Calculating Your Downtime Costs – And Avoiding Them
For most businesses, some downtime is inevitable. Machines break, one process or lack of materials bottlenecks the others, and things just happen. Most of the time, this is written off as what something that simply goes on without major consequence and no further exploration is done. However, I recently came across a professional discussion on LinkedIn that challenged business owners to calculate and then take a good, hard look at the costs of their downtime. What I learned might surprise you.
Downtime Costs in a Continuous Production Facility
The easiest setting to calculate downtime in is an environment of constant production. This is usually a factory in which there is perpetual demand for a product and therefore every minute is maximized. This is good for the bottom line and production numbers of a company, but can also lead to high costs during downtime. In such a setting, one needs to look at the financial ebb and flow of a business on a per hour basis, and then assess how much profit is created for each hour of operations. For most businesses, this number will fall in (at least) the thousands or tens of thousands of dollars range.
Once you know how much you make each hour, and by extension how much money is lost in an hour of downtime, we can start to do some simple number crunching. If you calculate that your business loses $20,000 per hour of downtime, each percentage point of working efficiency is then worth $200 per hour to your business (20,000/100). Let’s say you determine that you’re producing at about 90% efficiency. Hey, a 90% would get you an A- in school; not bad, right? Well consider that not having that extra ten percent means you’re losing a potential $2,000 every single hour. Over the course of the year this can amount to millions of dollars. Even percentage efficiency differences of just a couple points can cost hundreds of thousands of dollars per year.
Here’s Some Things You Can Do About It
Have a Plan: The type of downtime that usually ends up costing us the most is unplanned downtime, a case in which the adage “expect the unexpected” really rings true. Having a plan for backups or alternative production routes in the event of things like:
- Power outages
- Machine breakdowns or malfunctions
- Conditions that prevent employees from getting to work
- Lapses in supply materials coming in
- Lapses in demand
Having some idea of what you’ll do in each situation is better than none. You might, for example, have a generator to provide temporary power in the event of an outage, or switch to manual labor for machine and transport tasks that can be safely done by hand if a machine stops working, etc. Train your employees on these plans and have written versions on hand at all times.
Re-Evaluate: One of the easiest ways for downtime to fly under the radar is by simply not caring enough to do something about it. Now that you know that small differences in efficiency and production really can have a huge impact, consider plugging any leaks you have; you might consolidate scheduled maintenance or upkeep tasks to keep your planned downtime minimal. On the other hand, if the only downtime-inducing condition you’re seeing is lack of orders/demand, consider doing more outreach, advertising, and networking to acquire new clients and contracts in the spirit of constant growth. You should be doing this anyway, but its easy for businesses to get content in their current position. Instead, realize that you should be using your employees and equipment to their fullest potential.
Control Damage Gracefully: Above all, you need to be in control during any downtime you do experience. This includes being able to work under pressure to hire or dispatch repairs teams, keeping open communication dialogues with clients about any delays, and communicating effectively with your workers about what’s expected of them in downtime situations. Downtime is costly, but by following these tips you can effectively minimize and manage it with ease and confidence.
- 5 Tips for Reducing Downtime
- Three Ways To Cut Non-Value Adding Processes From Your Business
- The Six Big Losses
- TPM Lean Production
- Chaku Chaku & Other Lean Terms You Should Know
- Top 6 Losses in OEE
- Business Performance Measurement Methods & Their Effectiveness
- Heijunka Box
- Improvement: Make a Win-Win Situation for Both the Business and it’s Employees