Why Safeguarding Makes Dollars and $ense

Aug. 22, 2003
A software tool from OSHA dramatically illustrates the financial sense in investing in safety.

by Joseph J. Lazzara

Why should you safeguard your processes and machinery? According to a recent poll by the Liberty Mutual Group, 61 percent of executives claim for every dollar spent on investments in workplace safety, $3 are saved. OSHA's Office of Regulatory Affairs provides similar, although even more encouraging results, suggesting $4 to $6 saved for every $1 invested. Furthermore, 95 percent of executives in Liberty Mutual's poll believe workplace safety has a positive impact on a company's financial performance. The extent of the bottom line impact can be surprising.

Consider, at first, the negative effects and shock of having an employee injured on the job. There are direct costs, such as medical expenses and compensation payments to the injured worker. Next, there are indirect costs, which include lost production and productivity, OSHA fines, the replacement of damaged goods and equipment, training and higher workers' compensation costs. The poll by Liberty Mutual also revealed that 40 percent of the executives reported that $1 spent on direct costs generates from $3 to $5 of indirect costs. So consider that an accident with direct medical and compensation payments of $15,000 will likely cost between $45,000 and $75,000 more in indirect cost. Now consider this: Indirect costs account for the majority of the accident expenses and are typically not covered by insurance!

Estimating Injury Costs

It is difficult to estimate the financial costs in advance of an injury. Fortunately, OSHA is now providing assistance predicting the costs of an accident through a free "$afety Pays" software program, which is part of OSHA's eTools and Electronic Products for Compliance Assistance.

$afety Pays is an interactive software program developed by OSHA to help employers in assessing the potential economic impact of occupational injuries and illnesses on their profitability. The program will calculate estimates of the average direct costs of an injury or illness and the indirect costs. On an interesting financial note, by employing user-supplied information on a company's profit margin, the program will project the amount of sales a company would need to generate in order to cover those costs resulting from the injury or illness. The $afety Pays program uses actual insurance company claims data, combined with an expert system to assess the financial impact.

Using $afety Pays

Using the $afety Pays program is simple. After downloading the program from the OSHA Web site (http://www.osha.gov/dts/osta/oshasoft/safetwb.htmlwww.osha.gov/dts/osta/oshasoft/safetwb.html), install it on your PC. After the installation is complete, the program no longer requires Internet access. The system then prompts users for information to do the analysis, offers choices from a set of lost work day injuries and illnesses (it even includes definitions), and creates a summary report of the estimated costs and the resulting new sales needed to cover the cost of the injury or illness.

The results of the OSHA calculations are staggering. Looking at a simple example, assume that Company A has annual sales of $10 million with an 8 percent pre-tax profit margin. The cost of a single injury due to an amputation (a very possible injury found in facilities using any type of power press machine) is estimated to be:

Average Direct Cost: $21,718

Average Indirect Cost: $23,890

Estimated Total Cost: $45,608

The additional sales necessary to cover:

Indirect Costs are: $298,625

Total Costs are: $570,100

In this example, the next 6 percent of sales growth will go solely to pay for the total cost of the accident. Is business slow? If your pre-tax margins are less, the sales impact is even greater!

Now consider a less severe injury, such as a laceration. Using the same company data, the total costs of this injury are $6,055, while the incremental sales needed to cover the costs are $75,688.

The $afety Pays software calculations, in my opinion, are generously conservative. In this example, you will note the ratio of indirect-to-direct costs are nearly 1:1, much less than the Liberty Mutual poll estimates of up to 5:1. A recent study by the American Society of Safety Engineers (ASSE) indicates the ratio of indirect to direct costs to be much higher, as much as 8:1.

Scientific Technologies Inc. (STI) is the largest supplier of machine safeguarding equipment in the United States, providing such products for 25 years and yet, the question of cost never fails to be a major stumbling block for the customer. The cost of retrofitting a power press with state-of-the-art safety equipment and controls compliant to today's safety standards will generally range from $5,000 to $15,000, depending on the age, type and capability of the machine.

It is apparent that preventing even a single accident more than pays for the safety equipment many times over. When you add worker satisfaction and positive workplace attitude into the mix, it becomes obvious that an investment in workplace safety makes good dollars and sense!

Joseph J. Lazzara is president and CEO of Scientific Technologies Inc (STI), the largest provider of automation safeguarding solutions in North America (www.sti.com). He has a bachelor of environmental engineering degree from Purdue University and a masters in business administration degree from Santa Clara University. He is chairman of the Safety, Health and Environmental Committee for the Association of Manufacturing Technology (AMT). He is also a member of the board of directors of the American Electronics Association (AEA).

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