When purchasing equipment, do you factor in the cost of downtime the equipment will create when it stops working? Of course you don’t. You’re buying new equipment so that you don’t have to deal with downtime. But if the equipment is poorly designed and shoddily constructed, you’re going to experience downtime despite the fact that it’s new. New doesn’t have anything to do with performance. And it doesn’t promise issue-free production.
Our belief is that you need to consider dependability and performance and cost of ownership when purchasing machinery, not just the price. The cost of ownership extends beyond the up-front price. Downtime is one such cost.
Calculating the Cost of Downtime
So, you went with the conveyor quoted at $30,000 instead of instead of the one quoted at $40,000. After your less-pricey conveyor system is installed, you begin experiencing problems. It plugs. It leaks. The chain breaks, and you have to halt production to fix it.
Outage costs are calculated by multiplying the hours of downtime by the cost per hour of lost production. In other words:
Outage costs = Downtime (hrs) x Cost/hr
How do you calculate the cost per hour of downtime? It takes some calculating.
First, consider whether the downed equipment interferes with your ability to make sales. If so, you’ll need to calculate your revenue per hour. Seasonal spikes and drops can affect this, of course, but for a general figure you can divide your annual revenue by 8,760 (hours in one, 365-day year).
For example, say your business brings in $10 million a year. Its revenue per hour would be $1,141.55.
Also calculate the percentage the downtime will have on sales. For example, if your business conducts half its sales online and half through salespeople, then a downed web server would have a 50 percent impact on sales.
Second, consider losses to productivity. How many employees will the downed machine affect? Calculate the average employee cost per hour, including pay, benefits and office space. Also consider the percentage of productivity that the downed machine affects. Is some productivity possible, or does it hamper productivity on all levels?
To get a good picture lost profitability, you will likewise have to calculate the units per hour produced and the average profit per unit sold.
Third, you will have to calculate the cost of fixing the problem: machinery parts, shutdown and startup costs, and costs of hiring external experts, such as electricians, if required.
Example of Lost Productivity Eating Revenue
Say you own a woodchip company that brings in $5 million per year in revenue. And let’s assume that $30,000 conveyor you unexpectedly breaks down after a few months. How much will it cost your company?
Fortunately, such a catastrophe won’t affect your sales, so we can skip step one. It does, however, affect productivity. Because this conveyor moves chips from the chipper to the storage unit, you have to stop almost all the production process to deal with the issue. That puts five people on the sidelines while your maintenance technicians fix the conveyor. Pay, benefits, insurance, training, and floorspace for these employees adds to $20/hr. each. If the conveyor takes five hours to repair, you automatically lose $500.
You will also lose five hours of productivity. With revenue at $5 million per year and a workweek of 40 hours, you lose $12,000 in revenue due to your machine’s break down.
With that figure alone, the unexpected break down costs more than the difference in price between the $30,000 and $40,000 conveyor. And we haven’t even figured in shutdown/startup costs, replacement parts, etc.
Is it worth buying a machine for $10 thousand in up-front savings if the machine will underperform? You decide. Our opinion is that your company will benefit from researching the dependability of machinery and investing in quality because a machine’s total cost far exceeds its purchase price.