Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
Impact of an effective Human Resource Management in
minimizing Operational Risk in the Ready Made Garments
Industry of Bangladesh
Noor-E-Hasnin* and Moinul Ahsan**
Background:
The Ready Made Garments (RMG) industry of Bangladesh evolved over the notion of producing quality
products in mass scale by maintaining low costs. This was and still is, the primary source of profitability in
this industry, providing a competitive edge over the competitors in the global RMG sector. However in recent
times this industry went through a paradigm shift and the global customers & regulators are increasingly
shifting their focus towards a sustainable business growth, maintaining quality outputs and ensuring a
positive impact on the society. Hence, the mindsets of the local RMG business owners need to change and
shift from the classical model of low cost and high margin to a more contemporary vision of investing in
developing the people and processes. This point-of-view is instrumental in meet the growing expectations
of global stakeholders by minimize Operational Risk and boosting organizational effectiveness in the longrun, via an effective Human Resource Management.
Research Objective:
Operational Risk is defined as the risk of incurring loss resulting from inadequate or failed internal factors:
processes, people and systems or from external events. It is an evolving idea and a concept that links
organizational effectiveness and efficiency with the potential failure points. Once failure points are identified,
controls are designed monitored and tested to reduce potential risks and boost the efficacy in operations.
The concept can be replicated from the perspective of the RMG industry as well. The objective of this paper
is to understand the root causes for potential operational risks that can arise from the internal factors,
particularly from people & process, and how an effective Human Resource Management can eventually
reduce operational risks and contribute to profitability of the organization. The research intends to establish
a link between Operational Risk Management (ORM) and its critical role in the organic growth of the RMG
industry.
Methodology:
The study will follow an amalgamated approach, and will be based predominantly on secondary data and
some primary data as well. Published research papers, articles, thesis papers, newspapers, online articles,
publications and journals will be studied for the literature review, to understand the different aspects of
Operational Risk. Real-life examples and case-studies in other countries or industries will also provide
valuable insights on the sources of Operational Risk and how the concepts of Human Resource
Management would help identify the root cause and eventually device viable solutions to eradicate the
risks. To understand the current scenario of the RMG sector of Bangladesh, research papers along with
journals and publications on various topics will be reviewed. We will also collect information from published
private and government sources like; Manufacturing Industries Annual reports, Bangladesh Garment
Manufacturers and Exporters Association (BGMEA) yearly report, Centre for Policy Dialogue (CPD) reports
and publication, Ministry of Labor and Employment etc. We will carry out a number of interviews with
managerial level employees in the RMG sector and short questionnaire based discussion sessions with a
number of RMG floor level workers as well. This will give us a real-life perspective that will substantiate our
understanding of the operational risk areas in the RMG sector and help us to suggest viable solutions to
alleviate them.
1. Introduction
____________________________________________________________________________________
*Miss Noor-E-Hasnin, Lecturer, Department of Management, School of Business & Economics, North South
University
**Mr. Moinul Ahsan, Senior Manager, Country Operational Risk, Standard Chartered Bank
Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
Table of Content
Section
Introduction
What is Operational Risk?
Operational Risk Management (ORM) process
Methodology
Human Resource Management & Operational Risk Management
in the RMG Sector
6. Recommendation and Conclusion
Reference
1.
2.
3.
4.
5.
Page no:
2
5
12
14
15
22
23
The Ready Made Garments industry of Bangladesh is the major force that drives our
economy. Today, this export oriented industry contributes to 82% of the total exports
made by the nation which amounted to USD 25.49 billion during the latest fiscal year of
2014-2015. Amidst the global financial turmoil and global political unrest, this industry has
grown more than four times in export volume over the last 10 years and has contributed
to an overall increase in exports for the country by a mammoth 360%. Employing more
than 4 million workers in the country, this is by far one of the largest employing industries
in the nation, creating job opportunities for woman and subsequently, and leading the
working class towards economic independence (Dhaka Tribune, 2014).
After the liberation war of 1971, Bangladesh was a country destroyed by war, struck by
famine and labeled as one of the poorest nations of the world. With no major industry or
natural resources to grow upon, the apparel industry shed some light towards economic
development. With a vision to transform the nation, late Nurool Quader Khan was the
pioneer of the RMG sector of the country. Back in 1978 he sent 130 trainees to South
Korea to learn how to produce readymade garments and then he started his own venture
named “Desh Garments” which was the first export oriented garments firm in the country.
A number of respected industrialists followed his footsteps and eventually started a new
era that transformed the nation as a whole (BGMEA, 2015). With the GDP of the nation
growing at a rate of around 6%, Bangladesh is seen as one of the brightest prospects
among the developing nations in the world.
Although this industry has shown promises and prospects over the years, the success
was not always blissful. A number of challenges, issues and incidents have been
impediments to the development of this industry. Issues like child labor, low wage rates,
poor working conditions, health and safety hazards, and political instability have often
largely over shadowed the low-cost competitive advantage of the industry of this country.
Things have changed over the recent past. As per a report by ILO, post the tragic
incidents of the collapse of Rana Plaza and the fire at Tazreen Fashions, unprecedented
efforts have been taken across the industry to enhance workplace safety and improve
workers’ rights in this sector (Islam & Moazzem, 2015). This industry matured over the
past and eradicated concerns like child labor by 1995. There has been a substantial
increase in the minimum wage rate, which shows a 219% increase during the last 5 years
(BGMEA, 2015). Increasing pressure by overseas buys, oversight from the international
Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
human rights organizations, regulators and the government have forced reforms in the
industry as a whole which now aspires to deliver quality products via ensuring human
rights and still maintaining the competitive advantage of low cost-profit ratio. Having said
so, experts believe that there is substantial room for development which, if eventually
addressed, could establish Bangladesh as one of the leading RMG exporting nations in
the world. As per a survey conducted by McKinsey & Company, the perspectives of a
number of key buyers from Europe and US have been taken into consideration and few
of the themes in terms of prevailing challenges that emerged from the survey were:
 Transportation & Energy Infrastructure: Transportation bottlenecks inside and
between major cities create inefficient lead times for garments and delay
deliveries to customers. With the change in dynamics of the nation’s unplanned
growth, this will become more severe. This is an important problem to consider,
as in the future, buyers would want to source more fashionable products with
shorter lead times. Although energy generated in the country has seen positive
turns in the recent past, stakeholders still rate it to be poor or very poor in terms
of uninterrupted power supply to the factories. This results in cost inefficiencies.
