Overall Equipment Effectiveness. Robert Hansen C.
the 698 hours are used for training and the rest (602 hrs) are truly saved in reduced scheduled time. Using this reduction in scheduled hours, the reduction in Direct Labor expense for case B is computed.
$22.1 million is a savings of $1.9 million from the original cost of $24 million seen in section 3.1. This calculation of savings may actually be conservative. In practice, the reduced hours would probably be overtime hours. Then an even bigger expense reduction for Direct Labor would occur.
Furthermore, the education and experience gained with focused OEE projects should yield continuing benefits. Following the adage “Give a man a fish and he can eat for a day. Teach a man to fish and he can feed his family for a lifetime”. In this case, with four 24-hour days provided for training, every crew should have four full shifts of focused training about OEE improvement projects. Such training would leverage to additional projects.
The financial parameters for Case B, now reflecting fewer factory hours, follow: (figures in Millions)
Notice that Operating Income has increased from $9 million in Case A to $10.9 million in Case B. Thus, a 10 percent improvement from OEE has led to a 21 percent improvement in operating income.
Providing business case information in this format should help decision-makers in your company be more aware of the benefits as the information is linked directly to the key parameters for which they are responsible. Being sensitive to the interests of your audience will help you develop more win-win situations.
Realize too that eliminating root cause limiters, thereby improving OEE, will provide benefits year after year. You should also try to determine the strategy that set up the problem in the first place, then take steps so that the conditions of problem will not occur again. This avoids future losses.
In addition, information should be communicated quickly to all similar areas to hasten corrective actions throughout the company. In this way, improved OEE is engaged and sustained at higher levels for your factory and your sister factories.
3.3 Case C: Full Factory, Improved OEE
Case C provides the same improvement scenario as Case B, (OEE = 66 percent: Availability 71.6 percent × Speed Factor 0.97 × Quality Factor 0.95 = 66.0 percent). However, we can now sell everything we can make. Therefore, the objective is to leverage maximum output. As with Case B, OEE was improved by 6 percentage points, or 10 percent, over the original OEE in Case A. The question here focuses on the gain in Operating Income from a full factory with higher OEE.
Assume that the factory schedule is the same as in Case A (7680 scheduled hours). However, we will still provide 96 hours of planned training hours (part of excluded time in this scenario) to focus on aggressively improving OEE.
Given OEE, Scheduled Time, and Ideal Rate R (217 units/hr), we can solve for the Number of Good Units Made.
Number of Good Units Made = Scheduled Time × R × OEE = 217 units/hr × 7680 hr × 0.66 =1.10 million units
Both OEE and factory output have improved 10 percent. They directly correlate.
If we continue to sell the 1.10 million units for a net price of $100 each, then Net Sales will equal $110 million. The annual cost of materials increases by 10 percent from $25 million to $27.5 million, reflecting the increase in units. Factory Overhead expenses remain at $18 million for the year. The cost of Direct Labor for the year will be increased to account for the same level of planned training as in case B.
As a conservative approach, Selling Expense is increased by the same 10 percent as OEE and quantity produced. ($16 million + 10 percent = $17.6 million). This estimate is conservative because many portions of Selling Expenses (e.g. the cost of advertising -- we already can sell everything we make) would not necessarily increase just because more units were made and sold. Therefore, the actual increase in Selling Expenses may be lower, and in turn, the bottom line even greater.
The financial parameters for Case C follow:(figures in millions)
Notice that for Case C, even though OEE increased 10 percent, Operating Income increased 62.2 percent, from $9 million to $14.6 million.
Part of the hidden factory is leveraged to the full benefit of the company. As a result, the long-term health of the business is stronger. For factories that find their products becoming commodity products with small profit margins, having effective factories is of paramount importance.
The overall power of an aggressive OEE strategy lies not only in the impressive improvement shown in this example, but also in the compounding of these results as the education tools of OEE drive continuous improvement year after year.
One sector of companies is in the enviable arena of new growth looking for more capacity. This exciting environment may drive quick decisions to add capacity via more capital. A better strategy would be to develop the discipline to drive higher OEE with the existing factory. Not only is capital for additional capacity avoided, but also the full rewards of an effective factory will exist throughout the life of the factory.
3.4 Case D: OEE Impact on Return On Assets (ROA)
At the 1999 Society of Maintenance Reliability Professionals Conference, one of the speakers, Carol Vesier, Ph.D., President of RonaMax, LLC, focused on marketing reliability improvements with her clients by first presenting the need to improve the company financial picture. This approach spoke to the heart of what matters to corporate managers; it also showed that significant opportunity often exists if factories produce at the high end of industry benchmarks.
She discussed using the 4 P’s of marketing (publicity, product, place and price) as they apply to in-house marketing of reliability. The product is actually how (not what) reliability or productivity improvement gains achieve corporate financial goals. Publicity is the education that reliability improvement is far more valuable than just reducing maintenance costs. Placement is “picking where (and to whom) you decide to market reliability ....not all work processes will benefit equally”2. Often the support for reliability comes from beyond the factory gates primarily because the existing organization has a local paradigm and believes they are currently doing absolutely everything possible. “Price refers to shifting the focus from maintenance budgets to business benefits”3.
This way upper management starts with a future financial picture, then works backward to find the pieces that provides the foundation for the results. Ms. Vesier indicated that, inevitably, managers find that higher equipment reliability and performance of existing systems can deliver the results they are challenged to produce. The managers become champions of a targeted OEE strategy and fully support a top down driven initiative.
Ms. Vesier discussed a client who determined that developing the capability of its existing factories was ten times more financially effective than constructing new plants for capacity. She indicated this client could spend $10 for education, reliability improvements, and root cause problem elimination as equivalent to spending $100 in capital for new capacity. Does this seem realistic?
If this were true, and because the vast majority of factories are not operating at world-class levels, why wouldn’t companies leap at the strategy of improving reliability and productivity. Perhaps this book will provide the education necessary for positive reliability publicity.
To examine this claim, and to begin developing the product for this type of marketing approach, an understanding of the fundamental concepts of manufacturing accounting and the parameters of the Return on Assets (ROA) equation must be developed.
Using the