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From SCDigest's On-Target E-Magazine

- Jan. 27, 2015 -

Supply Chain News: Leveraging the Overall Equipment Effectiveness Metric to Drive Manufacturing Improvement


IDC Manufacturing Insights Presents its Take on Measure First Developed in 1960s, Says It is Key Aspect of Smart Manufacturing


SCDigest Editorial Staff

The analysts at IDC Manufacturing Insights are out with a new report that again pushes the use a manufacturing metric developed in the 1960s by a man named Seiichi Nakajima called Overall Equipment Effectiveness, or OEE, but with IDC's own specific take on how it should be calculated.

In IDC's new research note on "Smart Manufacturing - The Path to the Future Factory," analysts Robert Parker, Marc Van Herreweghe, and Lorenzo Veronesi first noted that in just the past few years, perceptions by corporate executives relative to US production have changed for the good, with companies more willing to make investments in domestic production rather than assuming the smart course was to sooner or later move the work offshore, largely to Asia.

SCDigest Says:


IDC Says the that the OEE equation can in turn be extended to include a line or cell (a collection of equipment), a factory, or a whole factory network.

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While the reshoring trend may be overhyped based on the data, it does appear the US and some Euro companies are taking domestic manufacturing more seriously again, and maybe be interested in investing to make those operations more productive.

However, it is also clear that traditional, labor-intensive factories are a thing of the past. The trend now is to more advanced manufacturing, which generally implies a lot of automation and far few but generally more skilled shop floor employees to work with the technology to get products produced.

IDC prefers the term smart manufacturing, which it defines as "the convergence of data acquisition, analytics, and automated control to improve the overall effectiveness of a company's factory network," which defines a separate issue from the level of plant automation.

Increasing Operational Effectiveness

IDC believes that increasing operational effectiveness will be a critical element of transforming to smart manufacturing.

To that end, IDC offers its definition of the operational equipment effectiveness metric. It involves use of four supporting measures:

Efficiency: Actual output versus expected output. So if expected output is 10 units per hour and actual output is 11, efficiency is 110%.

Utilization: Availability and use of equipment - if a machine is running 99 out of 100 hours, utilization is 99%. Note downtime or lack of work could impact utilization.

Productivity: Is equal to efficiency times utilization. In this example, it would equal 108.9%, from 110% times 99%.

Reliability: Basically, a quality metric - how many good parts are produced as a percent of total parts. If there is one bad part out of 1000, reliability equals 99.9%.

From there, calculating OEE is a simple exercise: productive times reliability. In this example, that would equal 108.79%, from 108.9% times 99.9%.

IDC notes that there are other important measures that relate to factory efficiency beyond just machine efficiency. They include:

• Labor efficiency: How many machines can factory personnel manage.

Material efficiency: Optimizing setups and production sequences so less material is sacrificed to scrap.

Energy efficiency: Optimizing the consumption of energy in the process, which may include running the equipment slower.

In general, increasing the OEE metric should lead to more revenue and higher levels of profitability for a given plant. However, it is not always quite that simple, as the impact depends in part on other factors.

(Manufacturing Article Continued Below)



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Those include:

If the company is currently selling everything it produces and could sell more if it could produce more, then the consideration is quite simple - increased production means increased revenue.

Having smart manufacturing capabilities enables an enterprise to be more responsive to customer needs. Delivering a quality product on time builds customer loyalty so improved capabilities can be critical to gaining a larger share of existing customers' budgets and in stealing away customers from the competition.

It is a bit more of a bigger picture proposition but if the company has plans to significantly increase revenue, improving throughput can mean that new capacity requirements can be optimized, saving precious cash.

With customers increasingly asking for personalized or even customized products, having smart manufacturing capabilities may be critical to being able to meet those requirements and grow revenue.

IDC correctly notes that the OEE metric can be said to be focused on individual machines, and therefore potentially not be a good guide to understanding and improving the effectiveness of the whole plant itself. To address that, IDC says manufacturers need to first create a unified analytic model that allows for correlation across the individual machine measures, and that the OEE equation can in turn be extended to include a line or cell (a collection of equipment), a factory, or a whole factory network.

The report also recommends that "companies create an OEE hierarchy that encompasses the full production portfolio from the entire factory network to individual pieces of equipment. A thorough analysis of how improved effectiveness impacts financial metrics in the return-on-assets hierarchy (revenue, costs, asset levels) should be done so that justifications can be generated and progress tracked."

It concludes with some thoughts on smart manufacturing overall: The venerable factory is an important competitive weapon in the digital economy. Smart manufacturing programs can deliver financial benefits that are tangible and auditable. More importantly, smart manufacturing transitions the production function from one that is capacity centric to one that is capability-centric, and able to serve global markets and discerning customers."


Any reaction to IDC's take on OEE? Do you use this metric currently? Let us know your thoughts at the Feedback section below.

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