Published On: November 15th, 2016Last Updated: August 26th, 2021Categories: Articles, Condition Monitoring, Digital Transformation, Internet of Things (IoT), Smart City Management, Utility Management System

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Risk is typically the product of two factors, consequence and probability. These factors are often combined to develop a financial justification in monetary units. Risk avoidance is the process of reducing risk based on reducing the cost of consequence and likelihood of occurrence.

The role of a wireless monitoring system is to ensure that the risk is avoided as much as practicable. This is achieved by reducing the cost of consequence, i.e. avoiding a catastrophic failure and consequential costs associated with lost productivity, labour and spare parts.

For example: If a high criticality pump fails catastrophically, a potential consequence is $200,000 in lost productivity, labour and spare parts and other incidentals.

Consider this event occurring at a frequency of once every ten years. This represents an annual risk of $20,000 per annum. Now consider the same failure with the probability of one failure every two (2) years. The annual risk has now increased to $50,000 per annum.

$200,000 Failure Costs

Failure Every 10 Years             = $200,000 / 10 years             = $20,000 / annum

Failure Every 2 Years              = $200,000 / 2 years               = $100,000 / annum

So first let’s consider the reduction a wireless monitoring system may have on the consequence of the failure. Because this asset is being monitored, it’s able to be shut down in a safe and effective manner, eliminating much of the secondary damage typical in a catastrophic failure and reduce much of the downtime, as this repair can be planned.

Assuming failure probability is unchanged and consequence is reduced 50%

The residual risk is effectively half of the original

$100,000 Failure Costs

Failure Every 10 Years            = $100,000 / 10 Years            = $10,000 / annum

Failure Every 2 Years              = $100,000 / 2 Years              = $50,000 / annum

Now let’s assume that the probability is also reduced because our wireless monitoring system is able to effectively diagnose and eliminate the modes of failure that lead to the catastrophic event. This effectively doubles the useful life of the asset.

Assuming failure probability is reduced 50% and consequence is reduced 50%

$100,000 Failure Costs

Failure Every 20 Years            = $100,000 / 20 Years            = $5,000 / annum

Failure Every 4 Years              = $100,000 / 4 Years              = $25,000 / annum

The results are a risk avoidance of approximately 75% from the original. Our experience is that these are realistic and somewhat conservative numbers. The residual risk is 25% or a potential saving of $75,000 for the case mentioned.