LEAN RISK MANAGEMENT WHITE PAPER A matter of perspective

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1 LEAN RISK MANAGEMENT WHITE PAPER A matter of perspective As a Senior Quality Engineer for the Tech Group, I am actively involved with risk management at my site, while also managing our site Lean program. As part of our continuous improvement philosophy we professional staff are always encouraged to find ways to leverage expertise in one area to help us excel in another which is how this paper came to be submitted for your consideration. So how do we compare two such seemingly disparate systems of thought as Lean and risk management? The answer is that it is really just a matter of perspective. Both systems have a similar philosophy, require similar cultural enablers, and have tool sets that can be used in conjunction with one another. For the purposes of this paper let us define philosophy as a system of thought that provides a framework for how we view and interact with the world around us as well as those who reside within. Philosophy also answers the question, why do we do what we do? Cultural enablers are those common values, outlooks, practices and philosophies held by members of an organization that allow a particular system of thought to take root and flourish. Lean Risk Management is not Lean and it is not risk management but rather a melding of the two for greater effect. Lean is in many cases deployed in a reactive fashion. Waste is identified through waste walks, value stream mapping, kaizens and other means, then eliminated or mitigated using Lean tools. How much more powerful would it be if we could identify those areas in our organization where waste is likely to be created before it happens, and prevent that waste from being created in the first place? Lean Risk Management allows us to do that. Many think of risk management as a program or a system to be integrated with other organizational systems. It is also a process having its own embedded wastes. Lean Risk Management allows for a more robust risk management program by finding and eliminating process waste within the risk management program. Before we go any further into what exactly is Lean Risk Management let s look at both risk management and Lean separately. Introduction to Risk Management ISO 31000:2009 defines risk as the effect of uncertainty on objectives. ISO 14971:2007 used in the Medical Device industry defines risk as the combination of the probability of occurrence of harm and the severity of that harm. ISO 9001:2015 DIS defines risk as the effect of uncertainty on expected results. A risk management program is a series of interrelated processes and tools, designed to identify, describe, assess, mitigate and track risk, thereby managing organizational risk. Industry has various types of tools to both identify and assess risk, such as Failure Mode and Effects Analysis (FMEA), Fault Tree Analysis (FTA), and Hazard Analysis of Critical Control Points (HACCP). Another commonly used tool is Strength-Weakness-Opportunity-Threat (SWOT) analysis. We also have the means for ranking risk which then allows us to prioritize how we allocate resources to deal with that risk. The most commonly used tools are the risk matrix and the risk priority number (RPN). The attempts to prevent adverse events from occurring are called risk mitigation. The preferred hierarchy for risk mitigation is: 1. Design it out

2 2. Alarm when it occurs 3. Warnings (labeling) that risk laden event could occur After all efforts at risk mitigation have been implemented, a new risk assessment is performed and this new assessment value is considered the residual risk. At this point an organization must make the business decision of whether the benefits of going with a particular product or course of action outweigh the residual risk. A risk management plan is a living document that must be continually updated, and those updates responded to when necessary. Once risks have been assessed, potential causes identified, potential impacts contemplated and mitigation strategies developed, a model is developed which includes residual risk. Every effort should be made to continually update the risk model to take into account data from the field as well as, ongoing production information. Introduction to Lean With roots dating back to the turn of the 20 th century in this country, Lean as we know it today is based on the Toyota Production System developed in the 1950s and used in tens of thousands of organizations across the world in the last 60 years. Lean is a set of management practices that organizations utilize to improve efficiency and effectiveness. Lean utilizes a set of methodologies and tools to identify and eliminate non-value-adding activities and waste from an organization s processes. Waste can be thought of an activity or situation that consumes resources but provides no value from the perspective of the customer. In other words, through implementation of Lean methodologies, companies can do more work in less time with less cost. A byproduct of this increased efficiency is a reduction in process cycle time and eventually in on organization s product or service delivery lead time. This improvement is accomplished by identifying and reducing operational (manufacturing, administrative, and other support function) waste - and not just any wastes 8 specific ones. The first seven Lean wastes were identified as part of the Toyota Production System while the eighth was recognized some time later in the 1980 s. 1. Waiting: Time is money. Waiting ties up resources that could be more profitably engaged, such as a person that could be doing something else. o Example Waiting on line or holding on a phone call, are obvious examples; also, having to wait to ship something due to missing paperwork. o Example Having step 2 in a process slower than step 1, so that parts begin to pile up and the operator has to wait to process them while other parts are running on the machine. o Example Delays caused by having to wait while searching for needed equipment, tools, materials, paperwork etc. 2. Inventory: While it is of course necessary to have enough inventory to wet the line when production of product (initiation of service) begins and reordering can be accomplished, having an overabundance of inventory that could potentially expire, be lost, become damaged through excessive handling or movement, is a form of waste. o Example Producing inventory in anticipation of an upcoming order while there is a lull in production might seem like a good idea at the time. Producing to a schedule based on

