We recently received an e-mail regarding OEE calculations for batch processes and more specifically the effect on down stream equipment that is directly dependent (perhaps integrated) on the batch process. While the inquiry was specifically related to the printing industry, batch processing is found throughout manufacturing. Our more recent experiences pertain to heat treating operations where parts are loaded into a stationary fixed-load oven as opposed to a continuous belt process.
Batch processing will inherently cause directly integrated downstream equipment (such as cooling, quenching, or coating processes) to be idle. In many cases it doesn’t make sense to measure the OEE of each co-dependent piece of equipment that are part of the same line or process. Unless there is a strong case otherwise, it may be better to de-integrate or de-couple subsequent downstream processes.
Batch processing presents a myriad of challenges for line balancing, batch sizes, and capacity management in general. We presented two articles in April 2009 that addressed the topic of where OEE should be measured. Click here for Part I or Click here for Part II.
Ideally, we want to measure OEE at the bottleneck operation. When we apply the Theory of Constraints to our production process, we can assure that the flow of material is optimized through the whole system. The key of course is to make sure that we have correctly identified the bottleneck operation. In many cases this is the batch process.
While we are often challenged to balance our production operations, the real goal is to create a schedule that can be driven by demand. Rather than build excess inventories of parts that aren’t required, we want to be able to synchronize our operations to produce on demand and as required to keep the bottleneck operation running. Build only what is necessary: the right part, the right quantity, at the right time.
Through my own experience, I have realized the greatest successes using the Theory of Constraints to establish our material flows and production scheduling strategy for batch processes. Although an in-depth discussion is beyond the scope of this article, I highly recommend reading the following books that convey the concepts and application through a well written and uniquely entertaining style:
In his book “The Goal“, Dr. Eliyahu A. Goldratt presents a unique story of a troubled plant and the steps they took to turn the operation around.
Another book titled “Velocity“, from the AGI-Goldratt Institute and Jeff Cox also demonstrates how the Theory of Constraints and Lean Six Sigma can work together to bring operations to all new level of performance, efficiency, and effectiveness.
I am fond of the “fable” based story line presented by these books as it is allows you to create an image of the operation in your own mind while maintaining an objective view. The analogies and references used in these books also serve as excellent instruction aids that can be used when teaching your own teams how the Theory of Constraints work. We can quickly realize that the companies presented in either of the above books are not much different from our own. As such, we are quickly pulled into the story to see what happens and how the journey unfolds as the story unfolds.
Please leave your comments regarding this or other topics. We appreciate your feedback. Also, remember to get your free OEE spreadsheets. See our free downloads page or click on the file you want from the “Orange” box file on the sidebar.
If Lean Innovation is to become part of the new business norm, then why is that so many companies attempt to emulate what others have done? Innovation itself implies a sense of newness or differentiation from what was or is. It seems that “copy cats” are simply looking for the easy way out and call themselves lean in the process.
Duplicating successes from others will at least make you as strong as your competitor, but it takes true innovation to define the next leading edge “method” or technology. Perhaps integrating the established, well defined, and most importantly – PROVEN – is a good starting point, but the greater challenge is understanding the reasons driving these current systems and embracing the culture and lean mindset that drove these changes so we can take them further.
Why did Inventory Control seem to stop with KanBan? Why do improvement and quality initiatives start and stop at Six-Sigma? There is always a better way and it doesn’t have to be more complicated than its predecessor. Sometimes the simplest of innovations prove to be the most valuable and easiest to implement.
Lean Objectives will likely remain constant, at least for a time, and should be an integral part of your overall business planning process and strategy. We suggest that the opportunity to separate yourself from the competition is the approach or method chosen to overcome the same challenges they are facing.
Identifying the true root cause of any current situation is vital to ensuring the real solution is or will be implemented. It seems that most companies identify two types of core tasks: routine and problem solving. We would strongly suggest that another worthwhile effort is to review those current processes that are working and attempting to understand why. A lot can be learned from past or current successes as well.
Before paying a visit to “GE” or “Toyota”, understand the basic premise of their success. They were faced with a problem that other companies didn’t have and they invented a solution to overcome those challenges. The new “methods” not only worked, but proved to be even better than the existing systems that were in place.
Their success also relied on having a firm grasp of the real problem. They understood what needed to be accomplished, they just didn’t have the “HOW to do it”. This is the moment of truth for Lean Innovation. Having the processes in place that allow solutions to be developed that not only solve the problem but are robust enough as well to provide even a competitive edge.
Innovation doesn’t always mean new products or technologies, it can simply be a different method or system for accomplishing the basic day to day tasks at hand. Lean applies to the entire organization (system wide), so don’t forget about the method or approach and the who, what, where, when, and why of what we do.
We would strongly suggest, that eliminating complexity from any system will yield greater returns than you would imagine possible. People love simplicity, keeping in mind that perception is a matter of perspective.
Is employee morale impacting your OEE? If so, how much of a concern is it? As we wrote in one of our recent posts, “Perhaps the greatest “external” influence on current manufacturing operations is the rapid collapse of the automotive industry in the midst of our current economic “melt down”. The changes in operating strategy to respond to this new crisis are bound to have an effect on OEE among other business metrics.” We would argue that these times of economic crisis demand, now more than ever, that Lean Practices must become even more prevalent in our manufacturing operations.