 Compliance: A number of non-government entities monitor Bangladesh for
labor and social-compliance issues, for example ILO. Although most European
and US chief purchasing officers agreed in the survey that standards have
somewhat or strongly improved over the past five years, they noted that
suppliers vary greatly in their degree of compliance. Health and safety issues,
working conditions are some of the key areas which require more
standardization across. Environmental compliance, related to pollution on the
other hand is just beginning to get attention.
 Suppliers’ performance and the skilled workforce: Productivity is one of the key
factors that require attention. With the impact of rising wages in reducing
profitability, the suppliers need to ensure that they bring in more efficiency in
their production/ operations to not only meet increasing customer demand, but
also to satisfy new customer requirements for more sophisticated products.
Other concerns are: lack of capital investments advanced machinery and
technologies, and the insufficient size of the skilled workforce across the board.
Productivity of an organization can substantially increase by increasing the
capabilities and knowledge of the workforce alone.
 Raw materials: Bangladesh does not have all the raw materials required for
production and lacks a supply of natural or artificial fibers, and its dependence
on imports create sourcing risks and lengthens lead times. Lack of control on
raw material sources implies that global price volatility will have a direct impact
on price of raw materials. The development of a local sector would improve
lead times and prevent the risk of price volatility.
 Economic and political stability: Significant proportion of the chief purchasing
officers interviewed stated that if political instability persists in the country for
long, they would reduce levels of sourcing from Bangladesh. The survey found
that political unrest, strikes, and the ease of doing business are top of mind for
respondents.
Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
2. What is Operational Risk?
The concept behind Operational Risk which primarily evolved around the notion of the
financial sector, can be extrapolated and applied within the perspectives of all evolving
industries in the world. Operational Risk is defined as: the risk of loss resulting from
inadequate or failed processes, people, systems or external events.
It can be inferred from the definition that, operational risk looks broadly into two
categories, namely; internal and external events. It tries to analyze the risk aspects of all
of the internal and external factors that directly impacts the productivity of an organization
and creates a risk profile based on which the top manage of the organization can pinpoint on areas that require direct and immediate intervention. The Operational Risk
Management framework is an outcome of this concept which details on the steps of risk
identification, risk assessment, risk escalation, and risk monitoring & control. The idea
was first socialized by the Basel committee (formed by Bank for International Settlement)
as a separate category of risk for the banking industry. Previously the banking industry
had two main pillars for risk, namely: Credit Risk and Market Risk. As per the Basel II
accord set out in 2004, the committee agreed on the third pillar of risk distinguished as
the “Operational Risk”. Although the idea may seem mundane as to categorize a risk
under this concept, it seemed to be one of the major areas of concern for the banking
industry. Banking businesses are often more focused on the direct impacts of the credit
and market risk and overlooks the internal and external factors that may contribute to
inefficiencies and potential risks that may hamper the sustainability of business in the long
run. The idea may have evolved from the banking industry, but it a universal concept that
can be replicated across all industries (Bondarenko and Prokopenko, 2012).
Components of Operational Risk
As discussed in the definition, the major sources of Operational Risk evolved from Internal
& External factors.

Internal Factors
There are three major components that give rise to Operational Risk from internal
sources. They are namely: People, Process and Systems
Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
People, as the name implies refer to the Human Resource of the organization.
They are the human factors involved in the day to day activities of the organization.
It refers to employees working at all levels, starting from the strategic level down
to the operational level. Human interventions are becoming less significant at the
ground level where an industry is driven by production. Having said so, although
machines and technologies are taking over, significant proportions of the job
cannot be automated and relies solely on people. Roles which are strategic,
managerial, directive, advisory, validating and administrative in nature require
people who have adequate levels of knowledge and experience to pursue them.
Service oriented industries like banking, insurance companies, health-care, travel
agencies etc. require people along with some technological assistance.
Developing countries like Bangladesh on the other hand has a huge surplus of
skilled / non-skilled labors and with unemployment rates high, recruiting people at
all levels starting from production to the top senior levels is more cost effective for
companies than investing in technological solutions. As an internal component and
a source for Operational Risk, people failure is one of the most significant root
cause that can directly expose the organization to potential risks.
First of all, any organizational process when run with manual human intervention,
are prone to human errors. People are not perfect. Lack of concentration, workload, distractions, lack of motivation, physical and mental health can lead to errors
and low quality work output. As per a study conducted by Heuvel, Lorenzo &
Rooney (2002), human error is defined as Human error is any human action or
lack thereof that exceeds the tolerances defined by the system with which the
human interacts. It has been ascertained that human errors can be attributed by
two opposing concepts. One is “Unintentional Error”; actions committed or
performed by individual without any prior knowledge, intentions or thoughts. The
other is “Intentional Error”; actions deliberately committed or omitted because
individuals believe their actions are correct or better than the prescribed actions.
In both cases, the outcomes of the events are human error which can reduce
organizational effectiveness substantially if not addressed immediately. The study
which was conducted over health-care employees generally depict that staff
training is one of the key tools that can be used to reduce intentional errors which
are usually caused by lack of knowledge about the work itself, the regulations and
the expectations from the supervisors. Apart from training, the study also showed
that ensuring workplace safety and security, designing an ergonomically friendly
work environment, maintaining a healthy work-life balance, and communicating a
positive management attitude can help employees to feel more connected and
comfortable with their work. This can eventually lead to a motivated and energetic
work-force generating quality output with minimum unintentional errors. As
discussed earlier, human error can be managed but not completely eradicated,
and it is also not possible to automate all activities in an organization. This is where
Operational Risk Management comes into play.
