Total Failure and Defect Cost

Each business organization is different and each defect, error, and failure it suffers has different consequences. The total cost to the business organization of an incident will be shared between the departments, managers, and employees involved. Each department in the plant will carry a share of the financial burden of the failure.  The proportion of the cost each department ends up carrying depends on the extent of its involvement. Every failure will have a different financial impact and the extent of that impact must be understood and controlled.

The total costs incurred by a business from a failure event flows and sometimes recycle throughout the business organization. The different departments and costs listed below reflect a good number of them, though there are others specific to each organization, you will need to identify and recognize them to able to eliminate them.

When equipment failure happens many people suddenly get involved in solving it. Meetings are held, overtime is worked, subcontractors are brought-in, engineers investigate, parts and spares are purchased to get back in operation. Instead of the variable costs being a proportion of production, as intended, they instead rise and take on a life of their own in response to the failure. The losses grow proportionally bigger the longer the equipment repair takes or the greater the consequences of the equipment failure.

The total of the organization-wide cost of failure is not usually considered when the cost of a failure incident is calculated. This means that most companies (business operations management) do not fully understand the huge consequential costs they incur from every failure incident. Few companies take the time to account for the total dollars to purchase orders issued due to a failure. But the truth is the clerk would not be doing the work if there had been no failure. The cost was incurred only because the failure happened.

The same logic applies for all the costs due to a failure, if there had been no failure there would have been no costs and no waste. Not having the failure would have reduced the risk of a Health, Safety, or Environmental incident. Not having the incident and having to go through a startup and shutdown may have prevented off spec product and quality issues. Prevent the failures and you will eliminate major risks and may put yourself in a position to make more money.

The full cost of all failures and losses from a failure incident can be calculated in a spreadsheet. Simply trace all the departments and people affected by an incident, identify all the expenditures and costs incurred throughout the company, determine the fixed and variable costs wasted, determine the consequential costs, find-out the profit from sales lost and tally them all up. It will astound people when you show them how much money was lost by one small equipment failure.

It is not important to know how many times a failure incident happens to justify calculating the cost of failure. It is only important to ask what would be the cost if it did happen. An example was a 6” diameter PVC pipe carrying softened, de-mineralized water for a major power station failed at a glued joint and began starving the water supply for three boilers supplying steam to six steam turbines. It was only with the ability to supplement the water supply with raw water that the power plant remained in operation until the failure was repaired. There were some consequences and costs when using this low grade water source that also had costs implications.

Had the failure progressed to a disastrous conclusion an entire city of 1.5 million people, and its industries, would have lost power as each turbine progressively stopped from loss of steam. The repair of the pipe was done for several thousand dollars, but the potential consequence of the failure was in the hundreds of millions of dollars. Had the cost of failure been calculated first, far greater precautions would have been put into place to control the hidden risks inherent in the process.

Preventing the Consequences of Failure

It only takes a few large catastrophes close together in time or many smaller problems occurring regularly to totally destroy an organization’s profitability.

By determining the actual Equipment Criticality and Cost of Failure, you highlight to everyone that many risks to the business previously considered minor are actually high and they require a strong proactive management plan be put into place to address those risks. The frequency of occurrence maybe low but the cost consequences are high so the real risk for the organization is actually high.

Calculating the cost of failure provides a means to rate the consequences of decisions and failure incidents using actual dollars. The cost outcomes can be clearly and truly identified. Those that are unfavorable can be analyzed and modified to reduce the risk. This means some methodology can be used to analyze its consequences and associated costs before a decision is made.

RCM (Reliability Centered Maintenance) and FMEA (Failure Modes Effects Analysis are great processes to help understand process and equipment failures. They also are used to develop maintenance strategies to prevent the failure from occurring. Equipment or Asset Criticality are also tools to help determine which processes or equipment should be considered first.

Calculating the cost of a failure is an important step for everyone to understand the total picture. It can be used to help make better decisions in any situation where understanding the right financial consequences are critical to its success.

Conclusion

Identifying total defect and failure cost shows how vast amounts of money are wasted throughout an organization when a failure happens. The bigger the failure, or the more often one happens; the more resources and money are lost. The profits that could have been made are gone, wasted, and they can never be recouped.

The next time your operation has a failure determine what did it really cost your company? If someone designs or selects equipment take the time to ask or calculate the cost of failure and the cost of maintenance. It’s not what you pay for the equipment in the beginning, it’s what the equipment will cost you over 10 years of operation and maintenance. What are the cost consequences to the profitability of the business from its failure?

It is critical to your company’s profitability that failures are prevented. Failures can be stopped when companies understand the size of the losses and introduce systems, training and behaviors to prevent them. The training and understanding by all will show everyone the instantaneous losses from failure, and the greater profit in doing the right things right.