management, and 42 percent of them closely study the relationship between operational and financial data to better understand risk and how to stop it from hampering their growth in the future. The more prepared you are to respond to risk, the healthier your bottom line.

2. Some Risk Management Delivers Great PR

A couple of years ago, Matt Littlefield of LNS Research made a cogent case for sustainability being an excellent and unheralded type of risk management. As 2017 draws to a close, we can definitely see what he meant. We don’t really know what a “future-proof” business looks like, but we do know dangerously unsustainable business models when we see them.

When will we have dredged up our last barrel of oil? When will we remove one tree too many for a treasured forest to grow back? Forgive the shift toward melodrama, but what is risk management if not working each day to make sure you don’t use more than you need — or that the resources you depend on to keep your organization afloat will still be available in a few years?

Sustainability in manufacturing means using only your fair share of Earth’s finite resources. After all, not all the risk in business belongs to the business. At the same time, though, mitigating risk to the planet is just good business sense — not to mention a timely PR move.

3. Managing Risk Proactively Helps Weather Changes of All Kinds

The Boy Scout motto is “always be prepared.” It doesn’t say what for, because it proposes a mindset.

We spoke above about specific types of risks and why it makes sense to insulate yourself against them, but what about all the non-specific risks and opportunities that arise each day? These risks build company culture.

Managing risk proactively helps create a culture that is prepared for and enthusiastic about change of all kinds. You want a culture that creates not just better employees, but in fact, better and more well-rounded citizens who can study world problems and dream up new solutions.

As you’re studying the intersection of supply chain risk and profitability, for example, the members of your team will almost certainly learn something about your process and why it doesn’t work. And who knows? Maybe they can even apply their new concept more broadly to help solve a problem elsewhere.

Problems arising in your organization aren’t, in themselves, a sign of a poor risk management philosophy. But there definitely are some real signs to look out for, such as ambiguity in your company’s set of values and procedures or an overly siloed company structure, where the distance between departments results in waste and lessons not being learned in time.

As much as risk management is about anticipating future needs, it’s also vital for your day-to-day. It’s a way to keep your organization “humble,” for lack of a better word, by making self-examination routine.

Megan Ray Nichols is a freelance science writer. 

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