Blog: Understanding the true cost of downtime27th Jun 2018

Downtime is a big issue within any production environment. Yet, despite receiving a high level of attention, it is surprising how many companies end up miscalculating the impact it may be having on their business.

In simple terms, downtime is used to describe any unplanned event that disrupts or brings company operations to a halt - whether wholly or in part, for 5 minutes or more. Even a short break in activity can come at a substantial cost, especially when it comes to production line efficiency, hitting targets and meeting customer demand and expectations.

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That’s because productivity and profitability are closely linked, which is why improving the efficiency of the production line remains top of the agenda for most manufacturers.

Understanding and evaluating the genuine cost of downtime isn’t always easy. There are many factors at play, and while the financial hit you take may be obvious in some areas, in others it will be more subtle. There is no easy answer, but the process needs to begin with recognition for what the wider implications for the business may be.

To help you, we’ve taken a closer look at what needs to be considered as part of your calculations – both the tangible financials and more subtle implications, that can all impact on the bottom line.

Tangible costs of downtime

RaspeberriesThe first step is to ensure you have covered off all the tangible costs – i.e. the clear-cut and generally easy to measure, financial repercussions associated with any period of downtime. These will commonly include:

  • Loss of revenue

The most obvious impact of downtime is likely to be a drop in revenue. If the wheels aren’t turning, then you’re not making any money and the longer the downtime lasts, the harder it then is to catch up.

  • Failing to meet customer demand and expectations

You may fail to fulfil customer orders and what is expected of you. In some cases, this may result in financial penalties, when service level commitments are not met. But it also wastes resource, with additional time needed to be given to liaising, updating and managing customer relationships.

  • Increased product wastage

Downtime may result in increased product wastage for a number of reasons - for example, if orders are not fulfilled and end up being cancelled, and the associated ingredients cannot be repurposed.

  • Increased overtime to fix and recover

Racing to catch up, especially after a significant period of downtime, will often require all hands on deck, working around the clock to get back on track. This may mean extra staffing and overtime needing to be paid out.

  • Loss of employee productivity

The human part of the production process is just as important as any machinery you may be using. But unlike machines, people can take time to get into a rhythm. Downtime can result in stress, lack of motivation and boredom, all of which can have an impact on productivity.

  • Premium emergency shipping costs for spares

Additional and unexpected costs incurred as a result of downtime may include the need to pay premium prices to get and ship spare parts quickly. This cuts away at your margins.

  • Premium shipping costs to the customer to try to minimise shipment delays

You may then need to expedite delivery to customers who you have kept waiting, again incurring additional shipping costs, on top of covering delivery costs that may otherwise have been picked up by the customer.

Intangible costs of downtime

CookiesAs well as the more obvious costs, what can often be overlooked when evaluating the financial impact of downtime are the intangible costs. While these may be less easy to measure and put an exact figure on, their impact can still be substantial.

Examples here, include:

  • Knock-on impact on other scheduled work

When you’re thinking about fulfilment and targets, are you also thinking about the impact that downtime in one area of the production line may have on other scheduled work?

  • Damage to reputation

What takes hard work and time to build, but can be destroyed overnight? The answer is a good reputation. If you lose this then it won’t be long before you feel the impact. The digital world we now live in means word of mouth can spread faster and further than ever before. Above all, customers expect you to deliver on your promises. If you haven’t got a contingency plan, or the same issues crop up again and again, then you’re on very shaky ground.

  • Decline in employee morale

Tied closely to raised stress levels and the added pressure of playing catch up is the impact that downtime can have on staff morale. Throw communication with some unhappy customers into the mix and the workplace can quickly become an unfavourable place to be. Going further still, see a problem repeat itself again and again, and you may be faced with an unhappy work force. Employee churn can be one of the biggest headaches for any employer.

  • Innovation

All businesses need to be constantly innovating, if they are to retain their competitive edge. Time and energy spent playing catch up or firefighting, is time that could be put to better use, coming up with the next big thing and an idea that takes the business up a gear.   

Accurately measuring downtime

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Even the most efficient of production lines can hit problems and the unexpected from time to time. While calculating the true cost of that downtime may not be as straightforward as it first appears, it’s important to recognise and consider all the ways it may potentially impact on your profitability.

Once you are aware of what the potential consequences may be, you will be in a far better position to plan and take steps to reduce any such negative impact.

To give you a head start, we have put together a quick and easy availability calculator tool, that allows you to benchmark your availability rate against other companies. It can also provide you with an estimate of how much downtime might cost your business every year. Although it’s only a guide, we hope you find it a useful starting point.

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