A Review of the Linkage Between Manufacturing Efficiency and Downtime Cost

Manufacturing Efficiency

Companies strive to attain manufacturing efficiency by removing process bottlenecks, improving productivity through job redesign, training, and other interventions. They implement quality interventions such as Total Quality Management, Six Sigma, or Lean manufacturing process; improving inventory management by adopting methods such as Just in Time; and more. All these interventions focus on eliminating inefficiencies and waste and improving compliance with specifications.

The benefits of improved manufacturing efficiency include improved operating margins, better returns on investment, increased cash flow, better employee morale, better relationships with stakeholders, a more favorable corporate and brand image, and more, all contributing to more profits.

Elements of Downtime Costs

Downtime is a major factor that hinders the attainment of manufacturing efficiency. It leads to hold-up of the manufacturing process and creates a cascading effect that disrupts the workflow.

The ill effects of downtime and the related costs include:

• Cost of labor rendered idle by unavailability of the machinery. The actual costs include not just the direct wages of idle workers, but also overhead such as insurance, retirement, training, resources utilized by the labor and other related costs. This may also include overtime payments to make up for the lost hours.
• Cost of spares, overtime for maintenance personnel, communications, and other resources to restore the system.
• Extra costs to start a machine, such as excessive power consumption during start-up.
• Cost of waste resulting from incomplete or half-baked products trapped during the shut-down.
• Opportunity cost of possible profits by selling the extra production had the downtime not occurred. The formula to derive such lost revenue is (Gross Annual Revenue/ Number of Manufacturing hours in the year) x number of hours of outrage.
• Late delivery surcharges for delayed shipments, causing direct reduction in profits.
• Indirect costs related to loss of customer goodwill owing to inability to fulfill orders or low product availability in market. This leads to losses owing to reduction in sales and/or extra costs for public relations and advertisements to regain goodwill.

Totaling all the above costs, as applicable, provides the downtime cost for the applicable period. Very often labor costs, the direct cost of downtime, pale in comparison to the other indirect or hidden costs. To obtain average annual or monthly downtime costs, divide the total downtime cost by the number of days in the period, and multiply by 365 or 12 as required.

The relationship between manufacturing efficiency and downtime cost manifests in the fact that the above downtime-related elements and cost increase the cost per unit of the product, lower the productivity ratio by inflating the wage bill, create obstacles to work flow, and reduce product quality. Such factors directly cause manufacturing inefficiency.

Overall Equipment Effectiveness

The overall performance of machinery or a unit depends on Overall Equipment Effectiveness (OEE). OEE is a function of availability of the machine, performance rate, and quality reject rate. Overall Equipment Effectiveness = Availability X Performance X Quality

All three OEE factors relates to downtime costs.

• Availability rate is the percentage of time the machine engages in production. This is total hours of normal scheduled utilization divided by the total hours less downtime. Availability Rate = Total scheduled operating hours / (total scheduled operating hours – downtime hours)
• Performance rate is the percentage of available time that the machine produces at theoretical speed for individual products, and measures speed losses resultant from inefficient batching, machines jams, and other factors, which may indirectly be a result of downtime.
• Quality refers to the percentage value of the total output less waste and scrap. Machine downtime can generate scrap and waste as well as cause disruption of process flow, impeding quality in a big way.

Downtime determines the extent of machine utilization, and lesser the downtime, the better the reliability of the machine or unit. Reliability increase Overall Equipment Effectiveness, and better OEE directly contributes to manufacturing efficiency .

Reference

1. North American Systems International. “The True Cost of Downtime.” Retrieved May 14, 2011.
2. Fitchett, Don. “What is the True Downtime Cost (TDC).” Retrieved May 14, 2011.
3. DBA Manufacturing. “Manufacturing Efficiency Guide.” Retrieved May 14, 2011.

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