Second of all, workplace ethics is also a point of concern. Human minds are
corruptible. Short term gains and greed often drive certain group of employees who
have discretionary or decision making authorities to make unethical use of
Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
company resources to gain personal profit at the cost of company’s overall gain.
Internal Crime and Dishonesty or simply Internal Fraud, is one of the most
important aspect of people failure in organization, leading to Operational Risk.
Barnett (2011) highlighted in an online article that upon a survey conducted over
multiple industries on North America, Europe, Asia-Pacific and Latin America, it
was revealed that 60% of the frauds are committed by insiders. The study also
revealed that junior employees are the most-likely perpetrators followed by the
senior employees of the organization. However it is usually a joint effort by both
the senior and junior employees. Internal frauds can be managed by ensuring
tighter controls and engaging enhanced vigilance over the employees of the
organization. Draz (2011) featured an online article focusing on preventive
measures to combat fraud. Apart from tightening of controls, he highlighted on
monitoring and evaluation of the internal controls by organizing independent audit
activities and sharing of the lesson learnt of previous fraud incidents with the
employees of the organization. This will not only ensure socializing the
consequences of fraudulent attempt among the employees but it will also detail on
the control improvements undertaken by the organization to combat fraud. He also
highlighted over ensuring stringent monitoring of segregation of duties. The
concept states that different individuals will have different responsibilities and the
duties are clearly segregated among staffs, so that it would be difficult for one
single staff to perpetrate or plan a fraud. It would require a number of employees
working along the end to end process to perform fraud.
Processes are another important source of Operational Risk that originates from
weakness or lack of established controls surrounding the processes required to
perform particular tasks. Process is defined as set of steps or actions taken in order
to achieve a particular end result (The Operational Risk, 2010). Processes are
defined and executed by humans, and as previously discussed risks pertaining to
processes could be an outcome of intentional and unintentional human errors.
Organizational policies and procedures are dynamic in nature and to simplify tasks
and to ascertain execution of the activities to achieve organizational goals the top
management and the strategists set out the departmental operational instruction
or simply departmental processes. Management theorist Peter Drucker believes
that internal processes of an organization are crucial and are the key to bring
organizational efficiency and effectiveness resulting in overall organizational
profitability. The concept is simple, with all the activities designed and monitored
by the top management are jotted down in the form of instructions it becomes
easier for employees to follow the steps to achieve the goals to meet the
management expectations. Organizations need to come up with the process
universe, that is, a comprehensive list of end to end activities sorted by
departments and units. This provides a comprehensive mapping of all processes
which can then be evaluated to ascertain and establish links and will help the top
management to get a holistic view of the organizational activities under a single
platform. Peter Drucker also believed that processes are subject to change and
organizations need to welcome monitoring of the controls and look for scopes for
improving the processes to transform businesses and lead to innovate. This is an
Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
important perception and the top management of an organization needs to keep a
watchful eye to periodically review, assess, monitor and test the controls
surrounding the individual end to end processes with a view to increase efficiency
and effectiveness and ensure seamless business operations. The line managers,
top management and the internal audit teams can work together to make sure that
the processes and controls surrounding the processes meet the organizational
standards, policies, procedures, and the overall vision of the company. In other
words, processes need to be updated from time to time, addressing all probable
gaps to bring in organizational efficiency and reduce Operational Risks.
The question that looms is, how does operational risk management play a
significant role in ensuring organizational effectiveness? Operational Risk
Management intends to find gaps, inefficiencies, inadequacies, and potential
failure points for each and every process of the company. As discussed earlier,
one of the key functionality of ORM is to establish the process map and identify
potential failure points for each process. This is a preemptive measure that tries to
establish enhanced and stringent controls within the process itself to reduce the
probability and impact of any failure or inadequate process. This is evident in
production lines where the tasks are heavily segregated. A single person is not
entrusted with the responsibility of building the entire product himself/ herself.
Rather the job is broken down into many smaller activities which is then performed
by a number of individuals who specialize on a particular task. The flow of the work/
semi-finished product from one person to another has a built-in control system
which ensures that errors or mistakes performed by an individual will be identified
by the next person in the production line and so on. Moreover, many companies
also employ quality assurance checks and independent audit of the finished
products to look for faulty products and pinpoint the problem. To illustrate on the
importance of ORM on process redesign, we can look at how the banks in
Bangladesh enhanced their vigilance by grooming up their controls surrounding
the Magnetic Ink Character Recognition (MICR) cheque to combat external frauds.
A Bangladeshi online newspaper (BDNews24) published an article on June ’15,
titled “Counterfeiting MICR cheques increasing” where it was stated that although
the MICR cheques were supposed to be less prone to frauds due to its features,
fraudsters were still being able to manipulate this financial instrument and
perpetrate frauds. Upon a root cause analysis, it was identified that bank officials
were not able to identify fraudulent cheques as the changes were not always
clearly visible under naked eye. Many leading banks revisited their process and
incorporated another set of controls where Ultra Violet (UV) lamps were provided
to the branches, where the staffs were able to detect fraud cheques by placing it
under UV lamps and the alterations were identifiable. This not only made the
process more robust to combat fraud, but it also helped staffs to boost their
efficiencies.
System, is the last of the internal factors that is one of the key components of
operational risk. Systems are defined as all technological supports/ assistance that
Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
helps the employee of an organization to perform the task based on systems or
automated tools. This usually ranges from computers, software, production
machines, telephones and electrical systems all of which contributes to the overall
activity of the organization. Failure of the core banking system for example will lead
to immediate financial and reputational loss. If customers are standing in the
branch queue and the branch staff cannot execute the customer transaction due
to system glitch or failures in the banking system, this will lead to immediate
business opportunity loss and customer dissatisfaction. In this interactive age of
media, reputational damages spread fast and the impacts are usually long lasting.
