In these troubled times for business, there is a need to reduce the costs associated with running the business. If we take a Middle Eastern regional example, 60% of the manufacturing cost is raw materials, 30% is overheads and 10% is direct wages. If the cost of the overheads or fixed cost is $10,000 per month and you produce 1000 units, then the fixed cost per unit is $10. If you produced 4000 units per month, the fixed cost would still be $10,000 per month, but the fixed cost per unit would have reduced to $2.50. You would have the increase in variable costs associated with increase in production and you would also have the increase in sales revenue and profit! The increase profit on fixed cost alone is $30,000 in one month!
So how do we measure efficiency? The best method is to use Overall Equipment Effectiveness or Efficiency as some term it, OEE. This is a powerful driver for change, it is not the only one, but it is a very powerful one. As we have seen it is linked to profit. It should be linked to capital expenditure. If the OEE value is not in the 70% range, why buy expensive new capacity over working, at a cost, but a lower cost than CE to improve the current value stream and make it efficient. In my opinion it should form part of the job description and more controversially it should be a driver for the remuneration package.
OEE is one of the basic key performance indicators, KPI, that every business should monitor as increasing it and sustaining in requires the whole operation to perform as a team, not as individual functions or managers. Maintenance, Production and Quality functions all have their role to play in this measure.
OEE looks at how you use the planned operation time in terms of availability, productivity and quality of the value stream. This can be expressed as:
OEE = Availability x Productivity x Quality.
Let us quickly define these terms. A company plans to work for 24 hours per day, to run four different products. For each of the products there is a tool change, each change over from good part to good part takes 144 minutes. The operation was designed to run at a Takt time of 500 units per hour, the current rate is 320 units per hour. From what is produced there are on average 26 quality rejections per hour.
Availability is the time that the process is actually operating, there are two big losses involved in reducing the availability time, recorded breakdown time and set up and adjustment time.
The available time is the (planned time – down time)/ planned time x 100.
In our case ((24 x 60) – (4 x 144))/ (24 x 60) x 100 = 60%
Giving 864 operating minutes out of 1440, or 14.4 hours out of 24. This is Operating Time.
Productivity is the rate of operation or speed of the operation. The two big losses in this category are unrecorded small downtimes of less than 5 minutes, called idling losses and increasing cycle times or operating slower than the required rate.
The productivity is number produced / number planned x 100
In our case 320 / 500 x 100 = 64%
Out of the 14.4 hours of Operating Time we effectively used only 64% of it, giving us 9.2 out of 24 hours of Net Operating Time.
Quality is defined as the “good” product produced during the Net Operating Time. In our case some of the valuable time was taken up producing out of spec product! There are the final two big losses here in process scrap and start up scrap.
Quality is (Number produced – number of bad quality) / number produced x 100
In our case (320 – 26)/320 x 100 = 92%
Of the 9.2 hours of Net Operating Time there is only 8.5 hours of Valuable Operating Time from the planned 24 hours!
OEE = Availability x Productivity x Quality
OEE = 60% x 64% x 92% = 35%
This means that 35% of your time is adding value, 65% of your time is non-added value, 8.5 hours of added value 15.5 hours of non-added value!
The world class bench mark for OEE is 85%. This is not sweating the process, but inputs enough pressure to keep employees alert. There are times included for change overs, maintenance, training and customer order flexing.
The World Class benchmark OEE = Availability x Productivity x Quality = 90% x 95% x 99% = 85%
So now you have calculated your OEE, what do you do? Use the six big losses to pinpoint where the problems in the value stream are. For manual operations the problems are normally organisation and training; for automated processes they are normally change overs and maintenance. Use the Lean Tools, VSM,5S, 7 Wastes, Visual Control / Visual Management, Standardised Work, SMED – Quick Changeovers and TPM – Total Preventative Maintenance to reduce the wastes and improve the business. This will increase the quality and delivery levels given to you customers while reducing your internal costs.
This like most of my posts is a brief introduction / overview of a part of Lean Manufacturing. For more information, leave me a comment or email me.