Can OEE be Used to Reduce Operating Cost?

OEE or Overall Equipment Effectiveness measures manufacturing performance against perfection. It is regarded as the global benchmark for managing and improving manufacturing efficiency. Any deviation from perfection drives up operating cost. OEE looks at three different losses and multiplies them across to assess total losses. Those losses are:

Availability – This is a measure of downtime (both planned and unplanned)

Throughput – This measures rate loss against the theoretical maximum run rate

Yield – This measures the amount of efficiency lost due to quality issues

Each of these factors has a cost impact. There are measurable financial and other costs associated with having people at work, the lights on, and machines operating. Anytime these things are happening and you aren’t producing at theoretical maximum levels, you are suffering efficiency and financial losses. Most factories are operating at or below 60% OEE but have no idea. Additionally, most factories do not measure productivity, and many who do, use methods that exclude significant losses such as changeover times, start-ups, throughput loss and many others. Again, anytime you have people on the clock and product yet to be made, anything less than the theoretical max output is a loss…for whatever reason – controllable or uncontrollable. At the end of the day, all aspects of running your business are controllable; the only real question is: are you willing to do what it takes to “fix” something that is perceived as “uncontrollable”. I’ve worked with manufacturers who, for years, wrote off “bad raw material” as uncontrollable but have never talked with the supplier about fixing the problem or investigated sourcing with other suppliers. In almost all cases, uncontrollable is synonymous for “we don’t want to deal with it”.

The Logic

For a factory with a direct operating cost of $10M annually and an OEE of 60%, the total efficiency losses are 40%. Therefore 40% of the direct operating costs are also losses, or $4M in this case. At 100% efficiency, the operating cost would be $6M.

World-class execution is 85% OEE, which equates to a direct operating cost of $8.5M in the example above. For the same factory, there is a $2.5M savings opportunity for improving from 60% to 85% OEE. What would you do with an extra $2.5M dollars per year? Expand production? Pay bonuses? Acquire a new business? Buy a small yacht and sail around the world?

Achieving 85% OEE is challenging but attainable for the vast majority of manufacturers. Click the link below to receive a free report on how much savings opportunity you might have based on your direct operating costs and efficiency performance:

My Total Savings Opportunity

If you don’t know your OEE, we can get you up in going on Impruver in less than a month. It will help you track OEE by product, line, shift, team, and even individual. It’s a great tool for highlighting exactly where to focus improvement efforts. For the sake of the tool mentioned in the above link, input 60% as a reference point and see what you get for a savings opportunity if you’re unsure of your current OEE.



The Politics of Performance: The Relationship Between Results & Rhetoric in Business

Manuficient - Chess Piece

There is an interesting mix of performance and politics present in any group of people who share resources and work together. Performance can be viewed as any activity needed to help the organization to achieve its goals. If it’s a basketball team, performance can be viewed as either scoring points or stopping the other team from doing so. I like sports analogies when discussing performance because it’s one of the most objective ways to measure results. In sports, it’s difficult to deny that Michael Jordan scored a ton of points, which greatly contributed to his team winning a lot of games.

In most other businesses, performance can be viewed as activity that contributes to productivity or sales, a safer work environment, better quality product or service, or any other of the organization’s performance goals. Since these things are rarely, if ever, achieved in a vacuum, it’s not so evident who deserves credit for what aspect of success or failure. This is especially true in the absence of high-fidelity data down to the blocking and tackling level, which is often not practical for most businesses – outside of professional sports of course. Usually, everyone involved played a role in either creating success or causing failure. Who’s to say that what one person did was so much more significant that what the next person did to improve performance? Sure, this guy is in here 16 hours per day but who can say that he is productive for even one minute per day? Likewise, this other lady comes late and leaves early every day but who’s to say that her contribution didn’t accounted for 99% of the outstanding results?

In the absence of granular data and a thorough / objective evaluation of people’s actions and the impact thereof, their contributions are typically measured by one thing – other people’s perception of their performance. And perceptions are shaped by…you guessed it – politics.

Politics often have little to do with actual performance. It determines who gets access to resources, promotions, bonuses, fired, blamed, their way in a disagreement, and sometimes even life and death. Politics is about jockeying for power or control over resources; and exists as a result of scarcity. Scarcity can come in many forms such as financial, credit / credibility, titles, authority, privileges, promotions, etc. One of the rules of politics is – what gets repeated becomes reality; if not immediately, then eventually if it’s repeated enough and by enough people. This is why professional politicians develop “talking points” so that the same themes get repeated and ultimately accepted as truth. Unfortunately, politics can enable people with terrible performance to win and people with outstanding performance to lose. When this happens (as it does more often than you would think) the entire organization loses. The reality is that the poorest performers tend to get really good at politics for the sake of their own survival. Superstar performers are rarely good at politics since they believe the world is generally fair and their results will speak for themselves. However, whenever good results are produced, there are always a few over-ambitious and under-performing sharks waiting for the opportunity to take more than their share of the credit. Likewise, whenever teams do fail, these same people have toolbox full of techniques to deflect blame to someone else.

