Applying the OEE (Overall Equipment Effectiveness) metric to enhance profitability in small businesses.

Why is holistic measurement (OEE)required to understand operational performance?

You know the famous quote, “What you measure is what you get.”

Measuring is significant for business performance, and what and how you measure are critical. Your business performance will also be suboptimal if you measure wrong, suboptimal, or standalone objectives.

For example,

Typically, we measure our business or plant in the following ways.

1. Utilization perspective :

?In this measurement, we measure the number of hours the plant is running against the total available time. For example, if the plant runs for 6 hours against the total shift hours, say 8 hours, we measure plant utilization as 75 %.

It is straightforward. However, it will not indicate any other people's efficiency or product quality performance.

2. Efficiency perspective :

In this measurement, we measure people’s efficiency as the amount they produce against the standard quantity. For example, if the shift standard output is 1000 pieces and in a particular shift, people produce only 800 pieces, we declare plant efficiency as 80%.

It focuses more on the quantity against the standard; however, it does not indicate the utilization losses and quality output.

3. Capacity Perspective:

In this measurement, we measure plant effectiveness against installed capacity. For example, if a plant has the capacity to produce 2000 T and the actual production is 1000 T, we say capacity utilization is 50 %.

As mentioned earlier, it does not highlight utilization losses or even efficiency losses. All losses are combined, and there is no scope for further analysis or improvement.

4. Machine hour rate perspective:

In some organizations, people measure the revenue they generate against the machine hour rate. For example, if the machine hour rate is Rs 1000 and the revenue generated is Rs 600, then plant effectiveness is 60 %.

The machine hour rate is dynamic and will vary from organization to organization. Small companies do not have the bandwidth to calculate the machine hour rate frequently, and this measurement does not reveal the reason for utilization and efficiency losses.

5. Yield Performance perspective:

Some organizations use the yield indicator as a performance measure.

All those measures are right and serve the purpose to some extent for what it is intended. For example, you may measure capacity utilization as the ratio of production qty/capacity installed, which measures, say, 80 %; that means you may conclude that 80 % of the installed capacity is utilized. It may not give other information like the efficiency during the production, how much actively passed through quality specification, how much cost you incurred, etc.

Likewise, all the above typical measurements will give you standalone, suboptimal information about each function, which you need to consider together to arrive at some common conclusion about your overall business or plant performance.

To overcome the above limitations only, smart organizations adopt one measure, which will give a holistic view of your plant or business effectiveness rather than standalone performance, utilization, or yield performance.

The metric of OEE (Overall Equipment Effectiveness) fills the gap.

Introduction to Overall Equipment Effectiveness :

OPE(Overall Plant Effectiveness):

If your plant is small, one or a few assembly lines determine your business profitability. You can measure that assembly line, which will directly correlate with your business performance. You can measure it as Overall Plant Effectiveness.

OEE( Overall Equipment Effectiveness):

If your plant is relatively large and consists of many equipment and assembly lines, you can identify the most critical or constrained equipment and measure it holistically. This will allow you to measure the overall effectiveness of the equipment.

Suppose we apply OPE or OEE correctly in a small, emerging organization. As I have seen in my client organizations, this will directly correlate with delivery performance, sales turnover, and profitability, irrespective of their manufacturing industry classification.

The measure, either OPE or OEE, will consider the importance of EFFECTIVENESS rather than any standalone measure like efficiency, utilization, or yield performance.?

What is meant by OEE?

Overall Equipment Effectiveness (OEE) is one of the proven and best METRICs used for monitoring and improving the Efficiency of manufacturing processes.

The manufacturing processes include machining, fabrication, powder coating, and assembly lines.

OEE is a simple, holistic, and powerful metric.

OEE takes into account the typical sources of manufacturing productivity losses and groups them into three categories: availability, performance, and quality.?

Grouping them into different categories distills the complex manufacturing losses into simple metrics.

It helps us understand the losses clearly and choose the right lean tool for each loss. In addition, it helps us verify the effectiveness of each action against each manufacturing productivity loss.

