Equipment Utilization: What’s your number?

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Paul McNamara

Measuring equipment utilization is the best way I know to determine if your assets are being hoarded and, as a result, your business is incurring all of the costs of lost time and unnecessary money spent that comes with hoarding. To solve the utilization problem requires first an understanding of why it happens and what can be done about it, which the balance of this blog post is about.  The costs of hoarding are significant and include:

  • As much as 50% to 75% increased spending on equipment
  • As much as 25% to 50% increased spending on support costs like calibration and repair
  • Increased labs space and equipment storage requirements
  • Increased audit findings

Hoarding Kills Utilization and Piles on Costs.

The genesis for founding Sente was in a conversation I had years ago with an engineering executive who was telling me he was spending way too much money with me and he had to somehow reduce expenditures with my company.  He told me his teams were busy and had an insatiable appetite for more equipment.  The company I was with at the time was a beneficiary of this demand as we sold equipment, rented equipment, and repaired and calibrated equipment.  The more the customers needed to buy, the better it was for us, and the rest of the test supply chain as well.  Nobody in the supply chain really understood the problem and, even if they did, it wasn’t in their interest to solve it.

My formal training is in engineering but I had just completed a job running a manufacturing plant where everything was about uptime, utilization, and throughput.  When I asked the executive what his utilization was running he picked up the phone and asked a member of his staff who told him it was 90%.  When I asked how the number was calculated the response came back that 90% of assets were being used in the labs, and 10% of them were in their equipment crib.  Their utilization was so high, he said because they had a process for sharing assets through the crib.  The executive looked at me as if to say, “I told you so.”

I asked if we could go visit a lab because I had a hard time believing their 90% number because for that to be true the utilization in the labs had to be 100% and I knew that couldn’t be the case.  It was probably lower, but how much lower I couldn’t have imagined.  The executive and I visited a lab.  He counted assets actively involved in sourcing or measuring, I took a tally of all of the assets in the lab.  The utilization was less than 10%.  This was the executive’s problem.  I didn’t know why it was the problem, but I knew we were on to something.

A fundamental Mechanism at Work

The more companies I visited the more the numbers came back within a pretty tight band between 7% and 15%.  There was some sort of “physics” at play that made each company, as different as they were, the same when it came to utilization.  Luckily I had been studying economics, organizational design, cognitive science, and systems thinking and was able to discern the mechanism at work was the “tragedy of the commons.” When a fixed resource is shared by a community people wind up trying to hoard the resource so they can be sure they get their share of it.  It is the mechanism that most famously leads to overfishing of areas like cannery row in Monterey, California.  It’s what leads to hoarding test equipment or services and then the subsequent need to have more equipment and services than would be necessary if hoarding could be reduced.

Ultimately low utilization caused by hoarding was our challenge and it is one we’ve solved for our customers over and over again but still exists broadly across the marketplace in loads of Just-in-case test equipment.

Why Act Now?

Because we are in the most competitive marketplace in human history and our companies need to transform to move with more speed and lower costs if we want to compete effectively.

Higher utilization levels allow companies to unleash existing, pent-up investment capital capacity. Management then has the flexibility to shift already-planned investments of capital to new areas or hold on to newly released capital capacity for future programs while dropping the savings directly to the bottom line as a cost reduction.

Increasing utilization is also essential when it comes to maximizing the time of engineering personnel. An effective test environment management program improves the utilization of engineering capacity by minimizing or eliminating the need for engineers to be distracted by administrative concerns related to test equipment.

Low utilization can also be a symptom of something far more damaging: the distrust between your teams that leads to hoarding is also the distrust that will put the breaks on speed, innovation, and growth as we discuss in the blog post Are You Building a Foundation for Speed?

Do you have a hoarding and utilization problem?  What is your number?  Get the answer by working with Sente to Uncover Opportunities for Improvement. 

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Notable Quotes

“Test Resource Management has been instrumental in changing the mindset of engineering to think in terms of sharing the test equipment, and treating the test environment as a business within a business,”

– Director of Engineering, Fortune 75 Company