The Cost of Failure Easily Justifies Changing Your Operating and Maintenance Strategies to Using Plant Wellness Way EAM Philosophy
Never accept equipment failure as normal—the Cost of Failure destroys your business success. But by preventing failure you will gain massive operating fortunes forevermore
The cost of failure is so incredibly huge. It totals operating fortunes lost every month!
PEW/PWW EAM Course Day 1 – Foundations Session 4 – The Purpose of Business
The Figure is a simple accounting model of a business that every new accountancy student is shown. When a business operates it expends fixed and variable costs to make the product it sells. From doing business a profit is made that keeps it trading. The variable costs and fixed costs makeup the total cost. If the product is sold for more than the total cost a profit is made.
Two fundamental accounting equations derive from the model. The first equation explains how businesses make money.
Profit ($) = Revenue ($) – Total Costs ($) Eq. 1
When the costs are less than the revenue the business is profitable. The next equation explains where expenses and costs arise.
Total Costs ($) = Fixed Costs ($) + Variable Costs ($) Eq. 2
Impact of Defects and Failures on Profits
This slide shows what happens when a production failure incident impacts a business. The cost of failure grows and grows as it spreads throughout your business.
The incident starts at time t1 and stops the operation. A number of unfortunate things happen. Future profits are lost because no saleable product is made (though inventory can be sold until stocked-out). All fixed costs are wasted because there is no production. Some variable costs fall because they are not used. Others, like maintenance and management costs, suddenly rise in response to the incident. The losses and wastes grow. Some stop when the plant is back in operation at time t2. Others continue for months. The costs can be many times the profit that would have been made in the same time period. If a failure happens in a business that prevents production, the costs escalate and profits stop. Fixed costs are wasted and variable costs rise as rectification is undertaken. To these costs are added all the other costs that are spent or accrue due to the incident.
Production need to recognise that the cost of failure is a separate waste that needs to be controlled and reduced. A more accurate cost equation is shown in Equation 3.
Total Costs ($) = Productive Fixed Costs ($) + Productive Variable Costs ($) + Costs of Loss ($) Eq.3
Equation 3 is powerful because it recognises the presence of losses and waste in a business. From this equation is derived another that explains how businesses can lose a great deal of money.
Cost of Loss ($/Yr) = Frequency of Loss Occurrence (/Yr) x Cost of Loss Occurrence ($) Eq. 4
Equation 4 tells us that the cost of failure is lots of money will be lost and wasted every time there is a failure. The equation is a power law, which means failure costs are not linear and while one incident may lose a few dollars, another can total immense sums of money.
And clearly, repeated plant and equipment failures and stoppages totally destroy the profitability of an operation.
The Figure shows the effect of repeated equipment failures on the operation of our model business. Clearly, repeated plant and equipment failures and stoppages destroy the profitability of an operation.
Benefits of Reducing Operating Risk
Risk is the product of the likelihood that an event will happen and the cost if it does. Operating equipment risk is the size of the financial loss from an equipment failure during operation, i.e. the cost of failure. It is calculated by substituting ‘loss’ in Equation 4 with ‘equipment failure’, as shown in Equation 5.
Operating Equipment Risk ($/Yr) = Frequency of Failure Occurrence (/Yr) x Consequence of Failure Occurrence ($) Eq. 5
The cost of failure during operation can be reduced in one of two ways. By reducing the consequence of failure and by reducing the chance of failure. In the top Figure on the slide the consequence of time loss has been reduced so that repairs are completed rapidly. As a result production is back in operation faster and so fewer profits are lost. The lower Figure represents reducing the chance of failure where fewer failures occur during the same period of time. This also reduces profit lost because less things go wrong to cause waste of resources and money.
Consequence reduction strategies primarily focus on identifying existing defects and stopping them from becoming failures. This strategy accepts risk along with the loss and waste from it. In contrast chance reduction strategies do not accept risk, waste or loss because they prevent the defects that cause failures from arising in the first place. Chance reduction proactively identifies risk and eliminates it.
PEW SOLUTION: Build a Life Cycle System that Creates Plant and Equipment Reliability Improvement
Total Defect and Failure (TDAF) Costs and Losses go Company-wide | Failure Costs Surge throughout a Company
What is not well understood, are the massive surge of costs and accumulation of losses that occur throughout a business when plant and equipment fail. The table lists more than 60 business-wide defect and failure costs that can arise from a forced stoppage. Most of these costs are hidden from view by the cost accounting practices in use today. Normal financial accounting practices do not recognised these costs for what they are; unnecessary waste and loss. Because many of the costs of failure are unseen, little is done to stop them, yet they continually rob commerce and industry of vast profits.
PWW SOLUTION: Calculate the True Downtime Costs
The total impact of equipment failure is hidden amongst the many cost centres used in a business. For a failure incident to be fully and truly costed it is necessary to collect the numerous costs that surge throughout the operation into a single cost centre. It is not until all the costs, wastes and losses of failure are traced in detail throughout the business that the complete and true cost is known. This is done by following a failure throughout the business using the list of DAFT Costs in a spreadsheet similar to those shown in the slide.
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The PLANT WELLNESS WAY EAM TRAINING COURSE teaches you to use and master the Plant Wellness Way EAM methodology. Follow this link to read about Training for New Users in the Plant Wellness Way EAM Methodology for World Class Reliability.
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