Bottom line risk management

BOTTOM-LINE RI K MANAGEMENT

Transforming your safety program into a successful profit center$

© OSTN Bottom Line Risk Management 2

For Training Purposes Only

WelcomeMost managers make workplace decisions to enhance profitability through greater productivity, efficiency, and quality. In many instances they are slow to commit resources to suggestions for corrective action unless they include quantifiable data, useful information that they understand: Information that quantifies the benefits and proves cost effectiveness

Mark Hansen said it well, “The CEO’s and comptroller’s eyes glass over when talk turns to incident rates and experience modification rates for the same reason that a safety manger’s eyes glass over when talk turns to return on investment and equivalent uniform annual cost. The terms are not part of the same language. Therefore, to be understood the safety manager must speak a language that upper management understands - dollars and cents.”

This workshop will help you speak the language of top management by introducing various engineering economy principles such as present worth, depreciation, rate of return, replacement, retirement and cost-benefit analysis.

Goals

Through your participation in guided discussion in Part One you’ll gain a better understanding of:

• The direct, indirect and unknown costs associated with workplace accidents

• The benefits of paying for safety proactively

• The tools and techniques to measure those costs and benefits

In Part two, by participating in a case study exercise you’ll learn how to: • Estimate direct and indirect costs of an accident

• Determine the potential risk: probability and severity of an accident

• Complete a cost/benefit analysis including return on investment, business volume and units required to cover costs, payback period, and costing-back.

© 2000-2006 OSTN. All rights reserved.This material, or any other material used to inform employers of compliance requirements of OSHA standards through simplification of the regulations should not be considered a substitute for any provisions of the Occupational Safety and Health Act of 1970 or for any standards issued by OSHA. The information in this publication is intended for training purposes only.



Why does your employer “do” safety?

Knowing what motivates lets you target and appeal to needs.

Form Groups Introductions

Elect a group leader __________________________

Select a spokesperson __________________________

Members __________________________

The Social Imperative• Save lives

• Do whatever it takes

What’s the message?What management needs do you appeal to.

The Fiscal Imperative• Saves the company money

• Do what we have to to save money


The Legal Imperative• Stay out of trouble

• Do only what we have to


People do not care how much you know until they know how much you care.

Least effective strategy

Most effective strategy



XYZ Contractors MOD Rate = 1.02Classification Description Code Base Rate Payroll Adjusted Rate Premium

Concrete - Floor/Driveway 5221 .1261 $450,000 .1512 $68,040Carpentry - Multiple Family Dwel. 5651 .3970 $1,996,000 .4764$950,090

$2,446,000 $1,018,130

Workers Compensation Basics

How are rates determined?

Manual Rating - Also called the “Pure Premium Rate,” this rate is applied to all industries of the same type or standard industrial classification (SIC). Expressed as:

Dollars per $100 dollars of payroll

Example: $3.15 per $100 dollars of payroll.

Experience Rating - used to vary the company’s own rates, depending on its experience by comparing actual losses with expected losses.

XYZ Contractors MOD Rate = .8Classification Description Code Base Rate Payroll Adjusted Rate Premium

Concrete - Floor/Driveway 5221 .1261 $450,000 .10088 $45,405Carpentry - Multiple Family Dwel. 5651 .3970 $1,996,000 .31760$633,929

$2,446,000$679,334

Savings = $338,796 = 33%

3.75

3.50

3.00

2.75

2.50

2.00

1.75

1.50

Man

ual R

ate

MO

D R

ate

1.301.201.101.00 .90 .80 .75 .60

Below Average Accident

Rate

Average Accident

Rate

Above Average Accident

Rate



Company background• XYZ Manufacturing has been in business for about 15 years building components for and

assembling high-end quality constant temperature humidifiers for sale to research and medical laboratories. It produces and ships approximately 20 humidifiers daily which represents an average of $120,000 in sales. Annual business volume is $24 million

• The company employs 173 personnel with the following breakdown by position and hourly wages.

- 15 management ($35)

- 6 warehouse workers ($17)

- 20 fabricators ($21)

- 3 maintenance workers ($25)

- 122 production workers ($18)

- 7 administrative/accounting employees ($15)

• Annual Costs. Payroll $4.7 million; Benefits $2.3 million; Capital investment and facilities $2.2 million; materials/supplies $3.7 million; other $2.7 million.

• Net annual profit $1.2 million (5%)

• The Experience Modification Rate (MOD) is 1.05 and its SIC code is 3539.

