Chapter 9

Chapter 9
Managing risk and

recovery
Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved
This chapter examines managing risk and
recovery
Key questions
▪ What is risk management?

▪ How can operations assess the potential causes
and consequences of failure?
▪ How can failures be prevented?
▪ How can operations mitigate the effects of failure?
▪ How can operations recover from the effects on
failure?
What is risk management?
What is risk management?
Overview
▪ No matter how much effort is put into improvement,
all operations will face risk and occasionally
experience failures
▪ In a world where the sources of risk and the
consequences of failure are becoming increasingly
difficult to handle, managing risk is a vital task
What is risk management? (cont.)
Failure
▪ Things happen in operations, or to operations, that
have negative consequences; this is failure
▪ Failure will always occur in operations
▪ Recognizing this does not imply accepting or
ignoring it
Definition
▪ Risk management is about identifying things that
could go wrong, stopping them going wrong,
reducing the consequences when things do go
wrong, and recovering after things have gone wrong
Characteristics
▪ Although operations managers do generally attempt
to minimize both the likelihood of failure and the
effect it will have, the methods of coping with failure
will depend on how serious its consequences are,
and how likely it is to occur
How failure is managed depends on its
likelihood of occurrence and the negative
consequences of failure
Characteristics (cont.)
▪ Resilience is governed by the effectiveness of
failure prevention, mitigation and recovery
Risk management involves failure
prevention, mitigating the negative
consequences of failure, and failure
recovery
Characteristics (cont.)
▪ Risk management consists of four broad activities:
• (i) understanding what failure could occur
• (ii) preventing failure occurring
• (iii) minimizing the negative consequences of
failure, and
• (iv) recovering from failures when they do occur
How can operations assess the
potential causes and
consequences of failure?
How can operations assess the potential
causes and consequences of failure?
Overview
▪ The first stage of risk management is to understand
the potential sources of risk
▪ This means assessing where failure might occur
and what the consequences of failure might be
causes and consequences of failure? (cont.)
Identify the potential causes of failure

▪ There are several causes of failure including:
• (1) supply failure
• (2) human failures
• (3) organizational failure
• (4) technology/facilities failures
Identify the potential causes of failure (cont.)

• (5) cyber security
• (6) product/service design failures
• (7) Customer failures, and
• (8) Environmental disruption
The sources of potential failure in
operations

▪ (1) Supply failure
• It is any failure in the timing or quality of goods
and services delivered into an operation

▪ (2) Human failures
• There are two broad types of human failure:
✓ key personnel leave, become ill, die, or in some
way cannot fulfil their role, and
✓ people are doing their job but are making
mistakes

▪ (3) Organizational failure
• It is usually taken to mean failures of procedures
and processes and failures that derive from a
business’s organizational structure and culture

▪ (4) Technology/facilities failures
• Technology and facilities mean all the IT systems,
machines, equipment and buildings of an
operation. All are liable to failure, or breakdown

▪ (5) Cyber security
• It is defined as any risk of financial loss, disruption
or damage to the reputation of an organization
from some sort of failure of its information
technology systems’

▪ (6) Product/service design failures
• In its design stage, a product or service might
look fine on paper; only when it has to cope with
real circumstances might inadequacies become
evident

▪ (7) Customer failures
• Customers may “fail” in that they misuse products
and services

▪ (8) Environmental disruption
• It includes all the causes of failure that lie outside
of an operation’s direct influence
Post-failure analysis
▪ Although sources of failure can often be identified in
advance of their occurrence, it is also valuable to
use previous failures to learn about sources of
potential risks.
▪ This activity is called post-failure analysis
Post-failure analysis (cont.)

▪ This includes such as activities as the following:
• accident investigation
• failure traceability
• complaint analysis, and
• fault-tree analysis
Fault-tree analysis for failure to replace filter
when required
Likelihood of failure
▪ Estimates of failure based on historical performance
can be measured in three main ways:
• (1) failure rates
• (2) reliability, and
• (3) availability
Likelihood of failure (cont.)

▪ (1) Failure rates
• It is calculated as the number of failures over a
period of time

▪ (2) Reliability
• It measures the ability to perform as expected
over time

▪ (3) Availability
• It is the degree to which the operation is ready to
work
Bath-tub curves
▪ Failure over time is often represented as a failure
curve
▪ The most common form of this is the so-called
“bath-tub curve” which shows the chances of failure
as being greater at the beginning and end of the life
of a system or part of a system
Bath-tub curves for three types of process
Failure mode and effect analysis

▪ Having identified potential sources of failure and
having then examined the likelihood of these failures
occurring through some combination of objective
and subjective analysis, managers can move to
assigning relative priorities risk
Failure mode and effect analysis (cont.)

