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Dollars and Sense: Why You Should Translate OEE into a Financial KPI

Posted on January 12, 2022 by David P. Hicks and John Alford

Dollars and sense - Blog HeaderTranslating Overall Equipment Effectiveness (OEE) into financial terms allows everyone from the plant floor operators to executives, measure continuous improvement and understand the business value of OEE. The challenge is making this a reality. This blog will dive into what it means to measure OEE, why you should translate that into financial terms, why OEE is important, and finally what role software plays.

OEE is usually expressed as a key performance indicator (KPI) emphasizing performance. The use of OEE is gaining traction because it is such an effective metric to determine the improvement potential of one's equipment, facility, or even an individual process, and it generates a simple metric expressed as a percentage. However, because operators and enterprise-level often struggle to communicate effectively about the value of OEE, it is essential to find a way to translate it into a dollar amount everyone will understand. Operators and even managers usually calculate OEE as a percentage, but that can feel abstract without context. It is entirely possible to talk about OEE in terms of dollars. Let’s dive into why talking about OEE in terms of dollars instead of percentages can be a powerful tool for improving OEE and saving money. New call-to-action

What Does OEE Measure?

OEE tracks availability, performance, and quality, which in turn encompass the six big losses:

  • Breakdowns or equipment failure
  • Adjustments and setup
  • Minor stoppages or idling
  • Slippage
  • Waste and rework
  • Lower yield

There are several ways to calculate OEE, but broadly speaking, OEE is: 

Availability x Performance x Quality = OEE expressed as a percentage

A perfect 100% means that everything is running at full speed, with no stops, and flawlessly produced product. In a broad sense, most at the enterprise level understand that improving the OEE number from a 70 to a 78 is a clear improvement. OEE is an analytical tool for measuring improvement. It’s easy to note a reduction or improvement as the percentage will fall or rise accordingly. It is not unusual for new companies just beginning to measure OEE to see numbers in the 40s to 60s. Most consider an OEE of 85% or better to be a number any manufacturer would be proud to achieve.OEE is a metric that helps facilities to understand better where their loss is occurring, but it can also be helpful for those that are running smoothly. It challenges teams to ask the right questions about their processes and assumptions. There is always room for improvement, and OEE is a diagnostic that reveals hidden waste. It can be challenging to conceptualize what an OEE percentage change means in terms of money, so working out the cost of each percentage point is key. Let’s talk about why.

What the Financial Impact of OEE Means to Your Business 

It is vital to find a way to translate the OEE percentage into dollars. Enterprise-level may understand what OEE is but often do not give it full weight. However, seeing the connection between OEE and the financial impact makes it more exciting. It’s worth it to sit down with the finance community and work through how to evaluate OEE. It can be very illuminating for everyone all the way up to the CEO to realize that a single point of OEE is worth X amount of dollars. A facility might calculate their OEE to be 76% and raise their performance in a given time period to 77%. Enterprise-level might consider this change as more significant if they understood that each percentage point was worth a million dollars. 

Enterprise-level positions take a big-picture stance. Since many manufacturers rely on multiple KPIs and other metrics to monitor the health and productivity of the organization, OEE can feel like just another number. Translating it into a dollar amount takes the number from the abstract to the real. Financial numbers are more tangible and provide a concrete piece of information that helps center OEE as a valuable metric. 

Why Is OEE So Important?

OEE helps tease out hidden issues in production and also prevents falling into a rut. Repeating a process over and over can lull any manufacturer into thinking that a certain performance level is good enough simply because there are no apparent problems. But many manufacturers who believed they were running at theoretical maximum have calculated OEE and subsequently discovered that they were nowhere near it. It’s essential to impress the power of OEE on everyone involved in the processes in order to:

  • Recognize the elements of OEE to identify which drive value and which are lagging
  • Drive quality by applying right first time
  • Use speed losses as an enhancement opportunity without accepting slippage. 
  • Realize any OEE loss is a waste of material, people, or energy
  • Provide hour by hour tracking, which can yield extra points to boost OEE
  • Create problem-solving capability focused on how employees can become proactive problem solvers. The key is to search out the root cause rather than treat symptoms. 

Understanding OEE with Software

OEE identifies what a facility is capable of and illustrates avenues to problem-solve for increased speed, yield, and quality. Tracking OEE with real-time analytics gives manufacturers a dynamic number with meaning. Software programs like SafetyChain break down all of the data components that contribute to the OEE and visually illustrate areas of opportunity. Whether a company manually collects the data or uses sensors, monitoring OEE allows facilities to implement a mindset of continuous improvement. In conclusion, making the extra effort to understand OEE as a financial metric demonstrates how targeting processes directly affect the bottom line, down to the dollar. 

 

Topics: Profitability, Productivity, Technology, OEE