So it is very important that the supporting systems should always be up and
running to facilitate organizational productivity. Production based firms are heavily
reliant on technological advancements, and their major concerns are uninterrupted
electricity supply and sudden demise of automated supporting computer systems,
software and communication. With the technological advancements making life
easier and convenient, organizations are increasingly relying on systems as a
viable cost efficient alternative to manual work-around.

External Factors:
As already shared in the tabled at page: 4, external factors are a combination of
all external components within which the organization operates. Every
organization needs to interact with its environment and all influential external
stakeholders, namely: government & regulators. Government can amend its
priorities on a yearly basis to ensure benefits for the mass. This can include policy
level decisions to increase support of a certain industry for the time being while
creating difficult situation for others. For example, to promote domestic investors
and producers, the government can relax investment costs, arrange for soft loans
from government owned banks and lower the taxes or grant tax holidays. This
might as well be less encouraging for businesses which rely on imports.
Regulators, both locally and globally, on the other hand are becoming increasingly
vigilant and aggressive when it comes to ensuring compliance with the rules and
regulations. All industries operating in and economy are governed by a regulatory
authority. For example Bangladesh Bank sets out all the banking related
regulations and periodically monitors the banks in the industry to ensure
compliance. If any banks are found to be in breach, central bank imposes fines,
penalties and often license restrictions as well. Similarly, Bangladesh
Telecommunication Regulatory Commission (BTRC) is the regulatory authority for
the telecommunication industry in the country. Regulators formulate laws,
regulations and guidance which needs to be followed by all market players in that
particular industry. Regulatory fines are a common newspaper headline these days
and many leading banks are fined billions of US dollars every year on Sanction,
Anti-Money Laundering and Treating Customers Fairly non-compliance. Recently,
as per a report published by Reuters, five global banks have been asked to pay
$5.7 billion in fines over exchange rate rigging. Regulatory compliance is one of
the most important aspects of Operational Risk these days (Freifeld, 2015).
Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
Another important point to consider is the political condition of the country where
the business is operating. Unstable political conditions may demotivate investors
from investing, as strikes, processions and political activities have direct adverse
impact on regular business and the economy as a whole. Hartals and blockades
are one of the major impediments in economic development of our country. They
directly hamper transportation and does not allow people to come to work. This
results in significant amount of system loss and productivity of an organization is
severely damaged. For example, large departmental stores face huge challenge
in replenishing its stock of goods especially vegetables and meats which cannot
be stored for long and are perishable. On the other side of the supply chain,
farmers are directly impacted as they also cannot sell their products which cannot
be transported due to blockades. These incidents give rise to Operational Risk
which organizations need to keep in mind as they operate in a country.
Macroeconomic conditions of a country are grossly impacted by the internal and
external economy of a country. Unemployment rates, higher rates of interest,
inflation etc. needs to be taken into consideration to ascertain the macroeconomic
health of an economy. If the rate if interest increase, and inflation increases as
well, a company will realize that its cost of operation will increase substantially as
loans will be more expensive and suppliers of goods and services along with the
employees will all demand a higher payment for the same product or service
provided. In such scenarios, although a company cannot influence or control the
macroeconomic indicators, it can certainly change its internal policies to adjust with
the economic conditions to keep the profit margin fairly static.
Natural disasters like floods, fire, earthquakes, storms, tsunami, tornado, typhoon
etc. can have direct impact on the operation of a company. Incidents and accidents
are common in all industries may it be service or manufacturing. Countries like
Bangladesh are facing problems with regards to flood, fire, storms and tornados.
Although the country is yet to face or encounter some of the natural disasters, the
risks of the same occurring in the near future is eminent, and cannot certainly be
ignored. One of the major risks from the context of this country is with regards to
earthquakes. With the recent incidents in northern, eastern India and in Nepal, the
people of the country are becoming more aware of the risks of this natural disaster.
As per a report by a local online newspaper The Dhaka Tribune back in April ’15,
the Bangladesh Meteorological Department speculates that the capital city Dhaka,
with a massive population of 14 million crammed in the city is under threat of an
active fault-line which may trigger quakes of epic proportions. The department
speculates that a probable 7.5 magnitude earthquake can destroy as many as
400,000 homes resulting in a loss of at least 100,000 people (Mithun, 2015). The
operational aspects of such natural disasters can be categorized under two
themes. First is the loss of lives which would be dearly unfortunate as well as an
impediment to the growth of the organization. The day to day operation would haut
and if the damage is only localized to the organization only (in case of fire at the
production plant for example), this would mean that consumer and buyer demands
will not be met and business will plunge into losses. Second of all there would be
a direct loss of infrastructure and fixed assets. Incase the impact of the disaster is
Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
nationwide, the operation of the country will cease to exist as a whole. Although
the idea of combating natural disasters is impractical, organizations could engage
in taking preemptive measures to reduce the damage and alleviate the risk to some
acceptable levels. The concept behind the same is to establish an acceptable
Business Continuity Plan (BCP). As per a research conducted by International
Monetary Fund, Business Continuity planning is the management, development,
implementation and maintenance of policies, frameworks and programs to assist
businesses to ensure operation during business disruption. BCP helps an
organization in preventing, preparing, responding, managing and eventually
recovering from the impacts of natural disasters, accidents or critical incidents
caused due to external events (Storkey, 2011). Many multinational companies
these days have a formulated structure of a BCP plan put in force, which is
monitored by the top management.
The plans are robust and dynamic, updated on a regular basis. The external events
are risk assessed from the perspective of gross impacts (total financial and nonfinancial damage) and probability of the event occurring in the near future. Taking
all these into consideration, the BCP is finalized and updated accordingly. Few
examples of BCP are: backup data storage, backup workstations and production
facilities from a considerable distance from the main site (applicable for
organizations that have large geographic foot-print) and an alternative business
solution delivery where the production line is kept running by sourcing some key
inbound resources from different sources (which or else would have been
manufactured by the company) and meet & manage buyer demands. Such kind of
Disaster Recovery Management is one of the key aspects of Operational Risk
Management as well.
