How much is an hour of downtime costing you?
According to Oneserve, faulty machinery costs UK manufacturing three per cent of all working days, for an annual average of £31,000 per company. The report also states that three quarters of UK manufacturers outsource equipment maintenance, with each business spending £120,000 a year on average. Lost business and maintenance costs are the most obvious consequences of downtime, but not the only ones.
The figures provided by Oneserve are worrying, but even more concerning are the findings of Aberdeen’s independent research, according to whom 70 per cent of companies lack awareness of when their equipment is due for maintenance and 80 per cent are unable to calculate how much an hour of downtime is costing their business.
However, being part of the 20 per cent of that understand the true cost of downtime gives businesses a huge advantage over the competition, as this knowledge allows them to plan investments based on tangible facts and figure instead of on a gut feeling.
For example, managers could be hesitant to invest £100,000 to save ten minutes of downtime a day. But if we establish that downtime is costing the company £24,000 an hour, those ten minutes are worth £4,000 and the initial investment will be repaid in only 25 days.
The tangible costs
A business’s true downtime cost (TDC) is the sum of all costs sustained while production is on hold, as well as the resources needed to fix the cause of the problem. These include lost production, fixed costs such as labour and utilities, replacement parts, maintenance, but also lost businesses opportunities and erosion of clients’ trust.
TDC can be divided into tangible and hidden costs. Among the tangible costs, the first and most obvious is the cost of lost production. If a business typically produces 500 items an hour with a profit of £25 per item, an hour of downtime is costing that business £12,500 in lost revenue. However, this is just the tip of the iceberg.
Employees’ salaries and utilities are also substantial costs. When equipment goes down, the company produces less while using the same amount of labour force and retail space. Sometimes these costs can even rise, as the maintenance team might need to work overtime to get the system up and running again.
Another significant cost, especially for plants working with perishable goods, is that of lost or damaged product. For example, a milk processing plant will have, depending on the external temperature, 24 to 48 hours to finalise production. If the problem is not fixed on time, the whole batch of milk is destined for the bin.
The hidden costs
Besides the most immediate costs of downtime, there are others that might be difficult to calculate but affect a company’s performance just as negatively.
The first is the cost of depleted inventories. If production is on hold for several hours, stock starts to decrease. As soon as production resumes the plant will have to compensate for the lost productivity to continue to service its clients as usual. This means that employees might have to work overtime and machines will be working at full capacity, increasing costs.
If the plant is unable to compensate and clients are not serviced on time, the manufacturer runs into a different cost – that of losing customers. When downtime impact clients, they might start to question your ability to supply goods on time and might start to look into working with more reliable suppliers.
Finally, downtime hinders creativity. When the company’s focus and resources are all on fixing equipment and solving production issues, there is no energy nor capital left for innovation. This cost can seem negligible at first, but over time it seriously restricts a business’ competitiveness.