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The Huge Instantaneous Impact on Your Business of Defect Cost and Failure Cost
By Mike Sondalini

(Above chart borrowed from Mike Sondalini's book 'Defect and Failure True Costing - 2006')
The Cost of Failure to a Business
When a business operates it expends fixed and variable costs to make a product which it sells for a profit. Figure 1 is graphical representations of a business inoperation. The business produces a product that requires an input of costs which it sells to pay for them and make a profit. The business has fixed costs that it must carry regardless of how much it produces. These include the cost of building rent, the manager's salary, the permanent staff and employees' wages, insurances, equipment leases, etc. There are variable costs as well, such as fuel, power, hirelabour, raw materials to make product, etc. From doing business a profit is made that keeps it trading.

We can take the same analogy of normal business operation down to normal equipment operation. When plant and equipment are running each item has a fixed cost, a variable cost and generates a contribution to the overall business profit. It is reasonable to look at every machine and item ofplant in your operation as contributing their share to the total profit of the business - their 'profit contribution'. When an item of plant cannot be used for production it cannot contribute to profit. If the reason it is not operating is because it has failed, then not only is it not contributing profit, it also imposes added costs on the business.
In Figure 2 a failure incident occurs at time t1that stops the operation. A number of things immediately happen to the business. Future profits are lost because no product can be made (though inventory can still be sold until it is gone). The fixed costs continue accumulating but are now wasted because no product is being produced. Some of the variable costs will fall because they are not used, whereas some, like maintenance, will suddenlyrise in response to the incident. Other variable costs are retained in the expectation that the equipment will get back into operation quickly. These are also wasted because they are no longer involved in making saleable product. Usually workers are put onto other duties they are not meant to be doing. Losses and wastes continue until the plant is back in operation at time t2. The cost for repairfrom a severe outage can be many times the profit made in the same time period (the dotted outline in Figure 2).

When a 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 repair takes or the greater the consequences of the failure. You can see from the shaded areas in Figure 2 that when a failure happens the cost to the business is lost future profits, plus immediately wasted fixed costs, plus immediately wasted variablecosts, plus the added variable costs needed to get the operation back in production. There are many other consequential costs too.
When equipment fails operators stop normal duties that make money and start doing duties that cost money. The production supervisors and operators, the maintenance supervisors, planners, purchasers and repairmen start spending time and money addressing the stoppage.
Ifit escalates managers from several departments get involved - production, maintenance, sales, despatch, finance - wanting to know what is being done to fix the stoppage. Meetings are held formally in meeting rooms and impromptu in corridors. Parts are purchased and specialists may be brought in. Customers do not get deliveries and liability clauses may be invoked. Word can spread that the...
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