The True Cost of Failure

(or ‘What it really costs you when the plant goes down.’)

If your operation works around the clock and it can sell everything that it can make at very good
prices, the last thing you want happening is for your plant to go down. Every minute lost
producing mean profit is lost. Once the minutes tick by the production that should have been is
gone forever, and with it goes the profit that it would have provided.

If the lost time grows into hours then you have a very serious impact on monthly financial
performance. No operations manager wants to explain to head office that production was below
budget because the equipment failed. Worst still would be if there was more than one major
failure or stoppage to report.

Equipment failure that leads to total production loss is obviously a disaster. The costs can be
horrendous. Not only are all profits lost but you have to pay for everything standing there doing
nothing. You still have to pay for labour, the staff, employees, casuals and contractors. You still
have to pay for the rentals, the leases, the agreements and the hired items. You may have penalty
clauses in contracts invoked. You will have to pay for energy losses and inefficiencies on
shutdown and start-up. You may lose future contracts when customers hear about the failure.
On top of that you still have to pay for the repair, whatever that finally costs.

A complete plant shutdown is going to cost you the lost profits plus the total wasted cost of
running your operation, plus stop-start loses, plus consequential costs, plus opportunity costs
plus the final repair cost. It’s clear that you don’t ever want a total failure or stoppage in your
operation. But what if you have minor failures instead? They don’t take you out, but they cut
the production rate. How costly are those to your operation?

It is surprising how much even a minor plant failure costs. There is the lost profit from the lost
production capacity. To that add the cost of your labour having to do what it was not meant to
do. The operators, managers, engineers and supervisors get involved and lose time at meetings
and in discussions that could have been better used elsewhere. There could be waste from
product spills to clean-up, that’s more time and resources spent doing what they should not have
had to do. There will be energy and equipment efficiency losses on shutdown and start-up.
There will be time losses stopping, starting and handing-over plant. Administration and finance
have to process unwanted reports, there will be added purchase orders to handle, there is likely to
be added payroll workload, and to all this you still need to add the final cost of the repair.

What the minor failure does is drawn your resources away from what they are paid to do. Now
you are paying them to fix things instead of making product that you can sell. The more minor
failures and stoppages that you have, the more that your people are drawn away from value-
adding or profit-making activities and into work that keeps the place running, but does not make
any money. In this way you can have a very busy operation that doesn’t make much profit.

The true cost of failure to your business is far bigger that simply the time, resources and money
that goes into the repair. If you have too many failures or downtime incidents you will become
unprofitable. Failures and stoppages are the number one enemy in running a profitable
operation. They seem so small, and are so easily dealt with, that you don’t notice their
cumulative impact on the operation’s performance. You need to do everything humanly possible
to never have a failure.

A sound way to reduce failure is by doing more preventative maintenance. The definition of
maintenance is ‘to keep in a fit-for-service condition’. Preventative maintenance stops failures.
It is a proactive, failure-reducing activity. Maintenance of the preventative kind is cheap. It is
maintenance of the repair kind that is expensive.

Another strategy to reduce the number of failures is to increase training so you make your
operators and maintainers more expert. Experts make a lot less errors than do amateurs. Expert
golfers go around a golf course in sub 72 par rounds. Amateurs can go around the same course
at plus 100. The same logic applies to your workforce – the more expert they are, the more on-
par and better-than-par results they will deliver.

Lastly use reliability strategies that reduce failures. Such as design-out, where you identify the
root cause of a failure and engineer it out forever. Another strategy to adopt is failure mode and
effects analysis (FMEA) during project design. The methodology intentionally asks “How can
this piece of plant fail?” Then it asks “How can I prevent the failure?” The latest development
in the use of FMEA is to include the net present value of the total cost of future failures when
making design choices.

While on the drawing board the equipment used in the project is analysed for its total cost of
failure. As mentioned above, it is the lost profits, plus the total wasted cost of operation, plus
stop-start loses, plus consequential costs, plus lost opportunity costs plus the final repair cost.
The questions now become, “If this piece of plant fails what will it cost the business?” along
with “How many times can we afford for it to fail and still make a good profit?” Then the
question is asked “How do I minimise the total failure costs to the business?”

Known as Design and Operations Cost Total Optimisation Review it turns FMEA into a true life
cycle profit (LCP) methodology. With a full understanding of the total costs of future equipment
failures on the operation, the designer can chose the most reliable equipment, or the equipment
with the least total cost-of-failure, and so set you up for many years of successful production
performance and profitable operation.

Though your plant is busy, is it making the money that it should be making? The true cost of
failure concept explains where much of the profit goes in an operation. What happens when the
next industry downturn comes – will you be one of the first to shut-up-shop because your
production costs are high? If you want to be more profitable for longer, then adopt the practices
and strategies that stop the problems which cause your plant and equipment to fail.

Mike Sondalini
www.lifetime-reliability.com