1 January 2006

When True Cost of Downtime Is Unknown, Bad Decisions Ensue

By Dave Crumrine and Doug Post

"Downtime" is a nasty term and the subject of many staff meetings, reports, continuous improvement programs, and company metrics. You would think something so important to nearly every industrial sector would have a clear set of definitions and methods by which to calculate it.

Almost every factory loses at least 5% of its productive capacity from downtime, and many lose up to 20%. Downtime consultants estimate 80% of industrial facilities are unable to estimate their downtime accurately, and many of these facilities are underestimating their Total Downtime Cost (TDC) by 200-300%. Is this a cause for worry?

Consider not knowing TDC compounds itself when organizations seek to prioritize capital investments. As these organizations get more sophisticated at using financial tools like return on investment (ROI) and other leverage metrics, these tools become the key criteria in selecting and approving projects.

When a manufacturer uses ROI, it's especially important to know the real cost of downtime in your plant. By underestimating it significantly, 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.

Knowing your TDC can help you pick the best capital projects and then help you 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 is critical when executing an aggressive plan to minimize downtime. Selection decisions on your engineering, contracting, and other team support must occur 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.

A major challenge of calculating downtime costs is oftentimes you find the real costs hidden in other cost areas and do not show up unless you account for them properly. To effectively calculate TDC, you have to uncover all these costs and list them in a separate downtime category.

Consider the important components of TDC.

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 like 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, set up (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-The impact on downstream equipment at each stage in process.

Sales expectation-Include the excess capacity such as larger buildings, spare production equipment, etc.

Downtime costs (per occurrence)

Time-Calculate/record the time from the first occurrence of equipment breakdown to the time when equipment was back into full production.

Reduced Production-Units per hour lost.

Scrap-Include recycle costs and/or scrap value.

"Band-Aid Costs"-The costs of temporary fixes until the permanent fix is in place.

OEM, Consulting, and 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-Include costs for special handling of required parts.

Obviously there is quite a bit to think about when determining TDC. With so much at stake, payback can come back in a number of ways.

About the Author

Dave Crumrine is president of Interstates Construction Services, and Doug Post (doug.post@interstates.com) is president of Interstates Engineering, sister companies of Interstates Control Systems, a registered member of the Control System Integrators Association (CSIA). True Downtime Cost (www.downtimecentral.com) contributed to this article.