It can be annoying that we have to play the politics game; especially if you’re no good at it. However, it’s one of those things that will either propel your business to success or accelerate it’s failure. As business leaders, we tend to talk about performance as if politics doesn’t exist. But oh it does – and it has everything to do with how the business performs. But what is the right mix of politics and performance?

Internal politics is never value added but may be necessary. The ultimate goal of politics is to influence people’s decisions in one way or another and to shift / sustain power. There is a certain amount of value-added work that must be done in order for the business to achieve it’s objectives. Leadership should always look to minimize the amount of political behavior and maximize the amount of value-added activity. To do this, there must be a fair way to measure progress against equally challenging targets. Then grant power to those making the strongest strides toward achieving those targets. Thus, adverse political behavior should not be rewarded as it only begets more political behavior. However, when actual high-performance is adequately rewarded, it encourages stronger performances across the board.

The following leadership characteristics encourage adverse political behavior:

  • Favoritism
  • Gossip
  • Being aloof; unaware of people’s actual contributions
  • Incompetence; not understanding the value of people’s work
  • Granting unequal access to face-time, coaching, and mentorship
  • Creating or failing to eliminate scarcity of resources or recognition
  • Failing to acknowledge strong contributions or distribute recognition fairly
  • Punishing productive or progressive behaviors (even if they fail)
  • Accepting gossip as fact without sufficient investigation
  • Promoting based on political prowess as opposed to verified performance
  • Failing to recognize people’s (or your own) prejudice when considering a point of view
  • Failing to hold people accountable adverse political behavior

On the other hand, the inverse of these behaviors promote strong performance and help keep adverse political behavior to a minimum.

Political behavior can also be beneficial. The truth is that we are all the same; breathe the same air and bleed the same blood. We can accomplish a lot as individuals but a lot more by working together. The process of determining who will lead the group is done through politics. The better job we do of gathering and assessing people’s quality and quantity of contributions, the better results we get when we assign power to someone. We also need to assess our leaders’ capacity for respect for others and ability to get results through people. Unfortunately, by not having adequate systems in place, it’s difficult to truly size up someone’s contributions; and often use other people’s perceptions to make these pivotal decisions instead. What’s the solution? Be systematic. Continuous Improvement assumes you have a system in place to improve. Without a system (or standard) for assigning power to people, you have nothing to perfect. Once you have something, you can effectively assess each success or failure on its own merit and use that information to engineer a more perfect system over time.

One example of a great system for assessing true performance is the Factory Operating System (fOS). It helps to evaluate the members within the manufacturing operations chain of command based on the same metric. The metric is based on the principle of OEE (Overall Equipment Effectiveness) but improved so that it can measure the performance of people, assets, and entire systems. OEE is regarded as the benchmark for measuring performance against perfection and assessing the gap to World-Class execution, or 85% OEE. The fOS calculates the performance of shop floor operators, managers, and executives alike. It considers the performance of the leader to be an aggregate of their direct reports’ performance, which ties everyone in the chain of command up to the CEO to the execution on the shop floor, which is where value is created for the customer.



Exclusive Interview with Norman Bodek, Pioneer in American Lean Manufacturing Movement – Part 3 of 4

Norman BodekIn this exclusive interview with Manuficient Consulting, Norman Bodek shares some of the fantastic details of his career as a one of the pioneers in the American Lean Manufacturing movement. Norman is a publisher, professor, and author who has published hundreds of Japanese management books in English and other languages. Most recently, Norman co-authored the Harada Method, a step-by-step process for setting and achieving personal and corporate goals. Listen to Norman’s fascinating story and powerful insights into how American companies can overcome the challenges to achieving world-class execution.

Copyright © Calvin L Williams blog at [2015]. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Calvin L Williams with appropriate and specific direction to the original content.

Inventory Reduction: Bringing Your Working Capital Cash Back to Life

Manuficient Consulting - Pulse

Inventory is a fact of manufacturing life. It is accumulated and maintained for raw materials, work in-progress (or WIP), and finished goods. We like inventory when it means we can be highly responsive when the customer needs us to be. We don’t like inventory when we start to realize that it a) ties up a substantial amount of working capital, b) can be expensive to store and maintain, and last but not least, c) it weakens operational discipline – meaning is cultivates manufacturing and supply chain inefficiency. Thus creating a double-edged sword where you could get burned quickly for not having enough inventory and you get burned in the long run for having too much inventory. The Ideal state would be to not need inventory at all, but this would require you to have a supply chain that can deliver orders on-demand. This means having the right products at the right place in the right quantities and so on. This means immaculate execution on the part of your supply chain in terms of speed, quality, and reliability. Although this is an ideal state and not within short-term reach for most (if any) companies, it should be the ultimate goal of any company’s Continuous Improvement path to world-class execution.

