Business risk management strategies and implementation

Risk Management

Operational risks tend to focus on employees, and finding ways to ensure that employees are not a source of reduction in the wealth of the company. Among the operational risks that were identified in Horcher (2005) were those related to training, fraud, theft, as well as managing exposures to certain risks that arise in the course of operations. There have been many examples of operational failures over the years. While most fraud is going to occur at the highest levels of the organization (i.e. Enron), in other companies operating issues have been the problem.

One such instance was with Subway, which faced a salmonella outbreak in the UK (Poulter, 2008) in a major outbreak, but has also faced similar situations in Canada (Mickleburgh, 2011), and the U.S. As well (Blau, 2012; Falkenstein, 2010). Food poisonings increase the risk of legal action that could devastate franchisees and can have a strongly negative impact on the brand as well. Yet, they seem to happen quite frequently over at Subway.

Food poisoning is usually a training & handling issue. Occasionally, it can be traced to a supplier, but again to training and handling issues within the supply chain. The CDC estimates that each year 1 in 6 Americans gets sick from eating food, so in that sense given the number of meals Subway serves its track record might not be statistically horrible, but clearly this is something that can and should improve, because the brand depends on it. An estimated 3000 Americans die each year from foodborne diseases. The CDC notes that foodborne illness arises when bacteria are allowed to grow, which happens inside food, especially meat and leafy vegetables, on cutting services, or on the hands of food workers (CDC, 2014). Where Subway's supply chain risk is a different issue, the operational risk associated with workers failing to adhere to basic sanitation standards is an entirely preventable operational risk.

There are several ways for management to mitigate this risk. First, the organizational structure of Subway must be taken into consideration. Individual stores are owned by franchisees. The franchisees will get some training manuals from head office, but Subway also prefers to work with experienced franchisees, so a lot of the training is simply left to the franchise owner. So the first step for Subway is to ensure that there are strict training standards, and that franchisees agree to follow them. This is a step that can mitigate the legal risk for Subway, ensuring that the franchise owner bears most of the risk associated with operations.

For the franchise owner, mitigating this risk starts with establishing standards, if Subway has not already provided them. It is recommended that the standards are stricter than local food handling standards. Working to the minimum standards is cheaper in the short-run, but it also means that any failure results in the company being at risk. So the first step is to establish clear standards.

The second step is with the job descriptions. Safe food handling cannot simply be the job of one or two people, but everybody. Therefore, employees need to have a certain degree of empowerment over food safety issues, so that they can always make the right decisions The third step is training, so that everyone who works at Subway has a high level of training as to their expectations. Arguably, safety has to be a point of training emphasis, even more than other aspects of the job, because the downside risk is that much more serious. It is important that employees can successfully identify the risk factors -- for example that bad food doesn't always smell bad.

In this, and the supervisory aspect, there should be lead and backups in terms of enforcement. At all times, there should be two people who are not only trained on safety but who directly are instructed to conduct audits/inspections at regular intervals. This is a job for the entire team, yes, but with senior people taking extra responsibility. The multiple layers of responsibility will prevent incidents from occurring.

Periodic audits, either from the franchisee (who probably owns several franchises) or head office, will help to ensure that there is a higher level of enforcement, especially when coupled with severe internal penalties. Where there is a high risk that issues will be found and dealt with at the corporate level, there is that much higher level of motivation within the company.