The hidden cost of downtime in manufacturing
June 7, 2024
Updated on: June 10, 2024
4 min read
For a manufacturing company, predictability is of the utmost importance. Surprise events are often troublesome and unwelcome. Unplanned downtime in manufacturing is one example of a common, unpopular surprise. The cost of downtime and putting it right is another.
But when everything is running again and you absorb the repair bill, further, hidden costs strike you again. It is crucial to understand the full cost of downtime for your business. This includes lost sales, disappointed customers, and damage to your reputation. Understanding the effects is vital for building resilience to such shocks.
What is the direct cost of downtime?
As the name suggests, the direct cost of downtime is the easiest to identify and measure, and it is not hidden. However, there are several costs to consider...
These include the cost of purchasing parts to fix any faulty equipment. Additionally, there is the cost of production waste to take into account. These are the materials that were prepped but cannot be used due to the downtime. The cost of providing operators with idle time also factors in, even if they are sent home for the afternoon.
Direct downtime costs also include any additional expenses required to deliver the affected customers’ orders. Such as staff overtime, contracting out production, and expedited shipping.
What is the indirect cost of downtime?
The first type of hidden costs associated with downtime are indirect costs. We can identify and measure these amounts, but they are not directly related to the production downtime itself.
Decreased revenue
Of course, the quantity of widgets available for sale will decrease if the machinery that produces them breaks down. However, downtime on a busy production line will also create a backlog and increase customer lead times. In addition, it is worth considering the allocation of resources such as man-hours, capital, warehousing, and raw materials. If these resources had been used in other areas, it is possible that additional revenue may have been earned.
Furthermore, downtime can lead to lost sales opportunities. If a potential customer tries to purchase a product that is unavailable due to downtime, they may look elsewhere and potentially never return.
Personnel costs
As well as the time that machine operators don’t have any work to complete, unplanned downtime in manufacturing can often need extra support from administrative staff. It is necessary for managers to set aside more time in order to coordinate the response of the company.
Obtaining parts in a timely manner should be a top priority for purchasing teams. Also, customer services may have to address the growing dissatisfaction of customers. All of these additional man-hours put in have a negative impact on the bottom line.
However, the impact goes beyond simply the number of hours worked. Downtime can lead to a decrease in employee morale, especially if it becomes a frequent occurrence. Frustration and a sense of helplessness can set in, potentially impacting productivity even after the line is back up and running.
Customer compensation
Having to wait through a period of production downtime can lead to negative effects on the customer. Customers have the option of obtaining their products from a different supplier or even cancelling their transaction altogether. It is possible that the order will be much larger than the products that were just impacted by the manufacturing stoppage. They may be due a refund for paid invoices, or in the worst case may be due consequential damages.
What is the intangible cost of downtime?
Intangible costs are the second kind of hidden costs that are considered to be connected with downtime. These are the factors that we are able to identify, but it is quite challenging to measure them. There may be more to the cost than just money. In addition to this, it is probable that there is a substantial amount of information that is concealed.
Although it may be hard to measure the exact impact, its importance should not be overlooked.
Existing customer relations
Existing customers are those most likely to be directly affected by downtime in your manufacturing operation. They may, themselves, experience disruption as a result of your production downtime. Moreover, they can be subject to related financial costs such as production line stoppages or missed sales opportunities on their end.
In response, they may reduce future orders, or look for other suppliers. This loss of trust and loyalty can be particularly damaging, especially if negative experiences are shared online through reviews or social media.
Brand reputation
If news of your company’s production downtime spreads, it may begin to impact the image that people have of your brand. This is particularly true if your company has a reputation for fast production turn-around times. This may affect the willingness of future partners, customers, and shareholders to work with your brand.
Downtime costs are not just based on the time you spend waiting for a machine to be fixed and returned to service. Measuring downtime in this manner may not provide an accurate assessment. It fails to consider the broader impact that the temporary loss of essential equipment can have on your company.
Downtime has a real impact that goes beyond just the obvious costs. It can have hidden consequences that are hard to measure, like how it affects how customers see your brand and reputation.