3. Operational Risk Management (ORM) process
The Operational Risk Management (ORM) process is a cyclic and a step by step process
which is very dynamic and intends to eliminate drawbacks and make the framework work
effectively and efficiently. It is self-learning process as it aspires to ensure stringency in
organizational controls every cycle. Every organization needs to adopt a risk profile, which
is a comprehensive list of all of the risks that are potential to occur along with the action
plans to mitigate the same. This framework in general is composed of four steps, as per
KPMG business dialogue in Operational Risk (2012) they are discussed below:
Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
 Step 1: Risk Identification. The identification of a potential risk that is speculated
to occur with a material impact to the business and the risk profile of the
organization. This can originate from a number of sources, which are namely: the
external and internal factors resulting in Operational Risk, as discussed earlier.
Risks can be triggered from some individual incidents for example: a customer
complaint for poor service/ product provided or sold a fine or regulatory /
governmental enforcements due to non-compliance, findings from the internal
audits and quality assurance, major control failures in the internal processes and
people, and from external events like fire, earthquake, flood etc.
 Step 2: Risk Assessment. This refers to the measurement assigned to the risk(s)
that is/ are identified in the first step from qualitative and quantitative perspective.
Organizations tend to prepare a matrix for risk assessment assigns financial
impacts (financial loss) as well as non-financial (reputation damage, damage to
goodwill of the company, dissatisfied stakeholders) impacts of the event. This also
measures the probability and propensity of the events occurring. An example of
such a risk assessment matrix is appended below. This is a grid which assigns risk
a label in terms of tolerability/ acceptance. For example if a risk falls under the
category of catastrophic impact and is also likely to occur frequently, then it falls
under the red zone where risks are termed “Unacceptable”. These are the risks
that the organization needs to eliminate in the fastest possible manner. For
example, if an organization sets up a production plant in a geography where
earthquakes are relatively frequent, then the risk from earthquakes can be termed
as unacceptable as the effects of such an incident is catastrophic in nature. As a
result, if the organization wants to continue their operation in that location, they
need to ensure that adequate levels of safety measures are undertaken during
construction and employees are made aware of the consequences and trained for
Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
fast evacuation or other safety measures. Machines could be put in place to
measure seismic activities to predict earthquake patterns.
 Step 3: Risk Reporting It is the next step of the ORF framework which involves
the escalation of the risk identified to the respective departments and to the
respective top management involved in mitigation or set out strategies to solve the
problem. Operational Risk is a separate function in many contemporary business
organizations around the world. All business and functions are responsible for risk
identification and escalating the same to the Operational Risk Management team/
middle management who are in turn responsible for assessing the risk and
ensuring escalation to the top management of the bank.
 Step 4: Risk Management & Monitoring. This is the last step towards risk
management process involves designing of the treatment / action plans by the top
management. This involves the segment heads and business heads to review the
risk assessment and devise time-bound action plans that will involve employees
from different departments working together to alleviate a risk. For example, if we
take a look at the previous example of factory location built in earthquake prone
area, management will take preemptive measure such as training of employees to
react to such accidents by organizing regular safety drills. Once a control is
established or refurbished it is being monitored on a regular basis to ensure
effectiveness in reducing Operational Risk.
The four steps when taken into consideration, works in conjunction with the core idea of
making the existing controls, standards and processes more robust to combat the
Operational Risk. The process is cyclic in nature which takes turn in making the process,
people, systems robust and the responses to external events more dynamic. This will
increase preparedness among the people working in the organization and eventually
alleviate the propensity of the risk
4. Methodology
The study will follow an amalgamated approach, and will be based predominantly on
secondary data and some primary data as well. Published research papers, articles,
thesis papers, newspapers, online articles, publications and journals will be studied for
Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
the literature review, to understand the different aspects of Operational Risk. Real-life
examples and case-studies in other countries or industries will also provide valuable
insights on the sources of Operational Risk and how the concepts of Human Resource
Management would help identify the root cause and eventually device viable solutions to
eradicate the risks. To understand the current scenario of the RMG sector of Bangladesh,
research papers along with journals and publications on various topics will be reviewed.
We will also collect information from published private and government sources like;
Manufacturing Industries Annual reports, BGMEA yearly report, Centre for Policy
Dialogue (CPD) reports and publication, Ministry of Labor and Employment etc. We will
carry out a number of interviews with managerial level employees in the RMG sector and
short questionnaire based discussion sessions with a number of RMG floor level workers
as well. This will give us a real-life perspective that will substantiate our understanding of
the operational risk areas in the RMG sector and help us to suggest viable solutions to
alleviate them.
5. Human Resource Management & Operational Risk Management in
the RMG Sector
In this section, the concepts of Operational Risks as discussed above from the
perspective of the internal and external factors affecting an organization’s risk profile will
be linked with the major problems that this industry is currently facing. This is a root cause
analysis of the challenges faced and a viable set of suggestions would be put in place
from the perspective of Human Resource Management. To keep things within context,
the discussion below will be focused on some key issues concerning the RMG sector of
Bangladesh. The discussions will address the internal and external components of
Operational Risk and try to resolve or look for viable solutions from Human Resource
Management’s perspective.
Employee turnover:
As discussed above, for labor intensive industries, one of the key components and root
causes of Operational Risk trickles down to People. The RMG industry can be broadly
categorized under two major classes of employees: the factory workers and the mid to
top level management team.
Hossain (2015), cited the categories of employees and provided a contemporary view.
