R C HANSEN CONSULTING, LLC P.O. BOX 272427 Bob Hansen, P.E., CMRP, Author, Owner FORT COLLINS, CO. 80527 Manufacturing Excellence Benchmarking Services/Training Phone 1-970-490-1720 e-mail: email@example.com FAX 1-970-490-1780 White Paper on Application of OEE ROI Calculator for MEMEX Installations By Robert C Hansen, Author of “Overall Equipment Effectiveness: A Powerful Production/Maintenance Tool for Increased Profits” The OEE ROI calculator for Memex hardware/software installations is a powerful ‘First Look’ Tool for Manufacturing organizations interested in taking control of improvements toward manufacturing excellence. It is intended to quantify the business case to install automatic data/information equipment to expose Hidden Factory improvement opportunities. It can also build a reasonably accurate account of “How Much Money is being Left on the Table every week that Manufacturing Best Practices aren’t executed?” The Calculator output quantifies the increase in Income From Operations (IFO or EBITDA) for Same Sales Volume and Sell Everything scenarios for various improvement criteria. The OEE ROI calculator is intended as a very preliminary ‘rough cut’ analysis tool for developing a business case (to engage real-time manufacturing performance data for shop floor machines in manufacturing plants). Part of the reason Calculator is ‘rough’ is because a Plant average is used for several important parameters such as OEE, shift output, quality rate, etc.. Much greater precision can be developed by using actual OEE data differentiated by product run and by work station. Therefore, future monitoring and proactive use of the information provided by an installed system will significantly improve accuracy of alternatives to assist Leadership teams in setting direction and focus to maximize results quickly. First Look results are generated using Small, Medium and Large pre-selected productivity improvements (feedback from Memex users) to show the range of possible results. The current input values in the Calculator were supplied using hypothetical but realistic values for a machine tool plant. It is estimated that for most manufacturing plants, the Calculator results have a confidence level of 85 percent of being within plus or minus 3 percent. Note that Calculator treats each machine as producing a finished product that has an average Cost Of Goods Sold (COGS) and profit contribution (IFO or EBITDA). Typically, product flow maps should be used to review the business case for the flow recognizing that the only time a profit is made is when the final output of the stream is actually sold. Plant Throughput is used to look at the changes in expenses (materials and labor on key machines) and income (Throughput accounting). One Key metric to review is the Number of Reduced Shifts required on key machines for the Sell Same Volume. This could mean fewer Overtime shifts (overtime shifts are not considered in the R C HANSEN CONSULTING, LLC P.O. BOX 272427 Bob Hansen, P.E., CMRP, Author, Owner FORT COLLINS, CO. 80527 Manufacturing Excellence Benchmarking Services/Training Phone 1-970-490-1720 e-mail: firstname.lastname@example.org FAX 1-970-490-1780 Calculator) or that key shift people could do more non-key machine work (reducing contract work). Another key understanding is that Calculator doesn’t apply the Theory Of Constraints (TOC) therefore, if the proper application of tools and OEE improvement isn’t achieved at the constraint, then the increase to IFO is also limited. (Note that RC Hansen Consulting (email@example.com) can provide practitioner expertise to benchmark flow streams and prioritize improvement projects to maximize ROI.) Note, if extra people are assigned to cover for lunches and breaks or for cleaning/material supply then the work (pay) hours for a key machine should be increased slightly (e.g. by 0.125 for the hour covered for lunches and breaks). The quality factor usually has more impact than Availability or Speed Factor for bottom line improvement. When waste or scrap is improved, OEE improves AND LESS MATERIAL is needed which is like getting ‘free’ product to sell. To closely account for the change in material, Calculator determines the new amount of total units made and applies the base case unit material cost to the total number of new units required to make the good units for the associated scenario. Another powerful use of the Calculator is to zero all of the improvement parameters and then individually examine what 1 OEE point improvement is worth for Availability, Speed Rate, and Quality. This gives the user an approximation of Financial impact on IFO for types of improvement activities. Just as important, improvement input for the various parameters should be selected that represents the Gap between current performance and World Class. This scenario approximately quantifies the size of the Hidden Factory in Financial terms answering “How Much Money is Left on the Table?” (When a Flow stream is investigated, the input values must be of the constraint plus all downstream quality losses. For complex flow or multiple products/constraints request analysis assistance.) Calculator does not take into account changes in expenses for distribution costs. If there is a significant expense for delivery, the overall base case cost of material could be increased by the unit delivery cost times the current number of good units sold (and the same amount added to the Plant COGS). Then when the number of good units made changes, the distribution costs are approximately accounted for in the results analysis. (For the Same Sales scenario, this is a non-issue.) Calculator assumes the material cost is the same for all units produced and that each unit sold has equal contribution to profits (IFO). Once Memex data collection is in place and critical data is obtained by Product run, an in-depth product flow line analysis can be generated (Financial OEE) to more clearly define IFO results by product to determine contribution by constraint minute. If significant variation exists in some of these parameters, Calculator can be used in an incremental way for preliminary analysis by R C HANSEN CONSULTING, LLC P.O. BOX 272427 Bob Hansen, P.E., CMRP, Author, Owner FORT COLLINS, CO. 80527 Manufacturing Excellence Benchmarking Services/Training Phone 1-970-490-1720 e-mail: firstname.lastname@example.org FAX 1-970-490-1780 entering data specific to a product family (and properly proportioning the volumes, expenses, IFO, staffing, scheduled hours, etc.). When used in this manner, the values pertaining to OEE should be specific to the constraint within the flow line. However, caution is urged when Calculator is used to investigate a series of steps for a product flow (a product flow line) because complex interactions such as the effects of waste/scrap on upstream and downstream requirements, multiple constraints, shared resources, etc. are not considered. (Note that RC Hansen Consulting (email@example.com) can provide practitioner expertise to benchmark (in depth) flow streams and quantify/prioritize improvement projects to maximize ROI.) If staffing is significantly different on different shifts, then Calculator can be used to examine the results for a single shift (all of the parameters would need to be allocated appropriately among the various shifts) and then accumulate the total savings for the two different sales scenarios. Once the total savings has been computed the number of weeks for the project to be paid back must be recalculated using the following formula: (Project cost ÷ (Total Savings ÷ number of weeks of operation per year)) = number of weeks (of improvements achieved) to breakeven Note that ROI is MAXIMIZED by understanding 1.) WHERE projects should be focused, 2.) WHEN meaning what is the priority sequence and timing between actions and use of resources and 3.) WHAT; for the target selected, what OEE tools should be applied to quickly close the improvement Gap. The WHY for these steps in this order is not to get the biggest change in OEE in the shortest time but rather getting the biggest change in Financial OEE in the shortest time. (If these four points aren’t vividly clear for your situation, contact RC Hansen Consulting for assistance.) It is said “In the Land of the Blind, the One Eyed Man is King”. With proper analysis, obtaining real time performance data for your Flow streams can build the vision of what could be and set shift goals to proactively use OEE for Financial Success and competitive advantage.