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Assessing Risk

You may want to read this having read the blog regarding “identifying threats”. That particular blog deals with the matters of a first step in proactive risk management. We have provided a range of learning reading on the subject of risk management and as such I would suggest that you read each of them to gain an understanding of the subject.

Assessing risk in most circumstances is not technically challenging. I say in most circumstances because depending on what you are assessing there are some simple questions to be asked and the most common question is “what if?”

From the two examples below it is clear that if I or others had considered what might go wrong in the process, looked for the threats or hazards, we would have found the potential financial issue and in the case of the fire found that the timer required changing. We would have then reduced each of these potential risks to an acceptable level.

As such if we had considered each of the financial threats, we would have found the threat, assessed its potential impacts, put controls in place and monitored the situation reviewing our assessment over time and made changes as required to ensure the risk remained low. Of course, having an accountant alongside me would have helped when considering the threats.

With regards to the fire it would appear that time was an issue as the plant required to be in production sooner rather than later. In this case the technical expertise was available at the time of ordering the equipment however the specification was rushed and as such the equipment in part was not fit for purpose.

Examples

As with my other blogs I am presenting real workplace situations I was involved with. These cover both health and safety matters and business risk.

The first example I am presenting concerns cashflow and financial threats. The background to this example is as follows: I owned and operated a small business that sold qualifications both business to business and to the general public. Approximately 80% of sales were to individuals from the general public who were wanting to undertake qualifications within the health and safety sector. The qualifications were accredited by a recognised awarding body and the length of time a student would need to conclude the learning would be approximately two years. This varied depending on the student’s dedication to the studies. The average selling price of the qualification was approximately £2,000 GBP.

The business started in 2003 with a first-year turnover of just £30,000. Over the next 8 years or so the business grew to £2.2 Million. This is rapid growth given the average selling price of a single unit at £2,000. Please keep in mind that I am averaging the finances here and being very approximate.

Our payment terms were based on either payment in full at the point of order or payment terms of not more than 12 equal monthly payments interest free. Many of our clients would pay by credit card and it is this matter that caused a real threat to our business finances.

During 2008 the credit card assurer, those businesses that guarantee your credit card payments, decided that we had grown so quickly that they would impose a credit reserve on us of £200,000. In other words, they would withhold credit card payments made by our clients to us until the reserve they held reached £200,000. Our reserve held by them at that time was £50,000. As such we would be selling and delivering on qualifications for approximately the next three to four months with no income from credit card payments. In cash flow terms at that time a gap in cashflow of approximately £40,000 per month. Our costs were at that time approximately £100,000 per month and as such we faced a situation of a 40% gap in the negative.

The problem was easily solved as we introduced a new credit card facility, used parts of our reserves and basically managed the situation. We also knew that the £200,000 was ours and was sat in the bank of the credit card assurer. In their assessment our risk to them had grown and as such they wanted a higher level of our monies sat in their account just in case our clients asked for their money back. I could see their point, but their actions were immediate with no notice. I had looked at our cash flow and noticed that we had not received our monthly payments from them and then called to enquire why this was.

Could I have foreseen this threat, well yes and I could have put in place measures to reduce its impact. The fact is that it could have been avoided completely if I had assessed the threats. What I lacked was some basic knowledge and information. As it was, we as a business overcame the situation and gained a valuable lesson.

If I had undertaken an assessment of this threat just 12 months earlier I would have seen using a predicted cashflow using a time line as a guide a situation of the threat. The assessment would have indicted a high-risk rating. Using a set of mitigations would of allowed the situation to be reduced to at least a medium risk rating.

Fire in the shed

Background

During in the 1990s I was employed at a smelting works, basically the business took in alloys and base metals and through a process of smelting and melting, moulding and extracting produced ingots, wires and materials that we had refined and waste that could be further processed.

Employed as the Storage, Material Movements and Sampling Supervisor I also had additional duties of safety. The works also employed six engineers, all of which were highly qualified and competent in the subject.

The works building was a huge shed with outbuildings for the laboratory, engineering and offices. Within the main production shed we had seven melting pots (crucibles), five of which could hold one tonne of molten metal and two of which had the capacity to hold five tonnes of molten metal. The process was relatively simple, throw a measured amount of feed materials into a pot, melt, stir and add other materials sampling as you go until you have prepared an alloy to the correct specification and then ladle out into moulds.

The Incident

The melting pots we are discussing here held approximately one tonne of metal materials, normally lead and tin ingots ready for melting. Once the ingots had melted down this could be stirred and added to with various compounds or other substances to produce a given alloy. The pots were heated by small diesel fuelled furnaces situated at the base. These furnaces were regulated in terms of temperature and time. Basically, a temperature probe was inserted directly into the molten metal alloy and kept at a temperature by the furnace, switching on or off as required. The timer was also used to ensure the furnace was switched on and off during working and non-working hours. As such we could set the timer at 6 am Monday ready for the shift starting at 7 am. Setting the temperature allowed the furnace to be switched off automatically.

Fire Incident

The main instrument designed to turn the furnace off and on failed. At the temperature when the instrument should have turned the furnace off, it did not, and as such the furnace continued to heat the pot. To add to this the operator had set the timer incorrectly setting it at 6 pm to start Sunday evening, meaning that the furnace had at least been in operation from Sunday 6 pm to Monday 7 am. The pot and surrounding area were badly damaged by the fire but fortunately the housing of the immediate work area, a metal cabin, held and saved the whole shed.

The smoke damage was extensive covering the entire works shed in think black soot. It took three weeks to clean up using cherry pickers for the high roof.

The incident was investigated by the engineers who found that a metal break, a device that should have melted in cases of excess high temperatures and turn off the burner, did not melt as required. The timer was set incorrectly which was one root causes.

Again, let us consider what a risk assessment would have indicated if a specific assessment had been undertaken at the time of installing the equipment. It would have shown that the instrument, the timing device, required that the operators needed training, the instrument was mechanical and liable to fail if not serviced and tested regularly. The cut off safety device was correct in its manufacture however the specification of this device was not suitable for the conditions of our operations. Basically, the wrong part was ordered and fitted.

The assessment would have also indicated that the main losses would have been a potential loss of life if the fire had spread, not necessary for our staff but for fire fighters. The business would not have been able to operate for months due to a large-scale fire and this could have led to loss of employment. Of course, the risk assessment would have also shown the controls that were needed to prevent such an incident and as such the potential threat and loss (risk rating) would have been measured from very high risk rating to unlikely risk rating.

Previously in blog One, identifying threats, I introduced how we approach risk management in terms of identifying what might be or go wrong. In this blog Two, I have introduced threats and potential losses. In my next blog Three Risk Rating I will discuss risk rating and how we can give a threat a score or rating in order that we can prioritise our actions.

Mike Watson SVT Ltd

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