Bottom Line Losses Due to Downtime

Business owners know how to make adjustments in their business model when sales increase or decrease, when the cost of materials increases or decreases, and when other fixed costs change. What most business owners do not know is what their true cost on downtime is and why it keeps happening.

Today with markets changing daily and other unknown events causing market adjustments; and downtime happens, every person involved wants to get the problem resolved as quickly as possible and get back to work as soon as possible. At most facilities once the problem is resolved the management’s position or philosophy is that they fixed the issue and hope another issue does not happen too soon. A postmortem on the root cause of the downtime is seldom completed and the true cost of downtime is seldom calculated and tracked.

The following information is an overview on how to be prepared to track downtimes true cost.

Downtime Categories:

• Electrical
• Mechanical
• Man Made
• Act of God
• Planned

Downtime Types:

• Total Outage
• Partial Outage

Downtime Costs:

• Labor
• Parts
• Outside Labor
• Shipping
• Loss of Profit

Downtime Events

In most cases, if the problem was a card failure, the card gets replaced and operations continue like nothing ever happened. Whatever the problem was, the root cause of the failure was never determined. Sometimes, possibly after 3 or 4 issues with the same or similar failure, someone might say something about having repetitive issues.

If the problem was a mechanical part failure, usually the part gets replaced and operations continue like nothing ever happened. Just like above, the root cause of the mechanical failure such as lack of maintenance or end of life part fatigue was never determined.

If the problem is man-made, usually the issue occurred because of lack of training or the employee did not follow the training guidelines for the process which in turn caused the outage.

If the problem is an act of god there is not much that can be done about that.

Every business should know in advance what the cost of downtime labor is for every operation within the company by the minute. Without knowing these figures, the true cost of downtime will never be known.

Each Employee Cost:

• Hourly Rate
• Percentage of hourly company paid taxes
• Percentage of hourly company paid benefits
• Percentage of hourly overhead cost

Examples of Employee Total Hourly Cost:

Hourly Rate                                                                                      $22.57        Per Hour

Company Percentage Paid Taxes Per Hour                  9.2%            $2.08        Per Hour

Company Percentage Paid Benefits Per Hour             49.5%          $11.17        Per Hour

Company Percentage Hourly Overhead Per Hour        33.5%           $7.56        Per Hour

                                                              Employee Cost                    $43.38       Per Hour

                                                              Employee Cost                      $.72        Per Minute

Employee Production Rate                                                                      25        Units Per Hour

Sale price                                                                                            $7.50        Per Unit

                                                   Total Production Unit Value          $187.50        Per Hour

                                                   Total Production Unit Value          $3.12        Per Minute

With this employee every minute of downtime is costing the company $3.84 or $230.20 per hour.

It is estimated by many sources that an average business in the United States over a 10-year period will average between 5-20% down time per year. Using 2080 hours as a normal work year, and this employee as an example, his company can reasonably expect an average downtime between 104 - 416 hours per year. Each 1% of downtime for just this one employee equals $4,788.16 per year. This does not include the cost of repairs.

• 5% $23,840.90    Per Employee
• 20% $95,763.20    Per Employee

Business owners need to realize that 100% of downtime cost is deducted from the business year-end pretax profit amount. Another way of looking at this is every dollar of downtime cost eliminated adds a dollar to the year-end pretax profit in the example below eliminating the downtime would increase the year-end pretax profit 9.85%.

Example:

• Pretax profit                                       $1,000,000
• Downtime Dollar Cost                             $95,750
• Downtime percentage of pretax profit              85%

Once a business calculates their downtime cost in advance it becomes very clear that downtime is expensive. Repetitive downtime without finding the root cause(s) of failure is turning a blind eye to the problem.

When it comes to solving any problem the first step is to define exactly what the problem really is. To accurately define the downtime issues someone needs to know everything that broke or failed. Then a plan can be designed on solving the issue(s) if possible, but the downtime needs to be tracked, logged and calculated to find the total cost.

Every business is different and will have different costs for downtime. Every business will have different issues that cause downtime. Every business will have some amount of downtime that can be eliminated and some amount of downtime that cannot be eliminated; however, when you have no idea what the root cause(s) of downtime is/are you cannot resolve anything.

idea what the root cause(s) of downtime is/are you cannot resolve anything.