Discussions with a number of top executives and owners of RMG firms revealed that the
turnover rate of the midlevel managers have been reported to be high, with most of the
managers quitting within few years of employment. Owners claimed that this is due to the
lucrative nature of other industries, namely: telecommunication, FMCG & banking where
Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
the mid-level managers are exposed to better career prospects. Again at the floor level,
garments industry being a labor intensive industry needs a very stable number of bluecollar workers. However, as per a study conducted by the equity research teams of
Morgan Stanley in 2014, they highlighted that on average employee turnover at the
garments factories are at 10% which can creep as high as 30% during festivals like Eid.
The numbers although seem alarming, are considered to be regular and within the
expectations of the employers. This is one problem that needs remediation. The two
components of Operational Risk that this problem highlights are: People & Process.
From the perspective of Operational Risk, employee turnovers is one the Key Risk
Indicators (KRIs) that can measure a company’s potential to grow and pinpoints the
vulnerable areas where right people are missing, which needs to be immediately
addressed (Davis, Finlay & Wilson, 2006). Companies usually set a threshold beyond
which, a breach in the KRI indicates that the risk is beyond the appetite that can be borne
by the business (Hoffman, 2002). Why is employee turnover so important? The existing
employees of an organization have knowledge and skills that developed over time of his/
her tenure with the organization. This pool of knowledge and skill are not readily
transferable to a new incoming individual. A newly recruited employee would require time
and investment by the company, for him/ her to be productive enough within a stipulated
time frame. Attritions leave hole in the operational activity of a company and slows down
productivity. Again, newly recruited employees are a prone to processing errors
(intentional & unintentional) due to lack of proper and adequate trainings Heuvel, Lorenzo
& Rooney (2002). Persistent employee turnovers from all levels of the organization may
expose an organization to weakness in execution of organizational process, higher
number of errors beyond acceptable thresholds, customer dissatisfaction and loss of
productivity, efficiency and eventually a degraded goodwill. If not managed, the
consequence can be failure in operational process.
Human Resource Management (HRM) can suggest for viable solutions to manage
attrition to be kept within the KRI thresholds. As opined by Hossain (2015), the root cause
for high turnover rates at the mid-level management is largely attributed to factors like
social status of working in a multinational, less than competitive pay-scale when
compared to other industries, lack of a proper and established HR process dedicated to
employees. Most of the companies in the RMG industry does not have a fully functional
and autonomous HR department within its organizational hierarchy. To make the midlevel jobs lucrative, owners need to invest in a formal HR department within the
organization which will not only look at the employee welfare (staff benefits &
compensations) but it will also strive to be competitive with regards to the same. Activities
like recruitment, selection, performance evaluation and talent hunt needs to be formalized
and brought within a structure. Owners must as well focus on branding the company as
successful local ventures, a prestigious entity and focus on the opportunities for career
growth with compatible standards to other industries in the market. This will encourage
business and science graduates to pursue a career and if the benefit and compensation
packages can be substantially aligned, this will be the next upcoming industry with
immense career opportunities.
The compensation and benefit package of the blue-collar employees on the other hand,
also needs to be validated. As per Morgan Stanley’s research on the RMG sector of
Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
Bangladesh, the minimum pay scale for an average worker has been revised to USD 68
(BDT 5,300), which was a substantial increase of 77% compared to the last revision. Still,
the income can barely support a family of three and sometimes is not at all practical. The
research also identified wage as one of the factors attributing to high turnovers. Upon one
on one interview sessions with 20 floor level workers in garments factories near Badda,
it was perceived that the minimum wage is not at all practical and it is substantially less
when compared to the standards of living in the city. Owners are advised to provide a
bare minimum wage which takes into account of the living standards of that particular
area from where the workers are being sourced. Apart from that, employers can also
provide employees with free health-care centers, day care center for children, subsidized
lunch & snacks, transportation facilities etc. Although this may seem a bit far stretched,
research conducted by Morgan Stanley evidenced that a number of the firms in this
industry has already adopted these strategies which are proving to be extremely effective
in retaining employees.
Safety & Security issues and poor working conditions:
Another key concern that needs to be addressed and highlighted is with regards to
employee safety, security and working conditions. From the perspective of Operational
Risk, this can result in failure of process & people, caused by inadequate preemptive
management of external events.
Issue of fire and safety compliance has become perfectly synonymous with the RMG
industry ever since the “Rana Plaza” incident back in April ’13, and “Tazreen” fire incident
back in Nov ‘12. These events have not only been highlighted nationally but also globally
and viewed as cases of sheer negligence with regards to ensuring compliance to
workplace safety (Khatun, 2014). Incidents of fire and potential threats of earthquakes
are still on the horizon and are major themes of operational risk in this industry. If risk
assessed, this will definitely be categorized as a risk with catastrophic impact.
Although the impact of such events cannot be realistically minimized, the probability of
such events can be minimized. Post these incidents, buyers and international
stakeholders have enforced compliance to the safety standards. Additionally National
Tripartite Plan of Action on Fire, Electrical Safety and Physical Integrity (NAP) have been
set up by the government and facilitated by the ILO to set up safety training and factory
inspection (Khatun, 2014).
Post the incidents, “The Alliance for Bangladesh Worker Safety” and “The Bangladesh
Accord on Fire and Building Safety” have been formed. Although there are differences
between the Accord and Alliance, both are inspecting factories and making
recommendations for improvements with regards to: fitting fire doors and sprinkler
systems, strengthening support beams, removing dust and lint from electrical wires, and
taking out lockable gates. Currently 1900 factories are covered by these two
organizations’ programs, compared to around 5000 factories in Bangladesh overall of
which 3500 regularly export garments products (Morgan Stanley, 2014). These set of
compliance also expand to circumstance of factory safety and construction standards,
workplace safety, security of the employees, ethical conditions, etc., building on the codes
of the NAP and working with organizations such as the International Labour Organization
(ILO) (Hossain, 2015). Today, foreign buyers and investors take a critical look at the levels
Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
of engagement a company demonstrates with regards to compliance with the standards
set out by Accord & Alliance.
