The hidden costs resulting from inefficiencies and errors are staggering in the manufacturing industry. Between downtime, rework, material waste, and actions required to meet deadlines, the EBIT impact can be huge. Understanding how these problems arise is the first step toward mitigating them.
The staggering cost of unplanned downtime
A report by Siemens makes it clear that unplanned downtime results in an 11% decrease in annual revenue for the world’s 500 largest companies. These 11% add up to $1.4 trillion in losses on a global scale, which is about the size of Spain's GDP.
On average, facilities now experience 25 unplanned downtime incidents per month—an improvement from the 42 incidents reported per month in 2019.
However, the average cost of an hour of downtime has increased by 65%, and Siemens estimates that the annual cost of downtime for a typical large plant in the surveyed sectors has now reached $253 million per year.
Examining the cost of downtime from an industry-wide perspective provides another valuable viewpoint. Siemens research shows the following breakdown of hourly costs:
- Automotive: $2.3 million/hour (twice as costly as in 2019)
- Heavy Industry: nearly $300,000/hour (4 times as costly as in 2019)
- Oil & Gas: approx. $100,000/hour (down from 2022 peaks but still 2.5x 2019)
- FMCG: $36,000/hour (stable since 2021)
23% of downtime incidents are a result of human error
A global study of over 100 manufacturers found that 23% of unplanned downtime is attributed to human error.
The mental and physical state of workers, lack of communication, poor work environment, poor decision-making, bad equipment, and distractions are all contributing factors.
.png?width=1363&height=977&name=Namnl%C3%B6s%20design%20(4).png)
Calculating downtime impact on EBIT
To evaluate the cost of downtime and, in turn, its effect on EBIT, you must consider both the apparent and hidden costs. In an example from Evocon, the associated costs include both the apparent ones, such as the hourly cost of downtime, and the lost revenue resulting from it. But the costs also extend to the overtime required to mitigate the delay and how it affects your relationships with customers.
This can be calculated using this formula:
Cost of downtime = (Duration of downtime x Cost per minute of downtime) + (Lost revenue due to downtime) + (Cost of overtime) + (Cost of reputational damage)
The hidden costs and root of rework
It´s not only downtime that makes manufacturers inefficient. Numerous costs are associated with quality issues that result in rework and material waste. Scrap and rework costs up to 2,2% of yearly revenue for manufacturers, according to the American Productivity and Quality Center. For manufacturers that are effective at managing waste and rework, the costs can be reduced to 0,6% of their yearly revenue.
According to Ease, there are several reasons for the need for rework (that are all preventable through improving management systems):
- Operator errors as a result of failure to follow standard operating procedures or lack of training.
- Mechanical problems, such as equipment failure or calibration issues.
- Manufacturing processes affected by environmental conditions.
- Quality variations in material input.
- Measurement inaccuracies impacting product specifications.
The effects of missed deadlines and delays
Another aspect of manufacturing that impacts EBIT is missed deadlines or the extra cost of meeting tight ones. TQ Manufacturing presents a real example from a car manufacturer, where the price of a week's delay from a supplier exceeded $50,000, resulting from the overtime and shipping fees required to meet the deadline. And when the assembly line sits in waiting for components, the costs add up by the hour.
They also list additional costs associated with a missed deadline:
- Cost of overtime to catch up with delays.
- Additional shipping fees to reduce customer impact.
- Lost income potential from contract penalties or missed sales.
- Future business is being affected by a damaged reputation.
The potential savings in digital transformation
The costs of downtime, rework, and meeting deadlines quickly add up for manufacturers. Examining some of the drivers for these problems reveals that human errors are a recurring issue. Human errors cause 23% of downtime incidents. Operator errors, resulting from failure to follow standard procedures or a lack of training, lead to the need for rework. In addition, supply chain hiccups incur extra costs by necessitating costly efforts to meet deadlines.
But improved tools can mitigate all of these issues. With Mevisio, you can improve tracking and data collection to strengthen team communication, decision-making, and transparency. You can overcome human errors that occur as a result of analog workflows and poor communication, where old information leads to wrong decisions. Standard procedures can be readily available in real time to reduce the need for rework. And the management of both your workforce and supply chain is improved with real-time information that can be used for data-driven decision-making.
Ready to take action?
Understanding the actual cost of inefficiencies is only the first step—acting on it is what drives real impact. On June 30th, we’re launching a new way to get started with Mevisio, making it faster and easier than ever to address operational blind spots. Stay tuned.
