Operational Safety: An investment in Disguise

Published by MBA Skool Team, Published on July 07, 2013

From the Bhopal Gas Tragedy, India (1984) to the Fukushima Daiichi Nuclear Disaster, Japan (2011) and from the Piper Alpha Disaster, Scotland (1988) to the West Fertilizer Company Explosion, USA (2013) it has been proved time and again how important operational safety is for an organisation not only in terms of the tangible losses like human lives and organisation infrastructure but also intangible losses like organisation reputation and brand value. It was not surprising how the brand value of Union Carbide Corporation had a steep fall after the Bhopal Gas Tragedy and Warren Anderson, CEO, UCC was arrested and later charged with a culpable homicide case by the Chief Judicial Magistrate of Bhopal in 1986. The fire tragedy at AMRI hospital (2011), Kolkata occurred mainly due to safety loopholes in operations and non-compliance to safety standards of National Building Code. It enforced charges of culpable homicide on the board of directors and the license of the hospital was revoked after the incident. 


Safety Pays   

Businesses spend around $170 billion a year on costs associated with occupational injuries and illnesses which come straight from the organisation profits. But workplaces with proper safety and health management systems can reduce their illness and injury costs by 20% - 40%. [Source: www.osha.gov ]

Accidents are more expensive than it apparently looks. Some costs like compensation claims which cover medical costs for an injured worker, equipment damage and compliance violations are quite obvious but what we tend to forget are costs to train and compensate a replacement worker, repair damaged property, and investigate accident causation and to maintain insurance coverage. Even less apparent are the costs associated with increased absenteeism, reduced morale of the workers, costs pertaining to scheduling delays, third party liability and legal costs, dip in brand equity of the organisation and poorer customer relations. These indirect costs are not so obvious until we take a closer look.

A study made by Stanford University, Department of Civil Engineering done for Occupational Safety and Health Administration (OSHA) shows that the ratio of indirect costs to direct costs varies widely from 1:1 to a massive 20:1.

Whenever there is an accident the organisation needs excess sales in order to compensate the accident cost or to maintain the profit margin. In this case Sales required to pay for an accident= (Total Accident Costs/Profit Margin) . For example, if the total cost of accident is $1000 and the profit margin for the organisation is 1% the excess sales in order to recover the loss would be $1,00,000. 

Safety in Financial Sustainability

Safety forms one of the pillars of financial sustainability of an organisation by reducing operating risks thereby diminishing the probability of lost man-days due to accidents and minimizing attrition rates. This in turn means higher productivity and higher sales percentage for a company which directly translates into financial benefits. In the longer run it means firm positioning of the company in the market and sustaining even bad global economic conditions. For example Borealis, the European chemical and fertilizer company transformed its safety programme for operational excellence only to reduce its Total Recordable Injuries (TRI) from 16.3 in 1996 to 1.9 in 2005. This in turn gave the company 11% of the capital employed after tax deduction showing continuous profit despite a challenging economic climate[Source: http://www.pressreleasefinder.com].

WordPro Cabinetry in Cabool, Missouri saved $42,000 in workers compensation costs by bringing its injury rates down by ergonomic optimisation in its conveyer system[Source: www.osha.gov]. Limbach Facility Services, the US based construction company, in 2004 had a horrific worksite fatality which weakened the morale of the workers from which Charlie Bacon, CEO of mechanical design construction and service contractor reinvigorated the workforce and established an award winning safety programme. In 2004 Limbach suffered 94 claims with net payables of $1.5 million which came down to 32 claims and $170,000 in net payables in 2011 with the initiation of the Incident and Injury Free (IIF) programme by Bacon[Source: http://www.masonandmasoninsurance.com].


An average eye injury costs a company around $1463 [Source: www.osha.gov] while a pair of safety goggles costs around $3. Safety implementations should be proactive and specific tools like HAZOP, Hazard Identification and Risk Assessment(HIRA), Failure Mode Effect Analysis (FMEA) etc  should be used along with regular safety audits to prevent industrial disasters, fatality or  injury. A written safety programme with proper emphasis on Behavior Based Safety (BBS) reduces most of the incidents as 88% of the accidents are caused due to unsafe acts [Source: Industrial Accident Prevention by W.H. Heinrich]. Workers should be encouraged for incident reporting and incentives should be given for the same to keep them motivated. Incorporation of a proper safety programme in the business model not only makes a good business sense  but keeps the organisation ahead in the competitive markets.

The article has been authored by Debanjan Nag, NITIE Mumbai.

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