Enterprise Risk Management (ERM) provides organizations with a plan to assess and prepare for any risks that can interfere with the company’s goals. These risks can include dangers inherent in the industry, potential hazards and natural disasters.
ERM essentially defines the worse-case scenario and then develops a plan to deal with that scenario. An ERM plan requires businesses to prioritize risks and decide which ones they will actively manage. It’s something used across almost every industry, from healthcare and finance to construction and international development.
Six Sigma can play a role in making ERM plans more effective and successful.
ERM and Six Sigma Share Similar Goals
Both Six Sigma and ERM deal with many of the same issues. Both seek to improve systems through the application of data analysis and tools that identify potential errors and waste that can present risks to success. Both also deal with a certain degree of uncertainty.
Many of the tools used in Six Sigma help make corrections to a process and measure the results over time. This approach can prove useful for ERM in measuring whether improvements made to mitigate risk are working.
A study for ERM in the entertainment industry by researchers in the United Kingdom and Saudi Arabia, as well as research done by the Six Sigma Institute, offer ideas for Six Sigma tools that apply to ERM.
Pareto Chart
In most cases, 80% of problems are due to 20% of the causes. A Pareto Chart breaks down the most important factors. For example, in the entertainment industry study, researchers used the chart to determine what hazardous events most often occur while staging a production.
Root Cause Analysis
A variety of tools can help a team find the root cause for different issues. They include the Five Whys and a Cause and Effect Diagram. These tools allow teams to peel back the layers of an operation until they find the source of an issue. Again, using the entertainment industry study, a team might determine what causes strobe lights to smoke or a fire to ignite on a set. Causes typically include lack of proper training or malfunctioning equipment.
Failure Mode Effects Analysis
Once frequent risks and their root causes have been identified, the use of Failure Mode Effects Analysis (FMEA) can help determine which potential risks are the most serious. A project team lists potential risks, the estimated impact if they should occur, and then ranks them by severity. This helps to determine which potential risks should be prioritized.
Voice of the Customer
Lean and Six Sigma use Voice of the Customer to determine what is most important to the customer. In some cases, a Critical to Quality Tree can determine customer needs. This also can apply to prioritizing risk. By using Voice of Customer, teams can determine what risks most threaten aspects of a product or service that is most important to the customer.
Poka-Yoke
The idea behind poka-yoke – derived from the Japanese that essentially means to avoid errors – is to mistake proof a process. As part of risk assessment and the institution of new processes to manage risk, the ideas behind poka-yoke can serve as a guideline. Poka-yoke calls for adherence to three basic ideas: shutdown a process immediately upon the occurrence of a failure, eliminate the occurrence of failure and proactively stop a process when signs of future failure become apparent.
As applied to risk management, poka-yoke establishes that it is not enough to know the most common risks and their root causes, but also the potential signs that indicate a failure is on the horizon.
These Six Sigma concepts and tools can help improve ERM. That’s an important idea to consider in a time when risks seem to be multiplying.
