The enterprise has a huge number of items of expenditure. In the usual mode, the costs and profits of the enterprise can be represented as follows:
Each enterprise has some fixed costs that arise regardless of the volume of production - rent of premises, staff salaries, equipment rent, etc. Also there are variable costs - raw materials for production, electricity, hiring contractors for transportation of products, etc. The same applies to equipment - its acquisition and maintenance implies costs, and producing a certain product, it covers these costs.
But what happens if the equipment stops working because of a breakdown?
This infographics shows how the failure of the machinery of production equipment affects the entire enterprise. At the time point t1, a hardware failure occurs, which stops the production process.
At the enterprise a number of things will immediately happen: the future profit is lost, because the product can not be produced, constant costs continue to accumulate for nothing, because the product is not produced.
Some of the variable costs will decrease due to lack of demand, while some, for example, maintenance costs, will increase because of a failure. Other variable costs will not change in anticipation that the equipment will quickly return to production and the production process will start. The product losses continue until the broken equipment is put into operation - time t2. The cost of repairing a serious breakdown can be several times greater than the profit that the enterprise receives at this time.
The breakdown of complex production equipment attracts a lot of attention and forces the entire enterprise to change its schedule, in an effort to remedy the situation: workers are involved in repairs, personnel working with this equipment can not do their work, company managers try to create an optimal solution to the problem, subcontractors who can perform professional repairs. The funds are spent on the purchase of spare parts, while customers do not receive the products and the company loses its reputation. Such a scenario of equipment breakdown is similar to a catastrophe in which everything collapses at an incredible speed, but in fact, the consequences of a serious breakdown of important equipment can be just that.
The company's expenses are significantly increased as a result of equipment downtime due to a failure, but even more so because of a lack of maintenance strategy for different types of equipment in case of failures. The company pays for all this with its profit, which is then reflected in poor financial performance. These lost and unused funds can be considered as a cost of failure, because as soon as equipment fails, they should immediately be spent to start production back. The following infographics show how the profit of the enterprise falls, in the case of several successive breakdowns of equipment.
The actual cost of failure or defect
There are no identical enterprises, and every defect, failure and error has different consequences. The total cost of failure for the enterprise will be distributed among the involved departments and people. The share of the cost falls on each department in proportion, depending on the degree of its participation in the process at which the refusal occurred. Below is a list of items of expenses that may arise in connection with the breakdown of production equipment:
A. Labor: direct and contractual
B. product waste
F. additional capital
G. the resulting administration
The total cost of the organization to eliminate the failure – the cost of failure (ICOF) is usually not calculated to determine the costs incurred by the enterprise in connection with the refusal. This means that most companies do not fully appreciate the huge indirect costs they incur from every refusal. However, at the root of the problem is a fair judgment: these items of expenditure would not be if the equipment did not fail, and if more attention was paid to its maintenance.
To confirm the need to calculate the cost of failure, you need to guess what the consequences might be, if the failure still occurs. An exceptional example is a PVC pipe with a diameter of 150 mm, which supplies demineralized water for a large power plant, damaged in the joint. The water supply of three steam boilers to six steam turbines was stopped. If the refusal progressed, it would lead to catastrophic consequences: the whole city would have remained without electricity and heating. However, the company developed a plan in case of water supply failure – the station was automatically switched to additional water supply with raw tap water, so that the power plant remained in operation until the malfunction was eliminated. The repair of the pipe was carried out for several thousand dollars, and the consequences of the refusal could cost hundreds of millions. This example shows that the earlier the current cost of the failure and its consequences are calculated, the more effective measures to eliminate and prevent breakdown will be developed.
Determining the total cost of defects and failures using the cost of failure shows how huge amounts of money are spent throughout the organization when a failure occurs. The larger the rejection, or the more often it happens - the more resources and money will be lost. The possible profit will be missed, and the losses incurred will not be compensated in any way.
The next time you have a malfunction in your company and stop production - make a calculation of the cost of failure, and you'll see how much damage, in fact, costs your company. Preventing failures is critical to the profitability of any company. And in fact, a huge number of failures can be prevented if the company understands the seriousness of the consequences and applies an effective maintenance system to prevent future breakdowns.