3 o financial forecast may also seem like a good idea. However, this inventory takes up space, may have to be moved around (and potentially damaged). It also represents assets that you can t do anything else with other than wait for the order to come. This is often referred to as opportunity cost. Example Do you really still need that old stationary with the wrong Directors name, or the museum address prior to moving last year? Even relatively small institutions can travel part of their permanent collection that is not currently being shown with the potential of (1) generating income, (2) increasing institution visibility, and (3) being a benefit to another institution. 3. Defects: The cost of catching and correcting errors, as well as, replacement of items or materials and possible reduced value to the customer, are all part of the waste of defects. It should also be noted that the farther downstream (closer to the last process step) this waste is caught, the more costly it becomes. o Example Defective parts, improperly completed forms, customer returns. o Example - Incorrect purchase orders, marketing materials, informational brochures. Ever had to provide a complimentary/discounted ticket, item or service to make up for an error and mollify a customer? 4. Transportation: Unnecessary conveyance (movement between locations) takes up time, energy and can lead to other forms of waste. o Example - Having to move one pallet of material to access another that contains what is needed o Example - Unnecessary movement back and forth, in the relocation of paintings and artifacts when setting up an exhibit, due to poor planning. 5. Motion: Having an inefficient workspace is considered a form of waste because it can lead to lost time, hinder communication, impede effectiveness and worst of all potentially lead to injury. Having to move unnecessarily to complete a job. o Example - Having to go to another room to pick up a printed document or form. o Example Having to go look for a particular tool to start a job because it is not in your toolbox where you would expect it to be. o Example Every time you have to move something to get to something else at your work station. Having to stretch, reach or bend into a less than optimal position in order to complete an action (poor ergonomics). 6. Overproduction: Producing a product or service that cannot be delivered when complete is itself a form of waste. This inventory represents time, materials and other resources that have been invested, that cannot be compensated for while undelivered. The ideal scenario to work towards, is to produce and deliver a product or service just as the customer is requesting it. Perhaps the most insidious of the eight wastes because it so easily leads to other wastes. o Example Making more than is needed by the next process at any given time.

4 o Example The time and resources spent to produce inventory that cannot be shipped due to lack of orders from the customer. This inventory represents tied up funds that could be invested elsewhere. 7. Excess processing: Excess processing has two components (1) taking actions that are more than is required and (2) those actions bringing no additional value to the end customer. o Example Having two plastic liners for parts where only one is required. Maintaining a higher than mandated Acceptable Quality Level (AQL) level when data shows that it could be lowered. o Example Using acid free paper that might be used for a limited edition art print, to produce event posters. 8. Non-utilization: Not utilizing each employee up to their full potential, thus sub-optimizing overall organizational effectiveness, and possibly contributing to low employee morale. o Example Bringing in an outside consultant to do specialized training that internal resources could provide o Example Having a Lean team make improvements without allowing the area workers provide input. o Example Having an employee start on a 4-year degree when they enter the organization and not adding to their duties and responsibilities as they progress year by year through their educational program. As a way to remember the different types of waste, you can take the first letter of each waste and rearrange them to spell DOWNTIME. If we are going to continue talking about waste however, we must also look at defining the concept of value. Value must come from the customer s perspective. If the customer is willing to pay for something, then it has value. Think of the customer supplier relationship as a person looking at a black box. The customer inputs an order along with payment and expects out a good or service that meets their requirements, lasts as expected and is delivered on time, at the desired cost. The customer really doesn t care what goes on inside the black box (what the supplier needs to do) to make that happen, unless there are risks that could potentially impact the customer. An example of a value adding step in manufacturing is soldering a needed component onto a circuit board. Without the component, the board would not function and thus would have no value to the customer. Final inspection of the circuit board prior to shipping would be considered a non-value adding step, since it does not add anything to the finished product (though it would possibly catch the defect of a missing component). The inspection should still be considered important as it helps keep defective merchandise from getting to the customer, yet it is non-value added (though necessary) because as an individual line item, the customer would not be willing to pay for it. After all, they are purchasing a circuit board (and what it does) and not an inspection service. The inspection would be considered a cost of doing business that the supplier factors into their pricing.

