How Manufacturing KPIs Work Together with OEE

At Evocon, we incorporate client feedback into the design and continuous improvement of our product. We also keep an open dialogue with our clients. This process recently uncovered an excellent client question: “How Manufacturing KPIs Work Together With OEE?” Our answer forms the basis for this article, which we hope can be of value to a broader audience.

OEE – a Universal Manufacturing KPI to Monitor and Improve

Typically, manufacturers will monitor several KPIs across the plant to understand how different functions across the plants are performing a specific process.

Since every process in a plant has a downstream customer and functions as a system, managers need to be able to see how all parts of the operations are performing quickly. Common KPI’s tracked monthly on the manufacturing dashboard embodies this idea and is a best practice.

Before we move any further, let’s quickly look at what OEE is and why it’s one of the best universal KPIs to measure and improve in manufacturing.

OEE (Overall Equipment Effectiveness)

OEE is a lean manufacturing tool and universal best practice to monitor, evaluate, and improve the effectiveness of a production process. This could be an assembly line, machine cell, packaging line, filling machine, etc.

Learn more: What is OEE and how does it work

Monitoring production and OEE allows us to visualize and reduce the Six Big Losses in manufacturing. Each of the big losses costs manufacturers money. So, it follows that improvements to OEE will have a positive impact on all cost related KPI.

Tip: all manufacturing KPIs inevitably lead back to cost control, minimization, or optimization in some form.

Common Manufacturing KPIs and Their Relation to OEE

Since every manufacturer is different, it is not surprising that metrics and KPIs will vary between each. That said, there is a handful of KPIs that we are going to look at for our purposes of understanding how KPI’s work together when we improve OEE.

Running cost per hour

Running cost per hour is a very simple manufacturing KPI that helps us understand if we are pricing products adequately.  To understand it better, let’s look at an example.

Let’s assume you operate a CNC machine shop and bid hourly jobs using a shop rate of $100. Your shop rate should include the sum of all costs related to manufacturing, such as operator wages, utilities cost, and maintenance and repair costs.

Naturally, you are interested in reducing these costs. Doing so allows you to either make more money or price your products more competitively.

Improving OEE can help you reduce these costs.

1. Operators Wages – when we improve OEE performance, we are becoming more productive. This increase in productivity means we pay less in wages for each item produced.
2. Utilities Cost – when you improve OEE performance, you effectively reduce manufacturing cycle time, and again, less time to produce an item means less electricity will be required to keep machines running.
3. Maintenance Cost – machines that are well maintained will last longer and perform better. Monitoring OEE gives you visibility into unplanned stops, such as when a machine malfunctions or needs an unscheduled repair. Naturally, one way manufacturers look to improve OEE performance is by eliminating unplanned downtime due to unscheduled maintenance. This, in turn, reduces your running cost per hour. Learn more: How to Track and Improve Technical Availability?

Throughput

Another useful KPI for manufacturers to measure is throughput. It is the number of units that can be produced in some amount of time, such as 100 units in a day or 5000 liters per minute, for example.

It can be used to describe the performance of an entire plant, a work cell, a production line, or a specific piece of equipment. In the case of a particular piece of equipment, its throughput should be the maximum run rate as specified on the manufacturer’s nameplate.

Throughput is useful in several ways beyond the most straightforward: to run your plant, you need to know how much it is capable of producing at any given time.

To understand it better, let’s look at an example.

Assume your plants’ throughput is 100 units per day, and you are operating at 55% OEE. If you improve OEE by 10%, throughput will increase by ten units per day.

The best part is that you increased output without investing in new machines, hiring new people, etc. Instead, you used OEE to understand where to focus to improve productivity and efficiency, for example.

Productivity & efficiency

You have likely heard that it is essential to improve productivity and efficiency. This is true; it is important. But pick one or the other as your preferred manufacturing KPI, because they are the same thing.

