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Assessing the Cost of Unreliability

These costs include the cost of repairing equipment after failure. They also include the lost value of the asset while it is unavailable to perform its intended function after a failure. In addition, they include the cost associated with off-spec product made while equipment was in the process of failing and the cost of energy consumed while shutting down and re-starting. If poor design practices have resulted in additional maintenance costs to support a system with inadequate inherent reliability, the cost of the added maintenance must be included. The cost of unreliability includes all costs resulting in any manner from poor reliability.

In fact, it makes best sense to evaluate the overall cost of unreliability twice:
• Once before performing a detailed assessment of each element that contributes to reliability.
• Once after performing the detailed assessment of each element affecting reliability

The first approach is a macro view from the outside-in of how much business is being lost because of lost production or cost being added. The second approach provides a micro view from the inside-out of how individual weaknesses in each element of reliability add up.

The first approach provides the impetus to move forward with the assessment. The second approach highlights detailed areas of loss that you never knew existed.

There are two advantages in developing an accurate Cost of Unreliability from both the top-down and the bottom-up. They are:

1. It is important for senior managers to know the total Cost of Unreliability from a business perspective to accurately understand the value of the entire opportunity. Without this information, senior managers may think that corrective action is too expensive. With an accurate Cost of Unreliability, they will know it is a good investment.

2. It is important to know the total Cost of Unreliability from a detailed perspective to provide a basis for closure. If there is a significant difference between the total 'tops-down' Cost of Unreliability and the sum of the individual parts, the assessment will not pass the 'smell test'. Either you have missed something or have exaggerated the value of something.

High Level Cost of Unreliability

In assessing the Cost of Unreliability from a top-down or outside-in perspective, we will be trying to understand the total loss of money that results from poor reliability. We want to assess the cost as senior managers, accountants, or investors would. They are not particularly interested in what is causing the loss of revenue. They are only interested the bottom line.

The first category of Costs of Unreliability is direct costs, which are those factors that have a direct cause-and-effect relationship with a reliability event.

These costs include:

• The value of lost production - or the income that could have been made if production had not been interrupted.

• The cost of maintenance needed to perform repairs and restore operation.

The second category of Costs of Unreliability is indirect costs.

These costs frequently have no direct cause-and -effect relationship, but are the result of poor reliability nonetheless.

These costs include:

• The cost of being a reactive organization - or the cost of having to be prepared to respond to failures. An organization that performs a great deal of reactive maintenance needs to be larger than a proactive organization. It needs people both to keep things running and to respond to failures. It needs a larger staff to manage all the problems. Managing problems keeps senior managers from focusing on future improvement and keeps them focused on the past.

• The costs of sloppiness - sloppiness is impossible to confine to one thing. It is impossible to confine a management philosophy that condones poor reliability to reliability only.

Poor reliability tends to infect other areas like quality, safety, and environmental performance. In assessing the Cost of Unreliability, it is important to include the impact poor reliability has on those areas.

• The cost of lost business - or the impact on your business from missing deliveries or making poor products while affected by poor reliability. Companies that accept poor reliability have two choices. First, their production and quality can suffer from poor reliability. If they want to prevent their poor reliability from affecting delivery schedule and quality, they have to have sufficient manufacturing capacity to both accommodate the losses and meet customer demands.

Second, they can have an inefficient operation that ultimately affects product costs. In either case, the customer will ultimately be unhappy and look for another supplier.

Detailed Cost of Unreliability

In assessing the Cost of Unreliability from a bottom-up or inside-out perspective, we will be trying to identify each and every issue that results in poor reliability and to quantify the relative value of that specific problem. Although the accountants and investors are not interested in this level of detail, this information is needed to build a plan of attack for corrective action. It is important to understand specifically what weakness is resulting in poor reliability and how large an impact is being produced. To be effective in making changes, we need to know what to attack and in which order we should attack each problem.

This article was excerpted from Reliability Assessment: A Guide To Aligning Expectations, Practices, and Performance by Daniel T. Daley (Courtesy Industrial Press)

Reliability Assessment

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