Benefits of OEE measurement:

1. As this measure encompasses utilization, efficiency, and quality performance, you will get a holistic idea of your plant’s effectiveness at the end of the day rather than other measures like utilization, plan vs actual, efficiency, etc
2. Easy to communicate to all FUNCTIONS?
3. Since all functions are involved in improving this measure, this measure enhances engagement among people, as I witnessed in my client’s operations.
4. Helps to focus on the overall performance of the plant rather than on standalone areas
5. If properly administered, it has a direct correlation with increased capacity, delivery volumes, sales turnover, and profitability.

Elements of OEE measurements

It consists of 3 parts: Plant Utilization, Output efficiency, and product yield performance.

In the picture above,?

The plant utilization is given as 75 % as it is derived from the ratio of working hours ( 6 hours)? to available hours? (8 hours)

The output efficiency is given as 83 % as it is derived from utilization data.

For example, in 6 hours, the plant is supposed to deliver 600 pieces ( assume 100 per hour), whereas the plant produces the actual output as 500. Hence, plant efficiency is? 500 / 600 equals 83 %

The quality performance is given as 80 % as it is derived from efficiency data; for example, 500 pieces are produced, and 400 pieces only pass through the quality test, and the final yield is 400/ 500 equal to 80 %

Hence, Overall Plant Effectiveness (OPE) is the multiplicity of Plant Utilization, output efficiency, and Yield improvement.

That is? ?49 %

So, instead of looking at a standalone measure of either 75 % plant utilization or 83% people or output efficiency or 80 % yield performance, you get a HOLISTIC MEASUREMENT to say? EFFECTIVENESS? as 49 %.

This measure will give you a HOLISTIC idea about your plant’s Effectiveness at the end of the day.

Business Implication of EFFECTIVENESS measure:

What does 49 % OPE or OEE indicate?

Given your current sales turnover or profitability, whatever you achieve is due to operating the plant at 49 % effectiveness. If you want to improve sales turnover or profitability, it is only possible by enhancing plant effectiveness measures. Improvement of plant effectiveness measures can include reducing plant utilization losses, improving people efficiency losses, and improving quality issues.

The action point is to understand your current plant or equipment effectiveness, the reason for the losses, and the actions you can take to improve effectiveness and, in turn, your business performance.

How to calculate OEE?

As mentioned, OEE is calculated from three categories: availability, performance, and quality.

OEE = Availability Performance Quality

Pl note that OEE is not calculated as an addition or average of three categories; it is calculated by?multiplying?three categories.

For example

Availability = 75 %

Performance =90 %

Quality = 89 %,

Then

OEE= 75 % 89 % 90%

?????? = 60 %

Availability Calculation:

Availability is the ratio of actual operating time to planned operating time.

It measures the downtime loss.

Availability = Operating Time / Planned Available Time

Operating time = Planned available time – downtime loss

For example

Availability =Actual Operating Time (300 min) / Planned Operating Time (400 min)

??? ???????????????=75 %

Planned operating ?time:

For example, you are running a shift for 8 hours

Planned Available time per shift is 8 hours or 8 * 60 = 480 min

Note :

In some organizations, it is a practice to shut down the equipment for morning meetings, refresh breaks, lunch breaks, etc. within 8 hours. In that case, you can deduct those times from the planned available time straightaway.

For example,

Morning meeting – 10 min

Lunch break – 30 min

Refresh break – 20 min

Scheduled maintenance check – 10 min

Hence planned shutdown time = 10 + 30+20+ 10=70 min? ?

? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ??Hence, the planned operating time is 480 -70 = 410 min

Actual Operating Time

Planned Available time – downtime

=410 – 110*

=300 min

*Break up? of downtime (110 min ) can be

Machine breakdown -20 min

Operator not available – 30 min

Material not available – 10 min

Changeover loss – 50 min

Hence,

Availability = actual operating time / planned operating time

?????????????????? =300/ 410

????????????????? = 73 %

Performance:

Performance is the ratio of the actual quantity produced during operating time to the standard quantity that can be produced during operating time.

From the above example,

Actual operating time = 300 min

Say std time per piece = 3 min

So, the standard output? can be produced ?or expected during operating time = 300/3 =100 pieces

Suppose, in a given actual operating time, the actual qty produced is 270 pieces, then

Performance = 270 / 300

?????????????????????? =90 %

Quality:

Quality is the ratio of good quantity produced to total quantity produced.