• Premium rates are $3.15 per $100 payroll.

• Annual workers compensation premium: XYZ’s standard plan premium would be approximately $155,000/year. However they have elected to participate in the Retrospective Rating Plan with the hope of saving substantial costs. Under this plan they pay only $43,000 (28%) at the beginning of the year. They will also pay all claim costs (medical, lost time, partial permanent disability) plus 20% for actual losses accrued during the year.

Safety Costs at XYZ INC.In this case study exercise each group will analyze a scenario and use several financial tools and techniques to determine hazard(s) and their associated costs to the company, and develop, prioritize and justify corrective actions based on cost/benefit factors.

Instructions

1. Become familiar with XYZ, Inc. background information and your group’s assigned scenario.

2. Complete each assignment and stop for class discussion before starting the next assignment.

XYZ Inc.



Scenario #1: Worried in the warehouseBob Smith, a forklift driver in the shipping department reported to you that early this morning he was loading 24 temperature control units on to a pallet in the upper storage area of the warehouse when he leaned up against the guardrail and almost fell to the floor 12 feet below. The guardrail was of homemade 2x4 construction and been in a weakened condition for about three months. Due to a lack of space in the warehouse, the platform is the only area currently available for storing control units. Bob, along with three other warehouse workers must work in the upper storage area loading/unloading parts approximately once a week.

Scenario #2: Anxiety in AccountingJill Jones, one of XYZ’s managers and only accountant, reported that she was carrying a box containing monthly checks and financial reports down the stairs from her office to the admin department when she just about tripped over a stack of books that had been placed on one of the uppermost steps. Luckily, she was able to grab a hold of the banister to stop the fall. Several co-workers have expressed concern about people placing items on the stairs in the past to their safety committee representative, but nothing has been done yet about the problem.

Scenario #3: Help in the HoleWoody Badger, a new maintenance man informed you, the safety committee representative, that his last employer had an underground confined space similar to one at XYZ uses to store mixed waste chemicals. He reported that he had been directed to clean out the tank once the waste chemicals had been emptied by a disposal contractor. He wanted to know where the confined space permit was, and who was going to be the attendant. The maintenance supervisor informs you that he did not realize special procedures or test equipment was required, and since they’ve never had them before...why now, all of a sudden?



Scenario #4: Faint in fabricationFox Scully, a custodian in the manufacturing facility reported feeling dizzy while working with Chemical-X, a highly toxic chemical when in concentrate. Fox dilutes the chemical concentrate, which is stored in five-gallon containers, daily with water in a 55-gallon drum near the location where it is used in the fabrication area. He is unfamiliar with this new chemical and as he was mixing it he suddenly became quite dizzy and nearly fell over and spilled the container of concentrate. The 23-person fabrication department is responsible for forming and assembling covers and doors for all humidifiers.

Scenario #5: Pain in ProductionBilly Goetz, one of three production workers who work in production wiring and assembling circuit boards, is concerned about pain she is experiencing in both wrists. She has noticed more frequent and severe pain in her wrists. Within 20 minutes after beginning her normal task, the pain becomes noticeable. By the end of the morning she has to take frequent breaks due to the severity of the pain. She notified her supervisor on two separate occasions (three months and one month ago), but has not yet received any guidance. Your employer has assigned the safety committee to come up with recommendations with justification.

Scenario #6: Feeling “Funny” in FramingPhyllis O’Delphia, a worker in the framing section of the fabrication department just found out she is 3 weeks pregnant and is worried about the chemicals she uses to clean and coat the metal humidifier frames. She has, on occasion felt light-headed and had to leave work, and once she got a nasty rash on her right arm (unreported). She states that she’s not really worried about it, but doesn’t really know anything about the chemicals, and just wants to make sure. Through questioning her supervisor you learn she is using Chemical-X, a solvent which is toxic to the liver, and Chemical-Y, a lacquer coating which can cause eye damage.



