This article was written by Dave Crumrine and Doug Post, of Interstates.
Downtime costs every factory at least 5% of its productive capacity, and many lose up to 20%. But an estimated 80% of industrial facilities are unable to accurately estimate their total downtime cost (TDC). Many of these facilities are underestimating their downtime by 200-300% according to downtime consultants.
Not knowing your TDC compounds itself when you set priorities on capital investments. As your organization becomes more sophisticated at using financial tools, such as return on investment (ROI) and other leverage metrics, these tools become the key criteria in selecting and approving projects.
When ROI is used, it is especially important to know the real cost of downtime in your plant. By significantly underestimating it, you could be missing out on valuable opportunities for your own plant, making poor decisions, or neglecting what you intuitively know are the most important priorities. By knowing your TDC, you can pick the best capital projects and then make better decisions within these projects.
Sometimes the overall approach to a project can change based on this important number. It is not uncommon for the TDC on a retrofit project to approach or exceed the project's capital cost. In a situation like this, the right project delivery method and the right project delivery team are critical when executing an aggressive plan to minimize downtime. Selection decisions on your engineering, contracting, and other team support must be based on increasing your total project ROI (including reducing downtime and risk). This may be contrary to your normal purchasing methods. Keep your eye on the project ROI "ball" to overcome these hurdles to building a great team.
Many of the real costs of downtime are hidden in other cost areas and do not show up unless you account for them properly. To effectively calculate TDC, uncover all of these costs and list them in a separate "downtime" category.
Take a look at the important components of TDC. As you read the list, assess whether your downtime number fully includes these issues.
Equipment related costs
Annually calculated as a constant unit price
- Labor cost: Account for the full cost of direct and indirect labor with benefits, and include a share of all overhead positions in the plant, such as managers and support staff.
- Product cost: The cost per unit of production at each stage in the process, along with the units per hour at the machine/profit center, can tell you the value of the product lost during an incident.
- Startup cost (per machine, line, cell, and profit center): Include energy surge costs, setup (materials and manpower), percent of reduced production (units per hour lost), scrap produced (include recycle costs and/or scrap value), quality inspection and rework costs), as well as other startup costs.
- Bottleneck cost: Predict the cost impact on downstream equipment at each stage in the process.
- Sales expectation: Include the excess capacity, such as larger buildings, spare production equipment, etc.
- Time: Calculate and record the time from the first occurrence of equipment breakdown to the time when equipment was back in full production.
- Reduced production
- Band-aid costs: Figure in the costs of temporary fixes until the permanent fix is in place.
- OEM, consulting, contractor costs: Include the annual fee or estimated cost per year for support during downtime.
- Tooling: Calculate the replacement or rework cost for tooling (per occurrence).
- Parts/Shipping cost
As you can see, there are many factors to consider when determining TDC. With so much at stake, an accurate estimate of TDC is essential to your bottom line.
About the Authors
Dave Crumrine, P.E., PMP, is president of Interstates, headquartered in Sioux Center, Iowa.
Doug Post, P.E., is president of Interstates Engineering, Inc.
A version of this article also was published at InTech magazine.