Inventory accumulates for a few main reasons, including but not limited to: unpredictable demand, over-purchasing, over production, unreliable manufacturing / supply chain processes, insufficient manufacturing capabilities, insufficient manufacturing capacities, lack of agility, and a whole host of other reasons. The main thing to understanding is that all of these reasons are driven by addressable gaps in performance; which are ultimately resulting in a “push” manufacturing model. If a company is maintaining any level of inventory, you can be assured that they are suffering from at least one of the items on this list if not multiple. The system-level key to reducing or eliminating the need for inventory is to close performance gaps in these and other related areas.

With that said, some of the root causes that result in the need for increased inventory levels cannot be resolved in the immediate future. You may find yourself with a need to reduce inventory levels drastically within 6 months to a year. It is not realistic, for example, to expect drastic changes in manufacturing capabilities or capacities in such a short time frame, especially if you don’t have the capital readily available to make significant engineering changes. For this reason, I typically recommend a time-phased approach to reducing inventory levels that drives both immediate gains and sets the supply chain on a path to world-class execution. The phases are as follows:

Phase 1 – Crisis Mode – Fire Sale: The goal here is to minimize the damage of further obsolescence which is what happens when excess inventory expires or is no longer demanded. The best case is to aggressively seek new customers who will absorb the excess (and/or obsolete) at full rate. The next best case is to offer the overages to the highest bidder. Another approach would be to donate excess or obsolete product (if applicable) and write-off losses.

Phase 2 – Short Term – Safety Stock Implementation: Apply appropriate safety stocks and tie inventory levels to demand. In Lean terms, this is an intermediate step to creating an actual pull system called a supermarket. Once the initial wave of excess / obsolete inventory has been reduced, the next step is to determine and implement the appropriate safety stocks. Safety stocks are determined through an algorithm of past sales (considering seasonality), expected future sales, and plant production capability among other variables. In this model, the production schedule should be driven by replenishing safety stock levels.

Phase 3 – Medium Term – Safety Stock Optimization: Match inventory to demand by SKU and apply additional reduction based on your factory / supply chain’s delivery capability. In order to execute this phase, you need to understand your factory and supply chain’s capability by SKU. It also requires categorization of product SKU’s into active (A), slow-moving (B), and excess / obsolete (C). A thorough analysis can help to determine the optimal levels of SKU’s in each category considering manufacturing performance and capability. Again, the production schedule is driven by safety stock replenishment requirements. The next step in the process is to provide suppliers with safety stock status information so that their production schedules can be driven by your needs for stock replenishment. This along with synchronizing with your customers effectively establishes a pull system, which the ultimate method for controlling inventory levels.

Phase 4 – Long Term – Inventory Quality Ratio Implementation: Implement the Inventory Quality Ratio (IQR) model that strives to minimize slow moving and obsolete items and maintain active items – measured as a percentage. IQR = Active Inventory Dollars / Total Inventory Dollars; in other words, the IQR would be 100% if all inventory were active. The definition and speed of turns of “active inventory” varies by industry but is generally the fewest number of SKU’s that makes up 80% of units sold. The IQR is a metric that can be implemented immediately or at any of the prior phases; however, the phases leading up to this one provide the foundation and information needed to implement IQR, which then lends itself to eliminating excess or obsolete inventory altogether. For slow moving SKU’s, the supply chain needs to be made reliable enough to execute effectively.

Ideal State – Ultimate Supply Chain / Demand Alignment: Match manufacturing and supply chain capabilities with demand to the point where orders could be filled on-demand with no inventories required. This is the classic model of “don’t even make it until after it’s been ordered by the customer”, which constitutes a pull production system in the purest form. This requires developing your manufacturing and supply chain processes to levels of world-class execution, or 85% OEE. This requires tremendous Operation Discipline and should be the ultimate aspiration of any Continuous Improvement program. Ease of implementation of this model depend heavily on the predictability of demand, but with the right science and analytics, any manufacturer can reach heightened levels of success.

Manufacturers need to establish an effective balance between supply chain reliability, safety stocks, and market demands. Inventory builds as a reaction to supply chain processes being incapable of meeting orders on-demand and the use of a push manufacturing model. In an ideal state, the customer could place an order, the factory could make the product and fill the order shortly afterward, and deliver it on time and in-full to the right location; this defines the supply chain’s level of execution. However, what actually happens is that manufacturers build inventory so they don’t have to rely on their supply chains to deliver within such a short window of time, risking failure to meet customer service expectations. Over time, this practice encourages greater and greater inventory levels, which only serves to hide the very inefficiencies that result in needing the inventory in the first place. Without effective inventory management systems, there is no check and balance to continuously drive down inventories, freeing up working capital (cash) that can be used for more productive purposes.

Copyright © Calvin L Williams blog at [2015]. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Calvin L Williams with appropriate and specific direction to the original content.

%d bloggers like this: