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The Importance of OEE in ROI Analysis for Manufacturers

time clock 9 min read • April 28, 2020 oee roi analysis evocon
carl waddill

Carl Waddill

Evocon Partner

Advances in the IIoT, as well as its widespread adoption, are providing new ways for manufacturers to understand and work with ROI analysis. In this post, we explore this topic and explain the importance of OEE improvement in calculating the ROI of your investment decisions. We’ll also help you understand the expected ROI of OEE software, which, in our experience, left many manufacturers scratching their heads.

What is the value of OEE in ROI Analysis? 

For any substantial capital expenditure, such as purchasing new production equipment or machines, most manufacturers will need to prepare a business case and calculate the return on investment (ROI).  Indeed, this is a standard best practice for many businesses before releasing funds, and there are not many financial managers who will not require it.

ROI analysis provides financial justification

ROI analysis helps us to evaluate opportunities and to provide financial justification for expenditures. It helps financial managers be able to answer important questions to ensure companies are making high-quality investment decisions.

Questions such as :

  1. Where should we invest? – Businesses have limited funds but multiple opportunities to invest. How can we compare and decide which is the best option?
  2. How should we evaluate the performance of an investment after implementation? – Companies should assess financial performance after investment to validate the ROI. Doing so can potentially provide insights for improved decisions in the future.
  3. How do we know if the performance of the investment is optimized? – Once we have a new machine up and running on the line, it will be helpful to see if we are obtaining the maximum benefit from our investment.

New investments must impact the bottom line

Beyond ROI, there are other indicators to look for, which show the investment is creating value for manufacturers. One of these is OEE, which we’ll look at in the next chapter. Mainly, an investment must ultimately improve the production process and allow us to do more with less. In practice, this translates into fewer production hours per item produced or less waste per production run. Either way, the investment needs to pay for itself while also increasing output, decreasing waste, or improving quality.

There are many ways for us to improve our manufacturing processes.

  • We could invest in new machinery.
  • We might reduce stops, with the help of OEE software.
  • Or we could automate routine tasks with robots.

All actions should result in a reduction in the man-hours required to produce an item. If we do not see this improvement, then the investment is not having an impact on the bottom line.

Other benefits that indicate an investment is creating value and impacting the bottom line positively, include:

  • Reduce overtime work or the number of shifts required to deliver the production plan
  • Postpone investments into new equipment and new facilities
  • Eliminate the need to increase headcount
  • React more quickly to demand shifts
  • Or, shorten delivery times.

Improvement in OEE as an indication of positive ROI

Overall equipment effectiveness (OEE) is a lean manufacturing tool and universal best practice to monitor, evaluate, and improve the efficiency of a production process. This could be an assembly line, machine cell, packaging line, filling machine, etc. Furthermore, by improving OEE, you improve most of the other critical manufacturing KPIs. That’s why using OEE to understand the ROI of decisions is vital.

Learn more: What is OEE and how does it work.

OEE is a significant benefit to manufacturers when working to justify new capital expenditures. Using live OEE data gives you hard facts which can demonstrate the constraints in your production process. And when you see improvements in OEE, these constraints are naturally being minimized. With this data in hand, you can easily model the value of new equipment or software that is purchased to improve the process.

Furthermore, monitoring OEE also allows manufacturers to pinpoint and prioritize opportunities by allowing them to quantify the value of the improvement. This, too, is helpful when working to justify new expenditures.

Indeed, it is hard to imagine a more credible metric than OEE to validate your investments.

Monitoring investment decisions using OEE improvement

Given the importance of ROI and OEE in manufacturing, it should come as no surprise that investments in production assets should, once operational, improve OEE. An excellent time to begin to calculate the value of improving OEE is while we are still working to evaluate new opportunities.

Better still, if you’re using Evocon’s OEE software, you can monitor how your investment is performing in real-time. In that case, if an investment is not improving OEE, the software can help you understand the reasons why. So by using OEE as a metric and looking at whether it is improving or not, you can ensure that you optimize the performance of your investment. Further, it is a means of tracking that you achieve the maximum ROI.

Naturally, the next question is that once you implement OEE in your factory, then how do you calculate the ROI of the OEE Software itself?

How to calculate the ROI of OEE software?

With more traditional investment decisions, like buying new machines, calculating your ROI is rather straight-forward. But with IIoT solutions, such as OEE software, many manufacturers find it challenging to understand the value they are getting from their investments.

The answers can be found by calculating the ROI of OEE improvement and monitoring the actual performance of OEE post-purchase. It is all about understanding whether your bottom line is impacted positively by implementing OEE software.

ROI Calculator for OEE Software

When using Evocon’s OEE ROI calculator, you can, of course, calculate the ROI of investing in Evocon’s OEE software, as this is its primary purpose. Additionally, you can use the formulas in the calculator logic when calculating the ROI of other IIoT solutions and software as well.

To give an example of calculating ROI, let’s use our OEE calculator as a basis and assume you operate:

  • Ten machines, seven days a week, 16 hours per day
  • At an hourly running cost of €95 per hour and a baseline OEE of 60%

If you invest in Evocon, and this improves your OEE from 60% to 63% (OEE growth of 5%), the value generated is worth 146 065€/year. The ROI for year one would be 817%, and the software would pay for itself in 45 days.

So, even though calculating the ROI of IIoT solutions can be challenging at first, the expected return in many cases is far more significant than most manufacturers assume. The biggest benefit is that investing in OEE software helps you optimize your current resources and increase output without buying new machines. And if you do purchase new machines, you can use OEE to maximize machine utilization.

Conclusion

We understand from our discussion that manufacturers are searching for and evaluating more investment decisions than ever before. Simultaneously, they are operating in a business environment of increasing competition. So, it is no longer enough to simply have a gut feeling that an investment will provide value.

For many years, ROI has been the primary means of justifying investment rationale. The introduction and adoption of IIoT allow us to monitor and capture production data at the machine level in real-time. With this new capability, manufacturers can extend and improve the method of evaluating investments. To do so, they should also consider the impact on the bottom line that a proposed investment has by looking at improvements in OEE.