▪ Failure analysis mechanisms include accident
investigation, product liability, complaint analysis,
critical incident analysis, and failure mode and effect
analysis (FMEA)
Procedure for failure modes effects analysis
(FMEA)
How can failures be prevented?
How can failures be prevented?
Overview
▪ Failure prevention is an important responsibility for
operations managers
▪ The obvious way to do this is to systematically
examine any processes involved and “design out”
any failure points
How can failures be prevented? (cont.)
Overview (cont.)
▪ There are three further approaches to reducing risk
by trying to prevent failure:
• (1) building redundancy into a process in case of
failure
• (2) “fail-safeing” some of the activities in the
process, and
• (3) maintaining the physical facilities in the
process
(1) Redundancy
▪ It is an important failure prevention method,
especially when the consequences of failure could
be serious
▪ Building in redundancy to an operation means
having back-up systems or components in case of
failure
(2) Fail-safeing
▪ The idea is based on the principle that human
mistakes are to some extent inevitable
▪ Simple methods of fail-safeing can often be the
most cost effective
(3) Maintenance
▪ It is how organizations try to avoid failure by taking
care of their physical facilities
▪ It is an important part of most operations’ activities
particularly in operations dominated by their physical
facilities such as power stations, hotels, airlines and
petrochemical refineries
How can operations mitigate the
effects of failure?
How can operations mitigate the effects of
failure?
Overview
▪ Failure mitigation means isolating a failure from its
negative consequences
▪ Mitigation can be vital when used in conjunction with
prevention to reduce overall risk
▪ It is as series of decisions under conditions of
uncertainty
failure? (cont.)
Failure mitigation actions

▪ The nature of the action taken to mitigate failure will
obviously depend on the nature of the risk
▪ Risk mitigation actions include:
• (1) mitigation planning
• (2) economic mitigation
• (3) containment
• (4) loss reduction, and
• (5) substitution
failure? (cont.)
Failure mitigation actions (cont.)

▪ (1) Mitigation planning
• This is the activity of ensuring that all possible
failure circumstances have been identified and
the appropriate mitigation action identified
failure? (cont.)

▪ (2) Economic mitigation
• This includes actions such as insurance against
failure, spreading the financial consequences of
failure, and hedging against failure
failure? (cont.)

▪ (3) Containment
• (i) Containment (spatial): This means stopping
the failure physically spreading to affect other
parts of an internal or external supply network
• (ii) Containment (temporal): This means
containing the spread of a failure over time
failure? (cont.)

▪ (4) Loss reduction
• This covers any action that reduces the
catastrophic consequences of failure by removing
the resources that are likely to suffer those
consequences
failure? (cont.)

▪ (5) Substitution
• This means compensating for failure by providing
other resources that can substitute for those
rendered less effective by the failure
How can operations recover
from the effects of failure?
How can operations recover from the effects
of failure?
Overview
▪ Failure recovery is the set of actions that are taken
to reduce the impact of failure once the customer
has experienced its negative effects
▪ Successful failure recovery can yield more benefits
than if the failure has not occurred
of failure? (cont.)
Overview (cont.)
▪ Recovery needs to be planned and procedures put
in place that discover when failures have occurred,
guide appropriate action to keep everyone informed
capture the lessons learnt from the failure, and plan
to absorb lessons into any future recovery
▪ All types of operation can benefit from well-planned
recovery
of failure? (cont.)
The complaint value chain

▪ The complaint value chain helps to visualize the
potential value of good recovery at different stages
Complaint value chain (a) initial value chain
and (b) with small improvements to each
step
of failure? (cont.)
Failure planning
▪ Organizations need to design appropriate responses
to failure that are suitably aligned with the cost and
the inconvenience caused by the failure to their
customers
of failure? (cont.)
Failure planning (cont.)

▪ The stage models include:
• (1) Discover
• (2) Act
• (3) Learn, and
• (4) Plan
Recovery sequence for minimizing the
impact from failure
of failure? (cont.)

▪ (1) Discover
• The first thing any manager needs to do when
faced with a failure is to discover its exact nature
of failure? (cont.)

▪ (2) Act
• If the failure is a severe one with important
consequences, we need to move on to doing
something about it quickly
of failure? (cont.)

▪ (3) Learn
• In failure planning, learning involves revisiting the
failure to find out its root cause and then
engineering out the causes of the failure so that it
will not happen again
of failure? (cont.)

▪ (4) Plan
• Operations managers need formally to
incorporate the lessons into their future reactions
to failures
Thank You!

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Managing risk and

▪ What is risk management?

Identify the potential causes of failure

Identify the potential causes of failure (cont.)

Identify the potential causes of failure (cont.)

Identify the potential causes of failure (cont.)

Identify the potential causes of failure (cont.)

Identify the potential causes of failure (cont.)

Identify the potential causes of failure (cont.)

Identify the potential causes of failure (cont.)

Identify the potential causes of failure (cont.)

Identify the potential causes of failure (cont.)

Post-failure analysis (cont.)

Likelihood of failure (cont.)

Likelihood of failure (cont.)

Likelihood of failure (cont.)

Failure mode and effect analysis

Failure mode and effect analysis (cont.)

Failure mitigation actions

Failure mitigation actions (cont.)

Failure mitigation actions (cont.)

Failure mitigation actions (cont.)

Failure mitigation actions (cont.)

Failure mitigation actions (cont.)

The complaint value chain

Failure planning (cont.)

Failure planning (cont.)

Failure planning (cont.)

Failure planning (cont.)

Failure planning (cont.)

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