In the material handling business, downtime is dreaded as one of the worst things to happen to an operation. When your equipment isn’t running and employees aren’t working, productivity and profit take a hit. What’s worse than downtime is unplanned downtime. It’s common knowledge that downtime should be avoided at any cost. But only a few organizations are aware of how much downtime actually costs them. Being aware of your downtime cost can be pretty helpful. This knowledge can enable you to justify a new equipment purchase and enhance productivity by discovering inefficiencies. In this article, we will discuss the real costs of downtime.
The impacts of downtime can be different in various industries, businesses with many factors driving the result. However, the factors that add up to the downtime cost are mostly similar. These are the factors that determine the cost of downtime to your operation:
- Loss of revenue/Unfulfilled orders
- Loss of productivity of employees or the whole operation
- Customer dissatisfaction
- Potential loss of customers
- Negative impact on the firm’s reputation
While downtime costs vary in industries and business sizes, you can roughly calculate the cost of downtime in a given operation.
Determining the Cost of Employee Downtime
- Ascertain the number of employees affected by the downtime.
- Make an estimate of the average salary on an hourly basis of those affected employees.
- Determine the employee productivity impact percentage. This number tells the amount of impact an outage has on employees’ productivity. This should be calculated hourly as well. For instance, a power outage might lead to a roughly 70% impact in productivity as all the material handling equipment running on electricity would be down.
- Now, you can calculate the cost of downtime by multiplying the three numbers determined above.
- For example: 20 employees x $80 per hour x 70% = $1120. Thus, $1120 would be your downtime cost.
Calculating the Cost of Lost Revenue
- Ascertain your average daily sales for the particular month by way of average sales during the season or month in question. Do the same for a longer sale period.
- Determine the total hours of business in a day.
- Take the hours of total downtime hours.
- The cost of lost revenue = Daily Average Sales / Daily Hours x Total Downtime Hours
- For example: $14,000 per day / 7 hours x 12 downtime hrs = $24,000. Thus, your lost revenue would be $24,000.
However when one or more of your material handling equipment is down, you need to take into account several other factors such as:
- Wages paid to the equipment’s operator (in case the operator wasn’t assigned to another piece of equipment)
- Number of overtime hours that were incurred
- Extra shipping fees incurred to expedite delivery and arrival of orders on time
- Cost of renting replacement equipment.
While these calculations can tell you the figure of cost of downtime, there are other, intangible losses that a business incurs due to downtime. These include company reputation, loss of business to competition, employee morale, among others. Thus, it’s imperative to know the cost of downtime and try to minimize it as much as possible. Learn here.