People are concerned about the state and stability of the company’s finances and the industries they serve. The automotive industry has been devastated by the recent decline, or more accurately, collapse of the market. Significant changes in operating strategy including lay offs and reduced production days have impacted all of the OEM’s including Ford, GM, Chrysler, Toyota, and Honda. No one company is immune from the effects of the current economic conditions.
It is clear that the auto industry fell behind the “power curve” and crashed. Did conditions change too quickly to avoid the inevitable? Was it so big that, like the Titanic, the ultimate demise could be predicted but not avoided? Toyota was the number one producer of automobiles in 2008 but failed to yield significant profits. Conditions such as these were ripe for continued growth in years past. It is clear that even the best of the Lean practitioners are not immune from the effects of the current economy.
A company’s agility will certainly be tested during times such as these. Sustainability and viability are among the few significant objectives of Lean dynamics. As such, Lean dynamics should be at the forefront of every business leader. How adaptable is your business? Are you reinventing your business in response to the changes of your industry? The true Lean practitioner is certainly challenged to eliminate waste and variation beyond current means and traditional approaches. As change is constant, we must continually seek out ways to redefine or “better” define our businesses.
At the most fundamental level, everyone is concerned about the state of the economy, however, individuals, at the personal level, are concerned about their jobs and careers. We all want to preserve our current life style to some degree and, at a minimum, continue to pay our bills. It would be a difficult task to estimate the lost productivity that occurs when someone’s state of mind is focused on their own personal situation versus that of the company. We have observed first hand how employee morale has diminished as a result of the recent economic doom and gloom. Nothing can come between an indivual and their prosperity – this is an instinctive, almost primitive, response mechanism – a self defense position.
While you may not be able to change the economy, we would suggest that you can influence the “morale” of your employees. People will understand that you didn’t cause the current economic crisis, however, they do expect that you will let them know what the impact is to your business and ultimately to themselves.
Be honest with your employees, let them know where you stand – where they stand. They need to prepare for their futures too, whether it is working for you or someone else. During times of crisis such as this, it is time for the executive leadership to stand behind their Vision and Mission statements and treat their employees – THE PEOPLE -the most important assets a company can have – with the dignity and respect they not only deserve but worked so hard to earn. Be present and available to your team.
Our employees recognize that we only attract, retain, and hire the best employees. Regardless of the economy, the standard remains and we take great pride in the strength of our people. They know this intrinsically.
People come to companies to work for PEOPLE. Their immediate supervisor or manager is, in their eyes, the company. Arm your staff with the information they need so people can make informed decisions. Believe it or not, people are motivated when they feel that they are part of the process and not regarded as part of the problem. Reality check: “People come to companies to work for themselves.” How does this statement change your perspective? Who do you work for?
How many times have you heard, “Our labour is just too high, we need to cut back.” Well, who made the decision to hire the people in the first place? Look in the mirror. Treat people like they are part of the team, part of the solution. Get them engaged and focused on moving forward. Will they be motivated? They will be if they feel that they are valued players on the team, performing meaningful work that is contributing to the success of the company. Times of crisis tend to bring teams closer together and, in the end, they become stronger for the cause.
A great business parable written by Patrick Lencioni, “The Three Signs of a Miserable Job”, may provide some useful insights to motivate your team and even grow your business into a more profitable venture despite the current economic crisis.
While people think they work for a company or other people, we ultimately believe that people work for themselves and we, as a company, are the beneficiaries of their efforts.
So how does all of this tie to OEE? Weill, performance typically lags when people are not focused on the task at hand. There is a sense that, no matter what they do, they can’t change the current circumstances so, “Why bother?” Distractions of this magnitude are hard to ignore. As the leadership of the company, it is your responsibility to be in tune with the morale of your team and workforce in general. It is possible to mitigate the effects of low morale by addressing them early on and encouraging employees to be part of the turn around process.
This might be one of the few times in history where the term “CHANGE” will be viewed in a positive light and actually be embraced by your team.
We may just discover the 5S process for managing our economy with a real process in place to manage the fifth “S” Sustainability. Another one of the “anomalies” that just don’t make sense is, “This is just part of the nautral cycle of the economy. We were long overdue.” Somehow, that doesn’t say much about our governments or industry leaders. Why? Because it suggests we should have been more than prepared to deal with this a long time ago. The current scramble suggests the contrary to be true. Secondly, what is “natural” about the economy – it’s manmade – driven by the decisions of business leaders and governments around the globe. Natural? Never. A logical excuse that every one seems to accept as part of “nature”? Maybe.
OEE is a great metric to help identify where you may be incurring losses in your processes or operation. As one of the goals of implementing a Lean strategy is to reduce costs, it only seems natural that we should be able to determine what processes to focus on that are driving the greatest losses.