Working conditions, health & safety on the other hand have direct and daily impact on the
wellbeing of an employee. Frank E. Bird (1921-2007), a pioneer in occupational safety
measures, conducted a study in the insurance industry. Post undertaking the research, it
was concluded that for every major injury there were 9.8 minor injuries and the ratio of
lost time injuries to medical treatment injuries was 1:15. On a similar note, ILO has
estimated that 4 per cent of the world's annual GDP is lost as a consequence of
occupational diseases and accidents. This idea was also supported by Razzaue and
Eusuf (2007), who predict that improving work environment leads to an improvement in
their productivity, and increase efficiency of an organization. Working conditions at most
of the factories are far below standards acceptable for human wellbeing. Most of the
workers who were interviewed responded that, their work stations were very crammed;
many of the workers have to stand for hours (e.g. finishing area) and work in postures
which is ergonomically challenging. The temperatures often creep past tolerable limits
(e.g. dyeing area), noise levels are high (e.g. near generator room, boiler room and
ventilation systems), and some of the electrical components pose accident hazards.
Personal hygiene is a concern as many of the factories do not have adequate washroom
facilities and lack of hygiene practices at workplace poses risk of transfer of diseases
(Islam, 2014).
Human Resource has a key role to play in this context. The concept of employee safety
and security should not be enforced to any organization. Rather it should be viewed as
an involuntary reflex to the external events and potential safety and security hazards that
an employee of an organization has to face. The floor managers needs to be adequately
trained in promoting safety standards at work. They should supervise and in turn train
and educate the floor level workers with regards to the safety standards, Business
Continuity Plan and strategies and appropriate knowledge in use of hazardous materials.
HR should work with the top management closely and suggest recommendations which
could be:
 Use or air conditioning or superior ventilation systems to keep the production
floor cool and discharge toxic fumes and gases that might be hazardous to
health
 Providing sitting arrangements for all workers performing repetitive jobs and
frequent breaks could be provided.
 Setting up of mobile medical teams to treat employees affected by accidents or
who are facing health related issues.
 Installing more washroom facilities, promoting use of disinfectants and
disseminating knowledge on personal hygiene can prevent transfer of disease
and eventually reduce health related absenteeism.
 The generator room, boiler room and the ventilation system should be placed
far from the working area and should be properly sound proofed to acceptable
levels of noise.
 Maintenance and monitoring of all electrical equipment to check for faulty wires
or faulty machines which could be hazardous. (Islam, 2014)
Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
A healthy and a safe workforce will obviously generate greater outputs, better efficiencies,
minimum processing failures, and greater motivation to work in a place where the
employees are valued.
Lack of Productivity due to inadequate training:
Bangladesh is well known to the global market as the RMG industry which can deliver
products maintaining low cost, with the core reason being: cheap labor. As already
discussed with a monthly wage rate of only around USD 68, the producers get a
substantial competitive advantage compared to the global competitors in the industry.
Having said so, Bangladesh is still not the ideal place for the investors who demands
diversity, quality and efficiency in output generation. The root cause lies in productivity.
Yunus and Yamagata (2012) highlighted that although low wages helped Bangladesh to
compete in the international market, labor productivity was always an issue among
Bangladesh RMG that was not addressed adequately. Mlachila and Yang (2004) had
compared the value added by majority of RMG manufacturers in country, and found that
Bangladeshi workers have the lowest value added, less than one-fifths of Chinese RMG
workers. In a more recent study Berg et al. (2011) highlight the productive gap between
Bangladesh and its major competitors like China, India, Pakistan and Cambodia, was
substantial, with Bangladesh only being 77% productive compared to China’s baseline of
100% (as per data on 2009). The World Bank (2013) highlighted that improving labor
productivity is one of the main steps that Bangladesh has to take to remain competitive
in the RMG market. This would call for improving skills and literacy of the RMG workers
along with revision of the minimum salary standards. The risks pertaining to lack of
productivity is attributed to failure of people to undertake processes & systems
adequately.
Operational Risk management is synonymous to ensuring seamless productivity. The
ORM Framework discussed above highlights on this concept that, with an effective risk
management framework in place, an organization aspires to identify its risk areas, assess
the same, and put in mitigating controls to ensure alleviation or nullification. This in turn
makes the internal process better and resilient to risks.
BGMEA along with many of the firms have taken joint initiatives to alleviate concerns of
productivity. Fernandez-Start et al. (2011) informed that a plan was launched back in
2008 by BGMEA to increase labor productivity, diversify products and markets, and invest
in R&D and human resources. This was a collective effort and joint-ventures between
factories, buyers and organizations like the ILO were set-up. Projects such as the
Promotion of Social, Environment & Production Standards (PROGRESS) were set up as
training centers in parts of Bangladesh in an attempt to improve labor efficiency in the
RMG sector. A few of the global buyers also invested in joint ventures with some firms to
establish in-house training centers to foster learning. Hossain (2015) argues that a
number of factory owners have already set up training houses at their own initiatives with
a view to train new workers. The other side of the coin holds true too. With the looming
concerns of quality control and compliance, many RMG factory owners are still
preoccupied with these concerns and their efforts are paltry when it comes to training of
employees.
Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
One of the most important roles of Human Resource Management comes into play in this
context. Employee training and development is the key to organizational success in the
long run. The HR department or the line managers in charge should design an adequate
training plan, training materials and a training timeline that could be adhered to. Few of
the recommendations below has been ascertained post a discussion session with a RMG
sector specialist currently working with a leading global management consultancy firm
working with the RMG sector in Bangladesh.




Central governing bodies like BGMEA with the help from experts from RMG sector
could design and come up with standard training materials for the floor level
workers which could be standardized and published for the industry as a whole.
Many RMG workers stated that they get minimum direction on how the entire
process flow works, and their knowledge is very limited to the task he/she is
provided with. Floor managers could organize mandatory induction session for
new recruits who will be taken for a floor visit so that the employee can get a holistic
view of the production process.
Periodic training sessions can be held on the use of difference machineries and
how to effectively use them to generate the output in the shortest possible time.
