Plants must earn working capital

Stanton McGroarty says use OEE to refine investment business cases.

By J. Stanton McGroarty, CMRP, senior technical editor

There is a phrase we hear over and over in successful, growing plants, especially plants that are funded by parent companies. “We earned more investment in our operation,” is said proudly by managers whose operations have been funded for growth. The parent company, bank, or other funding agency has been impressed enough by the use of existing capital that it was willing to double down on its bet on a plant’s future success.

Funding decisions are often made in response to the energy and focus of plant staff. Current operating results usually play a big part in the discussion, as well. These are good information, but there is one well-known, underutilized tool that is seldom called upon in the making of investment decisions. That tool is overall equipment effectiveness (OEE), the best numerical indicator of how well production equipment is being used to generate income for a business enterprise.

If the current use of production equipment is not considered as part of the decision to increase plant capacity, two common mistake can easily happen. First, equipment that is not being exploited may be duplicated instead of being supplemented by different equipment that will be a better fit to the needs of the operation. Second, investment that is completely unnecessary might be made where minor operating changes to existing equipment might have provided the needed capacity.

J. Stanton McGroarty, CMfgE, CMRP, is senior technical editor of Plant Services. He was formerly consulting manager for Strategic Asset Management International (SAMI), where he focused on project management and training for manufacturing, maintenance and reliability engineering. He has more than 30 years of manufacturing and maintenance experience in the automotive, defense, consumer products and process manufacturing industries. He holds a bachelor of science degree in mechanical engineering from the Detroit Institute of Technology and a master’s degree in management from Central Michigan University. He can be reached at or check out his .

For example, equipment is often duplicated because it spends a great deal of time in setup. This may happen when long runs of standard parts must be interrupted by short runs of low volume service or specialty items. In this case, it may be wise to invest in flexible, longer cycle-time equipment to fill short orders, rather than install a second high-throughput line that will spend most of its time in setup. This approach is almost always a lower-capital alternative to duplication of, say, engine block or transmission housing equipment. Paint lines often provide this kind of opportunity, as well.

It is often true that equipment effectiveness is measured, either consciously or inadvertently, against budgets, rather than against the actual capacity of the equipment. Budgets tend to enshrine production losses as part of “how the world works,” instead of challenging the staff to identify and correct the bottleneck operation within a process. Improvements in cutting tool life, feeding equipment for parts and fasteners, or better cooling or hydraulic capacity often open up equipment output and allow for postponement of capacity increases. Improved operating procedures, or even the addition of working shifts, may also increase capacity without substantial investment.

Derivation: OEE is a straightforward KPI. It is based on the notion that capacity is typically lost in three ways. First, availability might be reduced by downtime. Second, output might be restricted if the equipment runs below the maximum design rate. Third, some production might be lost to quality problems.

Overall equipment effectiveness is the product of the percentage production allowed by each of these factors. Thus, for a machine that runs 75% of the time at 60% of design speed and produces 90% good parts, OEE will be as follows:

OEE = availability x throughput x quality
OEE = .75 X .60 X .90 = 40.5%

A more exhaustive discussion of OEE from Plant Services Contributing Editor David  Berger is available here.

Significance: Clearly, a piece of equipment running at this rate is not a candidate for duplication. But before deciding that this example is ridiculous, let’s consider possible reasons for some of the OEE figures. It is often true that availability is reduced by the amount of time the equipment spends in setup or waiting for a production schedule. Throughput can be constrained by material handling or packaging equipment, or by inadequate cooling capacity on, say, a welding operation. Quality problems might be caused by material handling, unnecessarily tight specifications, or tooling problems. All of these causes might be easy to fix, but on old equipment they might just be accepted.

Getting started: OEE of key equipment should be part of every production manager’s thinking. The computations aren’t difficult, and creating them tends to encourage useful teamwork among maintenance, production, and engineering people. As a starting point, compute OEE as a baseline before ordering new equipment for capacity reasons. It could save embarrassment, as well as time and money.

Read Stanton McGroarty's monthly column, Management Measures.