CALCULATING DOWNTIME’S COSTS

A couple weeks ago I discussed why it is critical to know your costs of downtime. http://packagingindustry.fraingroup.com/2011/10/05/know-your-costs/. It is an issue I seem to run into every week. Manufacturers who don’t know their costs will find it very difficult to justify addressing and reducing them.

We normally think of downtime as a meaning that the line is stopped but efficiency losses have similar impact. A line that is running at 75% of its normal efficiency will have the same output as a line running at 100% but that is down/stopped for 15 minutes of every hour. Efficiency losses are even more insidious. Fifteen minutes of downtime every hour is noticeable and likely need to be addressed. Inefficiency is often invisible.

Downtime costs can be divided into 2 major classes: Tangible and Intangible. Tangible costs are those which are relatively easy to quantify. Intangible costs are difficult to put a dollar figure on but may be even more significant than tangible costs.

Tangible costs:

Lost production – Everyone needs to visualize money, not product, coming out the end of the line. Each individual product represents some contribution to profit. It may only be pennies but they add up. A food packaging line running a product contributing 10 cents each at 350PPM will cost $35 for every minute it is stopped. Ten minutes per day results in a loss of $87,500 per year in lost profit. Ten minutes a day also results in the lost of more than 40 hours of production, 1 week, over the course of a year.

Lost capacity – The flip side of lost production is lost capacity. A plant that is running at full capacity, when market demand increases, may need to hire people, buy or rent machinery, build additional space, increase inventories and more to increase production capacity. These costs are usually pretty significant. Reducing downtime creates additional capacity for free.

Direct labor – Reducing downtime means more production using the same amount of labor. This allows it to be amortized over more volume, reducing the labor cost per unit produced. Reduced downtime frees mechanics and technicians from fighting fires. It allows them to make proper permanent repairs instead of temporary band aids.

Inventory – The carrying cost of finished inventory is typically around 30% per year. One cause of downtime is changeover between products. Some companies, to reduce the impact of changeover downtime will run larger production lots. This allows the changeover to be amortized over more products but also increases finished goods inventory. Reduced changeover downtime will allow smaller lot sizes and lower inventory levels.

Product loss – Downtime due to damaged or rejected product or machine jams will result in the loss of whatever that product is worth. Even when it can be reworked, there is always a rework cost.

Intangible costs:

Responsiveness – Less downtime, and especially less changeover downtime, will allow a company to be more responsive to their customers. Better responsiveness will provide a strategic advantage over competitors. The company able to satisfy often fickle customers will usually be the industry leader.

Stress – Downtime causes stress. It causes stress on machines. More importantly it causes stress on the teammates. People and machines both perform better when stress can be reduced.

Innovation – Downtime reduces the time accessible to imagine and implement ideas to improve operations. Stress mentioned above reduces the ability even when the time is available. Reducing downtime begins a virtuous cycle. Reduce downtime > improve operation> further reduce downtime  > further improve operation. Repeat ad infinitum.

Calculating the cost of downtime is not easy, few things worth doing ever are. The above examples are hardly exhaustive. Those are some ideas where to look for costs. The key is to get started. Get some estimates, no matter how imprecise they may be initially. Even imprecise estimates are better than nothing. Once started, it will be easier to refine them.

If you would like a copy of a presentation I did on changeover costs at PackExpo, drop me a note at johnhenry@changeover.com