Hazardous ConditionsDamage to ___ equipment ___ machinery ___ tools ____ materials

Moving parts: ___ rotating ___ cutting ___ reciprocating ___ transverse ___ pinching ___ punching ___ shearing ___ bending

Chemicals ___ toxic ___ flammable ___ explosive

Atmospheres ___ toxic ___ flammable ___ explosive ___ oxygen deficient

Electrical ___ cords ___ grounding ___ exposed circuits ___ other _____________

Temperature ___ cold ___ hot ___ variation ___ other _____________

Lighting ___ too little ___ too much ___ glare ___ other _____________

Noise ___ nuisance ___ excessive ___ continuous ___ intermittent

Location ___ at elevation ___ confined space ___ vehicle ___ water

Design ___ workstation ___ equipment ___ machinery ___ materials ___ guards

Other: _______________________________________________________________________________________

Exposure/Work PracticesNumber of employees exposed (may contact) hazards ____________

Frequency of exposure _____ continual ____/min ____/hr ____/shift _____/week _____/month _____/year

Duration of exposure _____ continual _____ mins ______ hrs _____ days _____ weeks

Work under stress _____ mental _____ physical Describe _____________________________________________

Nature of work: ___ piecework ___ prolonged standing/sitting ___ posture extremes ___ at elevation ___ confined space ___ other: Describe______________________________________________

Root Causes - Missing or Inadequate processesAccountability ___ Non-existent ___ Inconsistent ___ Consistent

Training ___ Little - None ___ General ___ Comprehensive

Supervision ___ Little- none ___ Occasional ___ Continual

Related Policies ___ Not addressed ___ Informal ___ Formal

Rules ___ None ___ Informal ___ Formal

Other: _________________________________________________________________________________________

Most probable outcome Accident type _________________________________________________________________________

Nature of Injury/Illness _________________________________________________________________________

Assignment One: Determine the nature of the Hazard



Determine Direct Costs - Budgeted Losses

• Additional workers compensation premium.

(medical $ _________ + time loss $___________ + permanent partial disability $__________) x 1.2

Determine Indirect Costs - Unbudgeted Losses

• Damage to equipment, machinery, materials, facility etc. Total $ _________

• Production downtime. Downtime ____ hrs. x Cost/hr $ ________ Total $ _________ (Due to emergency actions, damage, etc)

• Losses or costs from other sources Total $ ________ (Fire, explosion, chemical, emergency response, disposal, weather, etc.)

• Loss of product/services (Spoilage, defects, damage etc.) Total $ _________

• Demurrage. (Delays in shipment, filling orders). Total $ _________

• Additional overtime # Empl’s ____ x Avg. OT wages $ ________ x # Hrs. ______ = Total $ _________

• Supervisor lost time resulting from accident (inspections, accident investigation, meetings, admin, reports, etc.)

Salary $ ________ x # Hrs. $ _______ = Total $ _________

• Other managers’ lost time resulting from accident. (Inspections, meetings, admin, reports, etc.)

# Mgrs. ____ x Avg Salary $ ________ x # hrs. ______ = Total $ _________

Assignment Two: Determine the costs

1. Estimate (believable - best guess) direct and indirect costs for the resulting injury/illness if corrective actions are not taken.

2. Briefly list what factors you considered in arriving at your estimate in each area.

Total Estimated Direct Accident Costs $ _______________

What are the total estimated direct costs?



•Employees assisting with accident. (first aid, accident inv., clean-up, repairs)

# Empls ____ x Avg. Wage $ ______ x # hrs. _____ = Total $ _________

•Hiring and training replacement workers Total $ _________

•Wages of replacement workers # Empls. ______ x Avg. Wage $ ________ x # Hrs. ______ = Total $ _________

•Other non-productive time incurred by victim(s) # Hrs. _____ x Avg. Wage $ ________ = Total $ _________ (Medical follow-up appointments etc.)

•Potential OR-OSHA penalties Total $ _________ (Reference penalty schedule in appendix)

•Attorney fees # Hrs ____ x $200.00/hr Total $ _________

• Other ____________________________________________________________ Total $ ________

What is the ratio between direct and indirect costs in your scenario?

Indirect Costs = Direct Costs ____________ to 1

Direct Costs$ ________ + Indirect Costs $ __________ = $_________

Total Estimated Indirect Accident Costs: $ ________________

What are the total direct and indirect accident costs?

What are the total estimated indirect costs?



Risk = Exposure x Probability X Consequences

ExposureHow frequently is an employee placed in the physical or environmental danger zone.