From the above example,

Total quantity? produced = 270 pieces

Good quantity? = 240 pieces

Rejection / Rework quantity = 30 pieces

Hence,

Quality = 240 / 270

??????????? ?=89 %

?

After calculating all three elements, we can arrive at OEE % by multiplying the three values.

From the same above examples.

Availability: 73 %

Performance: 90 %

Quality: 89 %

Hence OEE would be = 73 % 90 % 89 % = 58.47 %

How much OEE % is considered GOOD for a discrete manufacturing process?

Generally, world-class OEE for discrete manufacturing processes is considered 85 % or greater than 85 %

It is arrived from Availability (90 %),?Performance (95%),?Quality (100 %) = 85 %

The study generally indicates that the average OEE score for the discrete manufacturing process is around 60 %. If we aim for an excellent OEE standard of 85 %, then we can realize that there is much opportunity to move from 60 % to 85 % through loss elimination or reduction initiatives.

As a business head, you can always aim to increase the OEE percentage as high as possible. However, we should strive to achieve at least 85 % OEE in a discrete manufacturing process.

In my experience, many companies in small, emerging spaces find it difficult to achieve that level, which indicates that potential for waste exists in the system. We need to encourage the team to eliminate or reduce the waste as much as possible to achieve a consistent 85 % OEE.

Can we apply the OEE concept in other than manufacturing functions?

Yes. We can apply the concept of OEE in any function beyond manufacturing. It is widely used in the manufacturing environment, as losses significantly impact the organization.

For example, realizing the potential of OEE measurement in driving business results in a manufacturing environment, one of my clients asked me to apply the OEE concept in an office environment, say, the Finance function, as most of them felt there was scope for improving the finance function’s effectiveness.

First, we must understand the purpose of administering OEE in any function. The purpose is to avoid finding fault with the people by measuring efficiency and utilization. The main purpose is to identify the major losses that affect the function and other functions in the organization.

By properly modifying the OEE format, we gathered many losses, and we could see some patterns of repetition.

For example, staff in the finance function used to wait to get signatures from higher officials before uploading the travel bills and getting approval to pay the travel reimbursement to the employees. From a lean perspective, the activity of getting approval before uploading the bills into the system is a waste, and it is also a duplication. The higher official needs to add more value in signing the bills before uploading. That can be delegated to the staff, and the higher official will have control while approving the reimbursement bill. Hence, the waiting-for-approval activity was eliminated.

Also, the uploading of bills was assigned to respective functions, and the uploading activity was eliminated.

The idea of administrating OEE in the office function is to identify waste and look for improvements to eliminate or reduce it through automation, policy changes, avoiding duplication, etc.

By implementing some of the process changes in the finance function, the effectiveness? is improved by 38 %

Hence, OEE can be administrated in any function other than manufacturing, and we need to look for a waste pattern from OEE data collection.

Steps in Implementing the OEE Measurement Process

• Identify the facility equipment or line to be measured
• Understand the current OEE? level approximately
• Collect shift-wise/day-wise data for a specified period
• Identify the loss pattern
• Classify the losses in each category
• Prioritize the losses
• Choose the right lean tool for elimination or reduction of losses
• Make an action plan to improve the OEE score by addressing the losses
• Implement the solution and monitor the OEE trend and losses trend
• Correlate increase in OEE with increase in plant delivery or capacity
• Continue the above steps

Sample format for collecting OEE data in small business

Below is the sample for collecting the losses in the machine shift-wise and day-wise.

The parameter can be changed according to your losses.

Real case study examples of OEE Impact on Business Profitability

Below is an example of OEE measurement implementation to eliminate waste in the system and its impact on sales turnover and manufacturing cost reduction in one of my client’s organizations. For confidential reasons, actual figures were not shown; however, the correlation data were correct.

OEE is being used as one of the business's KPIs.

Summary

Implementing the OEE measurement in a small organization will have more impact than in a large organization, thanks to a few critical processes that directly impact delivery, sales, and profitability.?

The CEO and leadership team are vital in inculcating the right measurement system.

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