Productivity

First, productivity is simply the ratio of output to input. Let’s look at an example.

Let’s say that it takes us 10 hours to manufacture a part today that we can sell for $500 each. What happens to productivity if we improve the process tomorrow, and it saves us 2 hours of production? Since it now takes 8 hours instead of 10, productivity has increased.

The calculation is as follows.

Productivity yesterday = $500/10h = 50$ per hour of work
Productivity today = $500/8 x 100% = 62.5$ per hour of work
Change in productivity = (62.5-50)/50*100% = +25%

Efficiency

Now, the standard definition of efficiency is the ability to do something without wasting materials, time, or energy. Which is helpful because it allows us to discuss waste. But is it any different from productivity?

Let’s look at another example.

Assume you manufacture bottled water, and each run yields 10,000 cases that sell for $2 each. That means your revenue is $20k. Your labor and material cost is $15,000 per 10,000 case run. This month you switched to a new supplier of plastic bottles because the quality is better for the same price. The new material doesn’t jam in the machine, so you no longer are wasting $500 in plastic bottles each run.

The calculation is as follows.

Efficiency (old supplier) = $20 000 / $15,000 x 100% = 133%
Efficiency (new supplier) = $20 000 / $14,500 x 100% = 143%
Change in efficiency = (143-133)/133*100% = +7.5%

Note: The calculation is the same for both efficiency and productivity. All you need to do is divide output with input. 

So, what happens to efficiency and productivity when we improve OEE? You guessed it. They both improve. This is because OEE is a reflection of how well you are managing the Six Big Losses. To improve OEE, you need to have less of one of the losses. In our previous example, it would be less material scrap. Thus, if you reduce scrap, you are more efficient, more productive, and you have improved your OEE.

Capacity utilization

Capacity utilization measures how much of your available production time is currently being used. Looked at another way, it tells you if you can take on more work. Fixed assets, such as your facility and machines, are expensive resources. This is why manufacturers desire higher rates of utilization. They are seeking to maximize the benefit of these resources. Which is why it is a common manufacturing KPI.

In the context of OEE improvement, let’s assume that we work to reduce unplanned downtime. Our OEE score will go up accordingly, but now, the plant has more time available to produce. Which is another way of saying that you have more capacity available to utilize. Thus, when we improve OEE by reducing unplanned downtime, we also have improved capacity utilization.

Lead time

Lead time is the amount of time from receipt of a customer order to delivery. Reducing lead time has two primary benefits.

First, you can respond faster to changes in customer demand. This is because you are able to start the production of different items sooner. Which means you can be more responsive to new orders.

Second, when you can produce an item faster, you are converting inventory into cash faster as well. The less time money is tied up in raw material or work-in-process inventory, the more cost-effective you become.

We have seen that improving OEE will often reduce the number of hours required for production. It is in this context that improvements to OEE lead to improvements in lead time.

Takt time

Takt time is the amount of time between beginning to produce one unit until you begin to build a new unit. In an ideal system, the takt time of your production process should be equal to and synchronized with customer demand. If it is, then you are only producing precisely what you can sell at exactly the moment your customer will buy it.

One of the reasons manufacturers measure and monitor takt time is to identify over or under-production. This is a clear indication that improvements to takt time occur when you improve OEE. Why?

OEE is concerned with the nominal rated output of your machines. It uses this to identify over/under production by comparing how you are running at a given time to how you should be running based on rated output.

Thus, it follows that OEE, like takt time, allows us to measure and monitor over/under production. Which, of course, means that when we improve OEE, we also improve takt time.

Implementing OEE Improves All Manufacturing KPIs

In this article, we began by reviewing several common manufacturing KPI’s and what they used to measure. Then we went on to discuss the effect which improving OEE would have on each KPI by working through several examples.

This exercise demonstrates exactly how manufacturing KPIs work together. It also is a compelling case for implementing OEE if you haven’t done so already.