(Multiply your rating by the number of employees exposed)

The hazard-event occurs: Rating

Continuously (or many times daily) 100

Frequently (approximately once daily) 50

Occasionally (from once per week to once per month) 10

Usually (from once per month to once per year) 5

Rarely (it has been known to occur) 2

Very rarely (not known of have occurred, but remotely possible) 1

Assignment Three: Prioritize Hazards

ProbabilityThe likelihood of injury or illness. Rating

Is the most likely and expected result if employee enters danger zone. 100

Is quite possible, would not be unusual, has an even 50/50 chance. 10

Would be unusual sequence or coincidence 5

Would be remotely possible coincidence. It has been known to have happened 3

Extremely remote but conceivably possible. Has never happened after many years of exposure. 2

Practically impossible sequence or coincidence. A “one in a million” possibility. Has never happened in spite of exposure over many years. 1

Number of employees exposed ______ x rating ______ = score _________

Number of employees exposed ______ x rating ______ = score _________



Risk Score = E _______ x P _______ x C _______ = ________

Risk Scores for scenarios

Scenario #1 = __________________Scenario #2 = __________________ Scenario #3 = __________________ Scenario #4 = __________________Scenario #5 = __________________ Scenario #6 = __________________

Using the information from the three charts above and the risk score equation, determine the risk associated with your scenario.

Consequences The most likely result - degree of Severity of Consequences Rating

Major Catastrophe: Numerous fatalities; extensive damage (over $1M); major disruption 1000

Several fatalities; damage $500K to $1M 600

Fatality; damage $100K to $500K 200

Extremely serious injury; (amputation, permanent disability); damage $1,000 to $100,000 40

Disabling injuries; damage up to $1,000 20

Minor cuts, bruises, bumps; minor damage 1



Engineering controls - redesign, replace, enclose...Immediate corrective actions. Accomplished by designing or replacing materials, chemicals, machinery, equipment, tools, or workstation. Describe corrective actions below:

Option 1: ______________________________________________________________

________________________________________________________________________

Estimated Costs: Down Time _________ Materials _________ Labor __________

Option 2: ______________________________________________________________

________________________________________________________________________


Long-term corrective actions. Address root causes that have contributed to hazardous conditions. Accomplished by developing or improving procedures and policies for design, replacement, and purchasing.

Option 1: ______________________________________________________________

________________________________________________________________________


Option 2: ______________________________________________________________

________________________________________________________________________


Assignment Four: Develop corrective actions



Management controls - revise procedures, schedules...Immediate corrective actions. Accomplished by developing safe individual work practices, procedures, and schedules. Includes the use of personal protective equipment (PPE).

Option 1: ______________________________________________________________

________________________________________________________________________


Option 2: ______________________________________________________________

________________________________________________________________________


Long-term corrective actions. Address root causes. Accomplished by addressing related operating related programs, plans, directives, policies and rules that allow unsafe work practices.

Option 1: ______________________________________________________________

________________________________________________________________________


Option 2: ______________________________________________________________

________________________________________________________________________


Total Investment $__________________________

What is the total investment?



Business Volume = $ ___________ = $ __________ .05*

ROI = $ ___________ X 100 = __________ % $ ___________

What’s XYZ’s return on our investment going to be?

Return on Investment

Percent ROI = Total Estimated Direct/Indirect Accident Costs Total Investment

Business volume required to cover cost

Volume = Total Estimated Direct/Indirect Accident Costs Profit Margin

Assignment Five: Determine the costs and benefits

How much product or service will XYZ have to sell to pay for the accident costs?

*XYZ’s profit margin is 5% or .05



Payback Period = $ __________ = _______ Years $ __________

How many humidifiers will XYZ have to manufacture to pay for the accident costs?

Units required to cover costs

Units Required = Business Volume Unit Selling Price

Units Required = $ ____________ = _____________

$____________

How long will it take to get our money back from the investment?

Payback Period

Payback Period = Total Investment Total Estimated Accident Costs

(x 12) (x 52) (x 365)

= _______ Months = _______ Weeks = _______ Days



Assignment Six: Determine adjusted profit margin

What will be the impact on XYZ’s profit margin if management does not take action on these hazards?

Total estimated accident costs for all scenarios

Scenario #1 = $ __________________Scenario #2 = $ __________________ Scenario #3 = $ __________________ Scenario #4 = $ __________________Scenario #5 = $ __________________ Scenario #6 = $ __________________

Total $ __________________

Annual net profit $ 1,200,000

Total accident costs - $ __________________

Adjusted net profit = $ __________________

Adjusted net profit margin

Adjusted Net Profit (ANP)Annual Business Volume (ABV)

$ ___________________= .0____

$24,000,000 = ________ %

Bottom line risk management

Engineering

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