From the example developed in our previous posts we determined that the OEE and related factors for our three processes were as follows:
Based on the OEE results, one would be inclined to take a look at Machine C as it has the lowest OEE. Is this really the greatest opportunity? The only way to answer the question is to understand what factors are driving costs and ultimately affecting profitability.
The performance factor for machine C is definitely pulling down the OEE for this process. What would you think if the machine is 100% automated (no labour) and the cycle time, although it may be less than standard, is still meeting the takt time to meet customer demand? Is there really a cost? Of course there is, but the impact to your business may be minimal in terms of cost when compared to the other machines.
It is clear that we need to develop a model to understand what losses and ultimately costs are associated with each of the factors. In turn, we will be able to better understand the overall OEE.
What costs do we consider? We recommend keeping the model simple. There are typically three cost components associated with any given process or product: Material, Labour, and Overhead. Burden is another term used for Overhead and we will use these terms interchangeably.
Our goal over the next few posts will be to develop a simple cost model for each process and, in turn, determine which one may be the process of choice for improvement. For now, we will provide a general discussion of some of the potential cost considerations.
Improving quality typically yields the greatest return on investment because all of the cost elements stated above are impacted by the Quality factor. Raw material, Labour, and Burden are all expended to produce a part scrap part.
The costs associated with Quality losses are further challenged when considering the number of parts that would have to be produced in order to recover these lost costs. If you are lucky enough to enjoy a 10% profit margin (clear), then, at a minimum, 10 parts would have to be produced for every part scrapped. Of course, more parts would have to be produced to recover other infrastructure costs incurred including documentation, record keeping, and scrapping of the actual parts.
Performance losses typically affect labour and overhead. Labour losses are easy enough to understand. If a machine is operator dependent, then we will have to pay a person to stand at the machine to run it. If it is running slowly, more costs are incurred to cover the additional labour time.
In many cases, direct losses related to overhead are sometimes difficult to assess unless a truly activity based costing system is in place. The reason for the complexity arises because some of the costs are “fixed”. Because the equipment exists, expenses such as depreciation or property taxes are incurred whether or not the equipment or, for that matter, the plant is running. The performance of the machine or any of the other factors for that matter won’t change this fact.
Availability then becomes somewhat more obscure when it comes to calculating hard costs. If the labour can be redeployed to another process when a machine goes down, perhaps some of the labour losses can be avoided. If not, then waiting for a machine to be repaired or material to be delivered is a real loss that should be addressed.
Intangible costs are also difficult to quantify but we should be aware of their existence. The costs associated or related to poor OEE may include overtime, expedited freight, and infrastructure costs related to extra handling of material or management of non-conforming material (containment, extra inspection, rework, and scrap). Although this is a relatively short list, it addresses the most obvious potential losses. With a little more thought, the list could easily grow longer.
Other key metrics in your facility such as customer delivery or quality performance indicators may also point to problems that can be traced directly to poor OEE performance. Although difficult to measure, a company’s competitive position is compromised when efficiencies are low and eventually the costs of poor performance make their way into the “burden” costs required to manage the operation.
While OEE is an effective metric for operations, on its own, it does not provide a direct indicator of real financial losses. As Lean Practitioners we are challenged to provide an analysis that not only improves the metrics of the business but also translate into real financial improvements on the balance sheet and ultimately – the bottom line. We would suggest that OEE is a time driven metric (asset time management strategy) versus our proposed COEE which is Finance or “Value” driven (cost management strategy). We are presently developing a model that will allow your OEE data to be sensitized with cost data as demonstrated by the table below.
We have coined the term COEE or Cost of Overall Equipment Effectiveness. Consider the following OEE results converted to Cost based drivers using standard costs as our baseline. The sample data and spreadsheet used to calculate this data will be available as a download soon. The overall spreadsheet is quite large and based on a fully detailed three shift operation.
Our OEE cost model clearly presents the real costs or “losses” incurred per part. Our Weighted OEE Cost Model will change the way you view OEE data, enabling you to set priorities and identify real, quantifiable, opportunities for improvement. The above snapshot represents the goal of our COEE project – a clean, clear, summary of the losses incurred correlated directly to your OEE index. Another advantage is that the Availability, Performance, and Quality factors are recalculated based on cost and presents a realistic breakdown of losses for each of these factors from a financial perspective. Our spreadsheet presents an advanced OEE example that will bring real value to your OEE implementation strategy.
NOTE: The fully developed spreadsheet is available from our FREE Downloads page or from the FREE Downloads box on the sidebar.
A well implemented OEE strategy should become evident on the balance sheet through improved material utilization, reduced labour variance (straight and overtime reductions), reduced scrap costs, reduced rework costs, and other burden account reductions.
Take quick, effective, and efficient action to solve the problems having the greatest financial impact to your business. Last but not least, don’t confuse activity with action. Decisions are not actions and talking about a problem or even writing about it could be construed as activity. Real actions produce real, measurable, results.
Change requires Change. Profit is to business as oxygen is to humans – you need it to survive.
We have created a number of Excel spreadsheets that are immediately available for download from our FREE Downloads page or from the Free Downloads widget on the side bar. These spreadsheets can be modified as required for your application. There are no hidden files, formulas, or macros and no obligations for the services provided here.