Notes From The Field, Streamline Process Management
Cost of Unscheduled Downtime
Our customer had issues with their automation network, and they were not able to run their facility. The facility runs 24/7 365 days. They had quite a few people working to resolve this – their top engineers, maintenance, operations, etc. The network had been down for 48hrs. Ultimately, they requested us to come ASAP to assist.
When I started to think about the whole situation I wondered- just how costly this whole incident has been. What is the cost of downtime? This is something that everyone is aware of, but few quantify. And if we did quantify it, what would it teach us?
Why this is important
The old maxim, “If you don’t measure it you can’t manage it,” comes to mind. As one of my professors said, “There are only two ways that team members add value, increase revenue or control/decrease expenses.” What occurs during downtime is you have decreasing (or zero) revenue, and increasing expenses.
When a network goes down, there is pressure to get it back up and running as soon as possible. Every minute counts. It is the responsibility of the technicians and maintenance crew to make this happen, fast. No pressure, right.
Looking at this From the Perspective of the Technician
How can they approach this problem? They need information (data), the ability to interpret that data, and then make a decision from that data as to how to proceed. What happens in many automation environments, is that they may have some, little, or no information, and perhaps little to no training. What could go wrong?
Looking at Operations from a Financial Viewpoint
Now I’ll put on my accountant hat. Let’s look at how management thinks about “operations” from a financial perspective. I believe this will provide a framework from which the technician can advocate for alternatives/products that limit or eliminate the issue of a network going down. Or the framework may help define the risk that management determines to be acceptable.
We’ll look at operations through the Income Statement. Below are a few terms to know. The Income Statement is generally laid out as follows.
- Revenue/Income – Sales of goods and services.
- COGS (Cost of Goods Sold) – or Direct costs, of those goods and services.
- Gross Margin (Revenue less COGS)
- SGA (Sales General and Administration) – Most of the supporting departments that are not directly involved in operations.
- EBITDA (Earnings before Interest Taxes and Depreciation/Amortization): This number is important to financial managers, as performance is evaluated based on EBITDA. Interest/Tax, Depreciation is (typically) outside their ability to control, so it is not included.
Other terms often used:
Do you need to justify adding a product? Download our excel template (like the one we used here) to run your numbers. Or give us a call.
Equipment used to assess and get the network running:
- 1 x Troubleshooting Ultra Plus Kit
- 1 x ComBricks Standard Monitoring Kit
- 3 x 1-Channel Scope Repeater
Equipment added to improve network stability:
You might also like a whitepaper from Procentec: How to Earn Money With Properly Diagnosing Your Network.
- Variable costs – Costs that increase with an increase in volume of production. Example: Unit x requires 2 commodity y to make so every unit we produce we will incur costs due to material requirement to produce that product.
- Fixed costs – Costs that do not increase with volume. i.e., rent.
The first question to ask – what is the revenue lost from a time unit of downtime? I pulled the operating info from public documents on this customer.
$438k/hour is the potential revenue lost.
There are costs that continue while trying to fix the problem: i.e., labor, utilities, etc. Stopping many inputs immediately is often not possible.
If we assume that 50% cost continue: $3,022*0.5/8760 = $172k/hour of continuing costs.
The opportunity cost is (lost revenue plus continue costs), $438+172= $610k/hour.
Depending on your industry, there will likely be other costs incurred. If a batch is stopped in the middle of production, is it garbage, can it be salvaged (but reworked), or can production just start up again?
Now if the operation is large, there can be some buffer between operations components. This number reflects the number throughout the financial chain.
Even small parts of a final product have costs tied to making them. The work in progress (WIP) account tracks the inventory of all components of your finished product. The Balance Sheet is where you find the WIP account. When you have a finished product, an accountant will transfer the value of the product to the Inventory account. When you sell your finished product the accountant moves the cost of the product to the Income Statement as cost of goods sold. There are two things to know if your network shuts down in the middle of a batch and you can save the components.
- Initially, the inventory account will be higher. This sounds like a good thing, but it isn’t.
- As the parts are sold this reduces margins; what follow is a negative drop to EBITDA.
As the EBITDA is a number CFOs care about, keeping your network running as planned is crucial to avoiding negative impacts to EBITDA.
Lastly, can we quantify any additional resources that were required: i.e., support from management, IT, outside consultants etc.? Once we can quantify it, we can understand the magnitude of the issues.
If I were writing out a proposal, I would start like this:
Purpose: To provide a quantitative analysis of downtime event, and provide alternatives for a path forward.
Make sure to emphasize why this is important: to reduce the financial risk of unplanned downtime.
Challenge/Background: List out a current evaluation of the situation. Listing resources, equipment, training, manpower.
Financial Outline the financial impact as above.
List 3 Alternatives (if possible). The first would be to do nothing. Doing nothing is always an alternative. Quantifying acceptable risk is the result of doing nothing.
Provide two other options with costs, pros and cons, and order of operations in this solution. Make sure to address the issues listed in the current evaluation.
Lessons Learned
What we usually find in making a proposal for a solution for our equipment is:
- t looks expensive compared to competitors’ products. But a single downtime incident more than justifies the cost, sometimes many times over. In this case the equipment paid for itself in less than 2 minutes of avoided downtime.
- Our permanent monitoring captures intermittent problems. Permanent monitoring allows customers to see issues coming before an incident allowing them to plan.
- As the EBITDA is a number CFOs/Management care about, keeping your network running as planned is crucial to avoiding negative impacts to EBITDA.
In this case of our customer’s numbers:
| Scenario 1 – Do Nothing | Scenario 2 – Fix The Problem |
| Lost Revenue $438k/hour | On site fee approximate $5,000 |
| Continued Expenses $172k/hour | Equipment added: |
| Opportunity cost per hour $610k/hour | 1 Standard Monitoring Kit $3,500 |
| 2 ProfiHub B5+4 $4500 | |
| Cost to fix the problem approximately $13,000 |
$610k/hour or $13k – as an accountant I know which I’d rather pay. In this case the equipment paid for itself in less than 2 minutes of avoided downtime.
Summary
Perhaps this seems like quite a bit of work, or as I have heard said, “Above my pay grade.” I say this – there are always leadership gaps, people that fill the gaps prove their worth. When a promotion opportunity does come, you have a much better chance than those that don’t fill the gap. Either way, don’t look at this as doing it for management/purchasing. You are doing this to get the right equipment to do your job. Do it for you!
Do you need to justify adding a product? Download our excel template (like the one we used here) to run your numbers. Or give us a call.
Equipment used to assess and get the network running:
- 1 x Troubleshooting Ultra Plus Kit
- 1 x ComBricks Standard Monitoring Kit
- 3 x 1-Channel Scope Repeater