This studied the effects of operational and financial slack on occupational safety (OSHA safety violations), by evaluating performance of 3945 publicly listed companies in the US.
Slack is defined as a pool of resources in an organisation in excess of the minimum to produce a given output. It includes different levels, including financial slack and operational resources and capacities and further sub-categories of financial slack.
Lower slack has been linked to impaired safety performance, but higher slack if not employed strategically is also less efficient. Also studied is the impact on coupling (being the inter-connectedness between the system components). Higher slack may help offset negative safety implications of coupling.
Providing background:
- Slack can provide organisations with opportunities to develop new products or enter new markets, or it can also be indicative of a financial burden due to inefficiencies
- Reducing operational slack “harms workers”, with one paper showing that a 1% increase in capacity utilisation (a decrease in operational slack) in USA manufacturing is associated with a .69% increase in workplace injuries
- Slack has two dimensions: excess input or resources and unexploited opportunities. Drawing on coupling from Normal Accident Theory, the authors hypothesise that lower slack will lead to tighter coupling and workload/stress, and thereby negatively affect risk
- Firms with larger buffers of financial slack would have resources to potentially mitigate negative safety implications of tighter coupling
- One study suggested that the inflection point of reducing slack to the point where financial performance is not further enhanced is fairly close to the productivity frontier. That is, on some slack indices, “at most about 10% of the firms in their sample would see improvements from increasing slack”
- Financial slack has been categorised into unabsorbed slack (available slack), absorbed slack (recoverable slack) and unborrowed slack (potential slack). Unabsorbed slack are readily available and the most liquid form of financial slack. Unabsorbed slack, like financial reserves, are less liquid, but have been accumulated and can be easily deployed at short notice. Absorbed slack are non-liquid resources that the firm has accumulated above and beyond the necessary requirements. This could be employing additional workers or having excess equipment. Unborrowed slack are future resource that could be raised if needed (e.g. raising debt levels). This is the least available and least re-deployable financial slack
- They argue that “In a firm without slack resources solving a safety problem will require taking resources from production”
Results
Results found that “decreasing operational slack harms workers and that this effect is mitigated when firms hold higher levels of financial slack” (p.30).
Increasing coupling by reducing operational slack leads to higher levels of safety violations. Increasing financial slack can attenuate the impact of tightly coupled operations on safety violations.
Data indicated that when firms have low levels of financial slack, decreasing operational slack lead to an increase in violations. Conversely, firms with high levels of financial slack can reduce operational slack without harming the workforce.
Reducing slack and increasing coupling reduces the reliability of the work environment. Reducing slack puts more pressure on workers by intensifying workload, work rates etc at the same time as removing safety buffers to “smooth over demand uncertainties and volatility” (p.41). Once buffers are removed, the “volatility is directly transferred to the workforce that has to deal with the volatility” that they “are not sufficiently trained for” (p41).
Further, market characteristics play a strong role, intensifying the impact of tightly coupled operations on safety violations. A higher probability of having a safety violation due to coupling was found when market conditions were characterised by high dynamism (market volatility & uncertainty), complexity (competitiveness & heterogeneity) and munificence (supporting continuous growth). These factors influence decisions about “optimal” levels of slack.
Authors note that the right level of slack to fully protect workers isn’t the level of slack to maximise profits; highlighting ongoing trade-offs. Although trade-offs exist, organisations can be both reliable, safe and efficient, but to simultaneously protect workers and improve efficiency by reducing operational slack, they may also need high levels of financial slack.
Moreover, financial slack and operational slack are different and complimentary. Financial slack is seen as a flexible buffer, whereas operational slack is a hard investment to change or redeploy. Firms with higher operational capabilities can better withstand economic downturns, but “these capabilities need to be built in periods of growth” (p42).
That is, reductions in slack are best done when they are least likely to be considered.
Finally, these results suggest that “managers of firms with limited financial slack need to explore alternative means of operational performance improvement other than cost reductions” (p.42).
Authors: Frank Wiengarten, Di Fan Chris K.Y. Lo Mark Pagell, 2017, Journal of Operations Management
Study link: http://dx.doi.org/10.1016/j.jom.2016.12.001
Link to the LinkedIn post: https://www.linkedin.com/pulse/differing-impacts-operational-financial-slack-safety-ben-hutchinson
SafetyInsights.org 