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Roi Calculator Spreadsheet - Download as PDF

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					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: rch4oee@aol.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: rch4oee@aol.com                                                 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 (rch4oee@aol.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: rch4oee@aol.com                                                  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 (rch4oee@aol.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.

				
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