Measuring the Cost of Inefficiency

You’re buying a new high speed vertical Form-Fill-Seal machine and have narrowed the choice down to two. Overall, they seem identical but one costs $200,000 the other $300,000. The only difference is that the first machine will run at 75% efficiency and the other at 77%.

Which machine do you buy? Are you willing to pay an extra $100,000 for an extra 2% efficiency? I suspect that most people will say no. It just doesn’t feel like it is worth it and there doesn’t seem to be a way to quantify the cost of the 2% loss.

Until a couple years ago I was the same way. It just seemed like too little to be worth that much money. Then Rich Frain and I wrote our book, Secrets of Buying Packaging Machinery. In the financial chapter I addressed the cost of downtime and how to evaluate it. I realized that that inefficiency was simply a form of downtime and could be evaluated similarly. After talking with several Black Belts, including my go-to expert Vivienne Henry, the concept proved valid and we published it.

Here’s the insight:

A line is running at 100% efficiency, has 0% downtime. Running at 0% efficiency, it has 100% downtime. Assuming linearity, downtime percentage corresponds inversely to the efficiency percentage.

A line running at 50% efficiency will have the equivalent of 50% downtime. A line running at 75% efficiency will have the equivalent of 25% downtime.

In our example, assuming a 2,000 hours per year of scheduled production, the $200,000 machine will run 1,500 hours and the $300,000 machine will run 1,540 hours (or an additional week).

If both machines run 100ppm, 40 hours is worth 240,000 additional products for sale. If each product brings an additional 50 cent margin, that is an additional $120,000 margin, every year. Payback on the additional purchase price is about 10 months.

Not too shabby.

I’ve simplified to illustrate the concept, but even when you start adding other factors, two key concepts remain:

1. Efficiency can be quantified in terms of time, production and money.
2. Even minimal efficiency gains pay off big.

Next time you think 1-2% is not enough to worry about, think again.