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The Cost of Problems

Posted by admin on October 1, 2013

For some manufacturers, problems are just a cost of doing business. Stuff happens.  It is a fact that even the best companies experience problems, but when a company takes a defeatist attitude about problems, it tends to lead to more problems and more severe situations.

Often the difference between problem prevention/problem solving focused and “stuff happens” companies is that the problem-focused company relentlessly measures the cost of problems.  Once the cost of problems becomes clear, the well-run company does everything it can to avoid problems and solve them quickly and effectively when they occur.  Problem prevention and problem solving move from being a nice-to-have capability to a mission-critical capability that drives quality, customer satisfaction and profitability.  And this leads to a proactive, problem avoidance culture rather than a constant, reactive fire-fighting mode of operating.

So what does a problem cost a company?  First, let’s define what we mean by a problem.  Our definition is: Any situation where performance is below what is expected.  In a manufacturing environment it is usually measured by the quality, quantity, timeliness or cost of product in a given time period.  So whenever the quality, quantity or cost of production shows a negative deviation from what it should be, you have a problem. 

The cost of a problem can be captured in many measures.  Some of these are actual out-of-pocket costs and others are the lost opportunity while a problem is being fixed.

Lost Time – While a problem is being fixed, employees are idle and being paid.  By calculating the fully-loaded hourly costs of the employees not working while the problem is diagnosed, parts are secured and the fix is made, you get an idea of the cost of lost work time.  Sometimes the plant also has to pay overtime so employees can work additional hours to meet promised delivery deadlines.

Additional Maintenance Staff - If problems become a way of life in a factory, the company may add maintenance staff to fix the constant flow of problems that occur.  This becomes an additional cost of doing business that ultimately makes the plant’s product less price competitive or lowers profitability if there is no price elasticity in the market.

Scrap – Usually no one knows there is a problem until bad product is being produced.  Depending how frequently the output is examined, it can be anywhere from a few minutes to hours until a problem is noted.  Given the product, this scrap can be worth hundreds of dollars to tens of thousands of dollars. 

Cost of the Fix – Fixes to problems often entail new parts and the labor to install the new parts.  If the problem was avoidable through proper machine operation and maintenance, these costs become part of the cost of the problem. 

Value of Lost Production – Ultimately, a problem means lost production or lost opportunity to sell product.  So a critical measure of the cost of the problem focuses on the value of the product that could not be delivered while the problem was diagnosed and fixed. 

Lost Customers – This is very difficult to measure, but companies with high incidences of problems risk losing customers because of unacceptable quality or missed deadlines.  Customers in just about every market segment have many options when buying products and they are going to go to the manufacturer that consistently meets quality and delivery expectations.

Incorrect Fixes – This measurement gets little attention but can costs manufacturers big money.  Incorrect fixes cost companies in two ways.  First, incorrect fixes delay addressing the root cause of the problem, which just continues the money drain.  Second, an incorrect fix can cause new problems that cost even more money and make it more difficult to identify the root cause of the original problem.  These situations can haunt a plant for months or even years as it applies band aids to keep things running.

There are many ways to measure the cost of problems.  Effective companies understand this and focus on the least costly problem: The one that doesn’t happen.  They put a premium on preventing problems, which allows them to give their full attention to the few that do occur.

In future blog postings we’ll consider the human cost of problems and why companies don’t measure the cost of problems.