In an electronics manufacturing production environment where a factory has automated machines and people, how would you calculate the cost if the process stops, including lost profit and losses due to unproductive people, equipment, and overhead?
Calculating the cost of a process stoppage in an electronics manufacturing production environment requires considering various factors, including lost profit, unproductive labor costs, equipment downtime, and overhead expenses. Here’s a breakdown of the critical elements to consider when estimating the cost of a process stoppage:
- Unproductive Labor Costs: When the process stops, the labor force becomes unproductive, which leads to additional costs. Calculate the labor cost per hour or day, including wages, benefits, and other associated expenses. Multiply this by the number of employees affected by the stoppage and the duration of the stoppage. For example, if you have 50 employees and the labor cost is $25/hour, and the stoppage lasts for 16 hours, the unproductive labor cost would be $25/hour * 50 employees * 16 hours = $20,000.
- Calculating the cost of a process stoppage: The stoppage will likely result in equipment downtime, causing losses in terms of missed production output and potential repair or maintenance costs. Calculate the average revenue generated by the equipment per hour or day, and multiply it by the duration of the stoppage. Additionally, consider any repair or maintenance expenses incurred during the downtime. For example, if the equipment generates $2,000/hour and the stoppage lasts for 16 hours, the equipment downtime cost would be $2,000/hour * 16 hours = $32,000.
- Overhead Expenses: Overhead expenses, such as facility rental, utilities, administrative costs, and other fixed costs, continue even during a stoppage. Calculate the average daily overhead cost and multiply it by the duration of the stoppage. For instance, if the daily overhead expenses amount to $5,000 and the stoppage lasts for two days (16 hours), the overhead cost would be $5,000/day * 2 days = $10,000.
To calculate the total cost of the process stoppage, sum up the unproductive labor costs, equipment downtime costs, and overhead expenses. In the above examples, the total cost would be $20,000 (unproductive labor) + $32,000 (equipment downtime) + $10,000 (overhead expenses) = $62,000.
Example: 2 Days (16 hours) Down
| Cost Category | Description | Calculation | Cost Estimate |
|---|---|---|---|
| Unproductive Labor | Cost of unproductive labor during the stoppage | Labor cost per hour * Number of employees * Duration of stoppage | $20,000 |
| Equipment Downtime | Lost revenue and potential repair/maintenance costs | Revenue generated by equipment per hour * Duration of stoppage | $32,000 |
| Overhead Expenses | Fixed costs incurred during the stoppage | Average daily overhead cost * Duration of stoppage | $10,000 |
| Total Cost | The sum of all the cost categories | $62,000 |
Remember that these calculations provide an estimate and may vary depending on the specific circumstances of the manufacturing environment. Adjust the calculations as needed to accurately reflect the costs associated with a process stoppage in your particular scenario.
As a rule of thumb support subscriptions or extended warranty agreements are 10% or more of the original value of the equipment. Given our realistic scenario above, having a complete support package in place for equipment with an initial purchase price of $200,000 is easily justifiable, considering a single downtime event can more than pay for the support.
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