The financial burden of downtime is concerning for any business, but for manufacturing firms, it is one of the most critical issues faced and poses a significant threat to the bottom line. That is why many manufacturers are looking for ways to minimize downtime. And they typically will focus on the types of events that cost the most. But as a manufacturer, do you know how to accurately calculate the true cost of downtime? This is a calculation that many get wrong and can significantly hamper efforts to minimize the financial impact of downtime occurrences.
At the highest level, you can divide downtime occurrences into two categories: planned and unplanned. There is a big difference in the cost to address each of these. As a matter of fact, a recent research study concluded that unplanned downtime costs 10 times as much as planned downtime! Therefore, focusing on minimizing unplanned downtime occurrences will have the greatest financial impact. But just how much?
This is where many manufacturers significantly underestimate their costs. Some only look at the direct cost of labor and materials to complete the repair, but there are many other factors that must be included – both direct and indirect. Factors such as lost production (lost revenue), wasted labor, excess inventory, stress to both employees and equipment, tarnished reputation, and missed opportunities for innovation are just some important considerations.
One of the largest direct costs is lost production. When machines are down, they are not producing. As an example, if a production line produces 500 widgets per hour, and each widget represents $5.00 in profit, the cost of lost production $2500 per hour. If we use an average of 4 hours to resolve an unplanned downtime occurrence, that would translate into a loss of $10,000!
Similarly, while a production line is down, the associated labor is still being paid (but not producing). This cost is never recouped. If the production line was already capacity constrained, there may be costs associated with late deliveries or, even worse, canceled orders. All of these are tangible and relatively easy to calculate.
Then there are intangible costs, such as reduced productivity due to worker stress and/or the stress on equipment. If customers are impacted by any downtime, you run the risk of not simply losing one order, but the customer for life. And if your staff is focusing too much time on fixing problems, there is no time left for innovation. While this is a more long-term impact, and a bit difficult to quantify, it should not be ignored.
You can see how all of this can add up. For the manufacturing industry, hourly costs of production downtime range anywhere from $2,000/hour to $30,000/hour! Check out this downtime calculator from Stratus. It can help guide you to consider the relevant costs associated with downtime.
How to Manage
Many manufacturers are now focused on moving toward predictive maintenance programs to minimize the occurrence of unplanned downtime. This involves using Smart Manufacturing technology to gather real-time performance data from production assets and feed that into advanced analytics programs that not only reduce the number of unplanned downtime occurrences, but also improve response time to such events.