Fernandez-Start et al. (2011) also highlight that productivity could be increased not
only by upgrading the knowledge of the people, but also by investing in capital
machinery which are technologically advanced and then educating the employees
to make use of it efficiently.
Additionally companies are planning to invest more on automated machineries and the
government is supporting the initiative by allowing duty free imports for such capital
machineries (Hossain, 2015). Although many of the owners argue that investments in
machineries and training of human capital will call for capital investments, this can be
perceived as a one-time investment with a multiplier positive effect on long term benefits.
Political and labor unrest
As highlighted by Schwab (2014) the Global Competiveness Report ranks Bangladesh
129th out of 144 countries when it comes to public institutions. Political instability can be
attributed by a number of index, for example: Bangladesh’s ranking of 135th in ethics and
corruption and 122nd in undue influence. This is a clear indicator that the government
practices and decision-making could probably be biased and not completely ethical.
These bureaucratic processes play a significant role in all industries, but especially at the
largest industry in the country, RMG. Political instability can be categorized under two
streams: politics by political parties & labor insurgency (Hossain, 2015). Strikes and
blockades are a bi-product of political agenda and usually does not have anything to do
with the workers. Hossain (2015) argues that most of the workers are generally very poor
and they do not want to engage in destructive activities that can hamper their earning
potential. Rather the political programs have negative impact on the mobility of the
workers. Due to lack of transportations, they cannot always go to work on blockades and
strikes. Yunus and Yamagata (2012) reports a large number incidents pertaining to labor
Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
unrests, but the cause of these unrest are: low wages and working conditions, not political.
From the perspective of Operational Risk, political and labor unrest may post safety &
security related concern for the workers. Historically, unrests have been proven to be
destructive in nature due to vandalism and loss of work hours and production. Foreign
investors and buyers in particular dread these events, as their investments and orders
are often jeopardized due to delays in meeting the business commitments. The
Operational Risk aspect pertaining to this problem is an amalgamation of both external
events and internal events.
Ahmed, Islam and Raihan (2013) conducted a study that identified correlation between
labor unrest and several factors that were initially deemed as the significant contributors.
The study showed that the below mentioned factors had significant positive correlation
with labor unrest.





Lack of Minimum Facility and Safety has been identified to be the most important
factor that leads to labor unrest in the industry. As discussed previously, the
incidents with regards to fire and safety and stability of buildings and infrastructures
have been the major points of concern, and workers are seeking substantial
assurance from their employers so that such incidents do not repeat.
Low salary is the second most important factor contributing to labor unrest. The
minimum wage paid is not at all substantial to lead a life in the city
Deferred payments and benefits. Companies often delay in payment of the monthly
salaries to the employees just to discourage turnovers. Some of the companies
have been alleged to defer bonuses, overtimes and other benefits indefinitely and
often way beyond schedule.
Seasonal Layoff is another problem which directly impacts the workers from time
to time. RMG production is solely dependent on exports and the orders placed
from the foreign buyers. Due to global financial turmoil and seasonal requirement
of products, many of the global buyers do not place orders round the year. This
results in seasonal unemployment and directly impacts the workers in the front
line, as this minimum source of income is their only bread and butter.
Excessive and impractical workload is a problem that has always been widely
criticized. Women are found to be working for more than 10-12 hours everyday
under very stressful and difficult working conditions.
Again, Human Resource Management needs to play a very significant role in this case to
ensure that the welfare of the employees and workers are protected. The key reasons
highlighted above in the discussion are material in nature and are substantial. Hossain
(2015) proposed for a collaborative approach between the factory owners and the
employees at large to form a labor-employee committee, where democratically elected
representatives from the workers would regularly meet and discuss their needs and
expectations with both lower and upper level management. Fernandez-Stark et al. (2011),
pointed out that this is an initiative taken by the RMG factories in consultation with ILO
and this is deemed to be a viable solution to establish communication between the
employees and the employers. HR is to play a critical role in management of such
Proceedings of 13th Asian Business Research Conference
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ISBN: 978-1-922069-93-1
committees. HR representatives must act as the voice of the employees and take neutral
yet achievable strategies on behalf of the top management. Few of the factors that can
be immediately addressed is to eliminate the rather purposeful delay in salary and benefit
disbursement. The workers come from low tiers of the society and they live on this salary.
Hence timeliness in salary receipt is a very substantial factor. Working condition related
to ensuring safety, security at workplace has been discussed in details in the previous
sections.
6. Recommendation and Conclusion
The Bangladesh RMG sector has been the catalyst for socio economic development of
this country. Being the largest and the most profitable industry of the nation, its
contribution in changing the lives of lower social class is substantial. This industry is
expected to expand even further and Bangladesh aspires to be one of the leading apparel
exporting countries in the world. There have been speculations that post the MFA era and
the tightening of regulatory compliance after the Rana Plaza incident would slowly cripple
the profitability and potentiality of this industry. However, this industry had always went
against the tide and even with the ever increasing cost pressure of increasing wages, and
compliance to safety standards, demonstrated enhanced vigilance in growth and
prosperity. A critical look from the contemporary perspective of Operational Risk
Management helped to provide a broader perspective in nature of the risks this industry
is exposed to. Being a labor intensive industry, the key factor behind all of the important
aspects of operational risk was always People.
Human Resource Management is the key. As discussed in the previous sections, there
are substantial rooms for improvement with regards to ensuring: a better workplace for
the workers, better training facilities, a better and a more realistic pay scale and benefit
plan, and a better means of securing their rights. Hence setting up a dedicated Human
Resource Management department in every RMG company would not only modernize
the managerial concepts of this industry but it will also have convert this industry to one
of the most lucrative in the country in terms of employment opportunities. The key point
to remember here is that the one-time investment in setting up of an HR department will
even be substantially dwarfed by the inevitable long term returns in terms of
organizational efficiency and profitability.
Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
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