Understanding The Financial Cost of Downtime in Manufacturing

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No business wants to experience downtime. When you’re in manufacturing, the financial cost of downtime can be significant. To satisfy your financial goals and keep your bottom line strong, you need to understand how much downtime is costing you as well as how you can reduce it.

Calculating the Financial Cost of Downtime

Research shows that the average manufacturer deals with 800 hours of downtime per year – or more than 15 hours per week – and the costs can be outrageous. Just for perspective, consider that the average automotive manufacturer loses $22,000 per minute of downtime. While your costs likely don’t come anywhere close to this, even losing a few hundred dollars per hour can have a significant impact on your bottom line.

Downtime is a part of doing business in an imperfect world where hundreds of variables are outside of your control. Ignoring the financial cost of downtime isn’t an option. And, to address it, you have to understand how it’s impacting your organization’s profitability. Just to give you an idea of the far-reaching impact of downtime, here are some of the direct and indirect costs associated with it.

Lost production

Obviously, the most direct impact of downtime is a loss of production capacity. If you typically produce 600 units per hour with an average profit per unit of $50, a single hour of downtime costs your company $10,000 in lost revenue. Account for a few hours of downtime per month and the costs really add up (You can use this calculator to play around with your own).

Wasted labor

When equipment goes down, the employees you’re paying to operate the equipment essentially become useless. This results in wasted labor costs. So not only are you not making money, but you’re also paying people for a lack of

It’s not just the employees who are directly responsible for the piece of equipment, though. When there’s a major breakdown, you likely call for all hands on deck. This causes a chain reaction effect where other areas of the business to become strained – such as customer service.

Depleted inventory

In many businesses, there needs to be a certain amount of product in the warehouse to keep operations running smoothly. Downtime prevents you from reaching these goals and depletes inventory. Considering that there are production limits when all equipment is fully operational, it can take days, weeks, or even months to catch up.

Stress
One of the biggest indirect costs comes in the form of stress – both on the equipment and the people running the equipment. When a machine stops working properly, it puts a strain on other parts of the system. This stress can cause further problems down the road. This puts added stress on the people operating the machinery and leads to poor decision making and mistakes.

Lack of innovation

When all of the company’s focus is on fixing equipment and solving problems, there’s no time or energy left for innovation – which is the lifeblood of any good business. This cost might not be felt in the moment, but the long-term impact can’t be denied.

Erosion of trust

When the financial cost of downtime impacts customers, they start to lose trust in the band. A lack of dependability becomes obvious, and they begin to think about pursuing other options.

6 Tips for Reducing Downtime

Depending on how you define downtime, what industry you operate in, and how much you rely on specific equipment to keep your business operational, you’ll experience some or all of these effects. But whether you’re doing $1 million of business per year or millions per day, you can’t afford to gloss over this issue.

While some downtime is inevitable, it doesn’t have to be something that continually plagues your business and constantly affects your bottom line. With the right approach, you can reduce downtime and the financial cost of downtime.

1. Conduct a Risk Audit

If you really want to start with a clean slate, you should conduct a risk audit. In fact, this is the fastest and most effective step you can take in reducing the risk of the financial cost of downtime.

In terms of equipment, one of the more helpful things a risk audit will do is point out obsolescence (or at least pending obsolescence). This will help you understand when to replace equipment in order to stay competitive and avoid expensive repairs down the road. (Parts for obsolete equipment are expensive and hard to come by.)

2. Invest in Preventative Maintenance

“No one wants to think about their new machine not functioning properly, but at some point, any machine will need repairs,” explains Dalmec, a leading supplier of lift assist devices and industrial manipulators. “The difference, of course, is how frequently those repairs are needed, how early on in the life of the machine the issues begin appearing and how costly the repairs will be.”

As wasteful as it may seem to slow down operation in order to work on a piece of equipment that’s functioning fine, preventative maintenance is critically important to reducing and eliminating future downtime.

It’s best to set up preventative maintenance schedules for each piece of technology or equipment that’s integral to your manufacturing processes. By defining a schedule in advance, you reduce the risk of putting it off and force yourself to stay on track.

3. Invest in Proper Training

Sometimes equipment malfunctions or breaks down, but not all downtime can be blamed on system errors. Sometimes user errors are to blame.

If you’re serious about reducing downtime, you must invest time into training and empowering employees. Operator errors are extremely common in manufacturing and have a tendency to be repeated over and over again until the root problem is addressed.

Training should be tailored to each and every employee, accounting for their strengths and weaknesses. A good operator should not only know how to operate his machinery but also how to fix and maintain it.

4. Cross-Train Employees

Over the years, manufacturing has become a very specialized field. You have employees who know how to perform a single function or produce a specific part of a product but are totally uninformed and unskilled when it comes to other issues. This might not seem like an issue when everything is running smoothly, but it becomes highly problematic when there’s friction.

One of the best things you can do to prevent downtime – or at least mitigate the negative repercussions of downtime – is to cross-train your employees. This does a couple of different things. First off, it ensures that more employees can come to the rescue and solve a problem. Secondly, it allows you to put displaced employees to use in other areas of the business. This reduces wasted labor costs and limits the “downstream” effects.

5. Make Smart Investments

You need to be smart about how you’re investing in new technology. Not only do you need the right equipment and systems, but you also need to be cognizant of the timing.

“Develop a strategic enrollment plan that allows you to integrate new technologies into your plant with a modernization program,” plant management expert Jason Sluyter advises. “Implementing a modernization program is a good way to reduce the amount of unplanned downtime.”

This strategic enrollment plan can be structured using the insights you gained from your risk audit. Move in waves, rather than replacing all technology at once. By integrating one new system at a time, you give yourself space to study the impact and make necessary tweaks.

If you’re worried about the financial impact of integrating new equipment into your operations budget, consider equipment financing. There are opportunities for you to finance expensive investments over a number of years. Not only will this create more space in your budget, but it’ll also give you the chance to invest in multiple upgrades within a short window of time. Plus, this investment may be worth it considering how much it offsets the financial cost of downtime.

6. Collect and Study Data

You’re operating in a business world that has an overwhelming amount of data. Every action you take or process you complete can be analyzed and measured using thousands of data points. But it’s not enough to collect data – you need to use it in the right way.

“Data can provide valuable business insights and cost savings, but it’s only useful if the collection and analysis of that data is easy, reliable, and fast,” Eric Ehlers writes for Impo.

It shouldn’t take you hours or days to collect and analyze insights for actionable takeaways. You need the ability to derive insights in real-time – or at least within minutes. This is the only way to understand what’s happening and put a significant dent on downtime.

Putting it All Together

In the world of manufacturing, downtime is an ugly word. It’s the bane of your existence – something you dread when you get out of bed in the morning and lay down at night. But it doesn’t have to be something you deal with regularly. By grappling with some of the big issues on the front end and setting up progressive strategies and techniques for dealing with potential problems, you can reduce downtime, increase profits, and build a more stable and formidable business.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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