Profitability Using OEE and Cost Drivers
OEE clearly helps to identify where inefficiencies in our manufacturing environment can be improved, however, OEE is only part of the solution to sustain or improve profitability. One of the main drawbacks to OEE is the inability to directly correlate OEE results to the financial performance of the operation. We have identified this as a concern as we have always attempted to make improvements that will provide the greatest return on investment (whether time or money).
While it is important for a business to serve the needs of its customers, it is equally important to remain profitable. The costs associated with the inefficiencies of your operation need to be identified to bring the best opportunties for improvement into focus. In this regard, it is important then to understand your cost structure. We have prepared a very detailed OEE model that attempts to present the relative costs associated with each of the three quality factors. The purpose of the model is to calculate actual incurred losses and in turn to provide a Cost Driven or Cost Weighted OEE Index (including each of the factors).
For the purposes of our discussion, we will use a relatively simple cost model. The most basic costs to manufacture a product are material and direct labour. We recognize that burden or overhead costs are also incurred, however, there are varying methods and approaches used to calculate what these are including Activity Based Costing, Totally Accounted Burden Systems, and Equally Distributed Burden among others.
With the exception of infrastructure costs for consumables or indirect labour, much of the burden associated with running a company cannot be allocated directly to one given product. Lean may identify or provide opportunities to increase available capacity. This new capacity can then be used for new business, in turn absorbing more of the overall burden costs and those associated directly with the asset itself such as depreciation.
Where’s the Money?
It is possible to allocate certain costs to each of the OEE factors to determine what processes or products should be the focus for improvement.
Availability, Performance, and Quality impact different elements of our cost structure. For the purposes of our discussion, the model presented here is somewhat simplified, however, it will help to expose the major losses you may be incurring.
OEE Model using Cost Drivers
We have developed a detailed Cost Driven OEE model that calculates the OEE factors and overall OEE based on costs. You can download a copy of this model from the Sidebar “Free Downloads” or click here.
Futher discussion on this topic is forthcoming. Our initial intent here is to at least create the interest and certainly prepare you for the next steps in our OEE strategy.
Feel free to send your comments or questions to LeanExecution@gmail.com
Until then, stay Lean.