Driving Profitability through Enhanced Efficiency: A Finance Professional's Guide to Overall Equipment Effectiveness
In other Chief Financial Partner articles, I highlighted the importance of building financial forecasts with detailed operational data and showed how this extra effort can directly improve results. I have also discussed why the new interest rate environment makes it more imperative than ever to closely manage expectations.
· Read: Mining data for profits… Literally
· Read: Why You Should Build Your Company to Thrive in This New Interest Rate Environment
When I was chief financial officer of Huttig Building Products, a Nasdaq-traded distributor of building materials, we focused closely on maintenance and production schedules for our fabricated products. We aligned our supply chain, labor schedules and maintenance plans and the resulting margins were the highest in the company.
In this article, I discuss the importance of measuring equipment effectiveness and its impact on related operations schedules. Although the concept of Overall Equipment Effectiveness (OEE) is not complicated, finance and accounting professionals often overlook it. Let us delve into what OEE is, why it matters, and how it directly influences the financial health of a company.
Understanding Overall Equipment Effectiveness (OEE)
OEE is a metric used to evaluate the performance of equipment or processes within a manufacturing or production environment. It provides insights into equipment utilization by measuring three key factors:
Availability assesses the percentage of time that equipment is available for production. Whether scheduled or unscheduled, downtime reduces availability. However, breakdowns, labor changeovers or dead times in the schedule are much more detrimental than planned maintenance. In the form of an equation, availability is expressed as:
Availability (%) = (Actual operating hours / Total hours) * 100
Actual operating hours are calculated by subtracting any planned or unplanned downtime from the total hours.
Performance measures the speed at which equipment operates compared to its maximum potential speed, offering insight into the efficiency of your operation. Factors such as equipment slowdowns, idling, or suboptimal operation contribute to reduced performance and lower OEE.
Quality may seem like an obvious area of focus, but measuring results against expectations provides valuable insight. The yield of well-tuned equipment pinpoints defects that stem from poorly maintained equipment, supply chain issues or operator errors.
The Importance of Measuring OEE
OEE data can quickly pinpoint inefficiencies in operations. The key take-away is to consider not just the individual KPI, but the interplay between each of these metrics. Focusing exclusively on availability (layer 1 and 2 on the clock on the left side, Figure 1a) only focuses on optimizing equipment uptime and ignores how effectively it is being utilized and maintained. In an equipment report, an OEE code of “Equipment Downtime” does not give you insight into the root cause. Digging a layer deeper (see layer 3 in the production clock on the right, Figure 1b) provides an understanding of the root cause. Delays caused by unplanned maintenance can be remedied with predictive maintenance techniques, the use of sensor data, condition monitoring, and predictive analytics to anticipate equipment failures before they occur. A review of your equipment schedule should confirm that routine maintenance tasks are scheduled based on usage patterns rather than arbitrary schedules.
By contrast, equipment “idle” time indicates poor alignment between labor schedules, supply deliveries and production schedules. Eliminating idle time may involve modifying production batch sizes, considering changeover schedules and anticipating demand. Idle equipment can also be a sign of bottlenecks. Take a step back and observe the flow of your production line. For more specific ideas, read the MBA-favorite, “The Goal” by Eliyahu Goldratt. In his book, the author introduces tools to identify and eliminate bottlenecks.
There are numerous disciplines that focus on operational improvement, and I do not pretend to summarize all of them here. Key for the finance manager is to understand that unrealistic expectations on a manufacturing or production floor can put undue pressure on the labor force to cut corners in quality or safety to compensate.
Pushing equipment too hard increases the risk of breakdowns. These breakdowns, coupled with delays in procuring spare parts or consumables, locating and transporting repair technicians, or finding the correct tools, can significantly impact both the output of the current shift and the associated supply and repair costs on your profit and loss statement.
Conclusion
Armed with accurate OEE data, you will feel more confident in your ability to make informed choices regarding capital investment, process improvements, or operational changes. Variance reports are more informative when they address equipment availability, performance or quality. Why? All these OEE measures provide actionable insights. Whether deciding to repair or replace equipment, implementing preventive maintenance programs, or redesigning workflows for greater efficiency, OEE changes the dialogue to focus on the proper measure.
By measuring availability, performance, and quality, companies can improve production volumes, which translate to higher revenue, reduced costs, and a sustainable competitive advantage. As companies strive for operational excellence in today's competitive landscape, prioritizing OEE measurement and improvement is key to maximizing financial performance.
For more information, I encourage you to visit Vorne’s site on OEE. Their knowledge and application examples for improving manufacturing operations are extremely helpful.