5 Lean Risk Management So what SPECIFICALLY does Lean implementation have to do with risk management? Organizational risk often hides in the hidden factory where waste is produced. Lean processes are transparent and make it easier to spot risk. Lean tools and methodologies can be used to eliminate or mitigate both product and process risk. Respect for the individual a cornerstone of Lean is also important when it comes to risk management, from two very important perspectives (1) protecting individuals within the organization from risk and (2) tapping into their collective knowledge to identify and mitigate existing risks. Both risk modeling and value stream mapping look at current and future states of the organization or process under review. Risk management and Lean implementation are already naturally related and interrelated. Risk management as a process, could contain waste. Every Lean transformational or improvement project contains an element of risk in its implementation. It is not possible to accurately calculate return on investment (ROI) without assessing project risk. Additionally the more complex a process is, the greater potential risk that something could go wrong and the greater opportunity for hidden waste. In effect, managing performance successfully also means managing risk effectively. Now let s take a look at table 1 below to see where the thought systems of Lean and risk management overlap. Analyzing the overlaps is how you determine if two systems of thought might work synergistically with one another. Thought System Philosophy Cultural Enablers Tools and Methods Lean Respect for the individual Desire to flow value to the customer as quickly and efficiently as possible Make decisions from the perspective of what s best for the customer Drive evolution by continuously improving Lack of silos Deployed across all levels of the organization Must be supported by upper management to succeed Benchmarking is done both internally and externally Value Stream Map 5S Layout Hoshin Kanri Risk Management Respect for the individual Protect the customer, the public at large as well as the company from the effects of adverse events Constant assessment of the risk model to identify any needed improvements Cross functional collaboration Requires input from all levels of the organization Requires external as well as internal inputs Must be supported by upper management to succeed FMEA Process Map Risk Priority Number Fault Tree Risk Matrix Table 1 Thought System Overlap Table Metaphorically, Lean practitioners think of process waste as being created in a hidden factory that exists in all organizations. If we look to how the ISO standards define risk, we can look at risk as the potential for harm caused by uncertainty in our environment. We will naturally be uncertain of anything that is hidden or unknown. With that being said, the hidden factory where waste is produced is a huge source of uncertainty and hence risk. With this understanding, it makes sense to explore where Lean and

6 risk management both overlap and interconnect, in order to see if the two thought systems might be used in conjunction with one another to positive effect. Key Point: Looking at the interconnections between Lean and risk management is where the potential for elevation lies to become something new and greater than the component parts. As we noted earlier, Lean when practiced is often used reactively. However, just as positive cultural enablers allow positive systems of thought to take root, conversely, negative cultural enablers can allow situations where waste may be created. Once these negative enablers have been identified, risk management can be accomplished during waste walks by looking for waste enablers as identified in the table below. In other words Lean and risk management interconnect when the risk of creating waste is included as part of the Lean assessment of an area. Thereby identifying the risk of possible process waste and taking preventive measures rather than waiting for existing waste to be identified and having to try to eliminate it after the fact. Table 2 below relates examples of different cultural enablers to specific wastes. The listing in this table however, is not meant to be exhaustive. The list will be different for each organization. Waste Defects Overproduction Waiting Non-Utilization Transportation Inventory Motion Excess Processing Negative Cultural Enablers Incapable processes Inadequate training Unclear requirements Push Systems Customer Requests Inadequate/suspect scheduling Inadequate equipment maintenance Lack of training opportunities Unclear career path Poor Layout Push Systems Customer Requests Antiquated accounting methods Poor Layout Inadequate cost-benefit-analysis Lack of structured decision making process Table 2 Waste Enablers (Risk of Creating Waste) Similarly when we look at risk management as a process with inherent wastes, we can see how Lean methodologies can help improve and refine this process. Risk management interconnects with Lean process improvement when the overall risk management program is evaluated from the perspective of how waste free the various risk management processes are. Table 3 below shows how the 8 wastes manifest themselves as part of the risk management process flow. Waste Defects Overproduction Risk Management Process Example Unrepeatable RPN Developing risk model for simple process that doesn t require it

7 Waiting Non-Utilization Transportation Inventory Motion Excess Processing Table 3 Risk Management Process Waste Queue Time Not including correct SME Inefficient review/approval routing Risk documentation and procedures maintained for project no longer in residence Having to track down data from different sources rather than having an automatic feedback system Over allocation of resources To conclude Lean Risk Management is an improvement over its two predecessors Lean and risk management in that (1) potential as well as existing Lean wastes are now addressed which had not previously been the case and (2) the risk management process will be much more lean and waste free, and hence more robust. About the Author: Lance B. Coleman is a Senior Quality Engineer and Lean Leader at The Tech Group in Tempe, Arizona who has worked in Medical Device, Aerospace and other regulated industries for over 20 years. He has a degree in Electrical Engineering Technology from the Southern Polytechnical University in Marietta, GA and is an ASQ Senior Member as well as, Certified Quality Engineer, Six Sigma Green Belt, Quality Auditor and Biomedical Auditor. Lance is the author of The Customer Driven Organization: Employing the Kano Model (Productivity Press 2014) as well as many articles on risk management, Lean and quality. He presently serves as the ASQ Lean Enterprise Division Education Committee Chairman where he is responsible for managing Lean curriculum development initiatives. Lance is also an instructor for the ASQ Certified Quality Auditor Preparatory Course and the Editor of the ASQ Audit Division newsletter. He has presented, trained and consulted throughout the United States and abroad. For question or comments lance@fullmoonconsulting.net