Safety first: Proving the business value of safety
June 12, 2009
By Lyle Masimore
It is estimated that workers in Canada suffer approximately 1,800 critical injuries and more than 80 deaths a year associated with the operation and maintenance of machinery, according to the Canadian Standards Association. And in the United States, the Occupational Safety and Health Administration reports that six million workers suffer from non-fatal workplace injuries each year, resulting in an annual cost of more than $125 billion US to businesses. Even with this data, proving the value of a safety system is an ongoing challenge for safety professionals and risk managers. Many find it difficult to financially justify the discretionary investments in safety-related assets and training intended to reduce work-related injuries and insurance premiums.
Generally, personnel in a manufacturing facility have to monitor much of their own safety. They also must be aware of how they are affected by the at-risk behaviours of co-workers. With noise, numerous machines and a handful of people on the plant floor, one mistake can result in a serious incident causing injury and wreaking havoc on production.
With an upfront investment in safety programs and safeguarding systems, the financial and employee impact of incidents that occur on the plant floor can be significantly reduced. Management and financial representatives of the company need to be aware of the consequences of an ineffective safety solution.
Reducing workers’ compensation
One of the most beneficial programs is machine safety because it proactively prevents injuries from occurring, thus reducing workers’ compensation claims and production downtime due to accident investigations. Because workers’ compensation programs affect the timing of cash flow, it is important to reduce the frequency and severity of employee claims to minimize premiums. In addition, reduced claim frequency and severity is related to deductible and self-insured plans, resulting in companies realizing the financial consequences sooner with a faster impact on cash flow.
The largest component of a company’s risk is usually the workers’ compensation premium. The four major drivers of this premium are payroll, employee job classifications, facility location and claim experience. With effective machine safety and training, at-risk behaviours and near misses can be reduced, decreasing the chance of an injury or fatality occurring.
Because of their measurable financial impact, claims and insurance premiums are considered direct costs associated with employee injuries. The indirect costs of injuries – such as overtime to offset loss of employee or additional time to make up production, management/supervisory time to investigate and manage claims, damage to reputation, poor employee morale and strained labour relations – are implicit to their financial and operational impact and usually do not have a set rate assigned to them. Indirect costs are difficult to determine on a company’s income statement, unlike insurance premiums. Liberty Mutual’s 2001 Survey revealed that these indirect costs are three to five times greater than direct costs. The result is that even though the upfront costs of safety may appear to be expensive, in the long run these investments increase safety in the workplace while lowering the risk of the indirect costs that ultimately pose more harm to a company’s financial performance.
Measuring potential savings
When calculating return on investment or internal rate of return, it is important to incorporate expected reduced claim frequency and severity from machine safety solutions. The company risk manager or safety professional should be the historian for detailed employee injury and claim information. Although a five-year history is ideal, three years is sufficient. When reviewing this information, it is important to identify claims that reasonably would have been avoided if a safety investment were in place. These claims will be useful in an internal audit or other finance function to justify assumptions. Your company may also track near misses, because it indicates exposure to risk. The finance department may require a capital project to exceed a certain threshold, such as a 20 percent internal rate of return or three-year payback.
Achieve financial benefits of safety
By including both direct and indirect costs in calculating the value of safety investments, it is easy to see the significant financial benefits of implementing a proactive safety program as an integral part of your Lean manufacturing strategy. Here are some tips:
Work with your safety and risk management departments. These knowledgeable resources can add credibility to a safety investment analysis. During an internal audit or other assessment, a financial planning analyst may require additional information to support assumptions and data. If a reference can be made to these departments’ support of the investment, the plant or business unit is more likely to support the investment.
Leverage the Lean manufacturing movement. A comprehensive safety strategy utilizing standard processes, and well-designed and integrated machine safety systems can significantly improve productivity. For example, by reducing over-production, processing, inventory and motion, management can implement Lean manufacturing principles while reducing risk and employee injuries. It is important to involve production and staff employees. They can improve productivity and safety as it affects their jobs.
Consider corporate governance issues. Senior management and the board of directors may insist that line management formally evaluate safety systems. They may need hard evidence of why investing in a safety program is essential to the health of the company. In addition, they also will want to understand how this affects the company’s other facilities. Although savings and investment payoffs will vary by country because of the different legal and workers’ compensation systems, the importance of safety remains unchanged. Seek the expertise of a consultant or manufacturer for more information before making a decision. W
Lyle Masimore is the business manager for Rockwell Automation’s Safety Business.
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