Improving return on assets to achieve high performance

Using overall equipment effectiveness as a measure of asset performance

Introduction
Today, manufacturers work constantly to increase asset utilization and reduce loss in the ongoing effort to achieve high performance. Pressure from shareholders is greater than ever and the funds available to invest in improvements are limited. To remain competitive, companies must get more from their assets while keeping costs down.

On the journey to high performance, manufacturers are pursuing a variety of new approachesfrom Lean manufacturing to collaborative manufacturing and supply chain management. However, companies often struggle to measure the performance of assets. This challenge is significant; if managers cannot measure performance, they cannot effectively diagnose or resolve problems. Too often, the information that companies use in such efforts is not reliable or not available at the proper time. For example, the process knowledge needed to understand the situation may reside with only a few employees. All of these factors can lead to a

fragmented and insufficient view of asset performance. Based on Accentures deep industrial experience, overall equipment effectiveness (OEE)1 has become a critical key performance indicator (KPI) for companies to improve measurement. In essence, overall equipment effectiveness is a compound KPI derived from three to four factors that measure the equipments operational performancethat is, how well a manufacturer converts its time into output. It can play an important role in the drive to achieve high performance; but to be effective, it needs to be approached systematically and holistically, involving people, technology and processes.

The basics of OEE

OEE aggregates a great deal of information into a single metric and can be applied to virtually any kind of process. OEE is a product of three factors: Availability (A) looks at whether the machine is running or is stopped because of failure, maintenance or other scheduled breaks. Performance (P) evaluates the equipments actual production rate in comparison to the rate it was designed to deliver. Quality (Q) assesses how well the equipment output is meeting specifications. OEE can be a useful tool for discovering a plants hidden potential.

1 OEE was originally proposed in the book Total Productive Maintenance, by Seiichi Nakajima, Productivity Press, 1988.

Figure 1. Accentures methodology to implement an OEE analysis.

1. Data modeling

2. Data collecting and master data management Automation OPC, web services, message-oriented middleware tools - Equipment status - Production and losses Master data: - Nominal speeds - Equipment and lines - Products - OEE and factors configurations

3. Report generation

4. Analysis

5. Improvement planning

ISA 95 standards: - Standardization and applicability to any process - MES context OEE link to other entities Productive and stop times modeling Ensure flexibility to define indicators and their factors

OEE and factors calculated by period and other criteria Evolution over time and trends Typical: - Productive x stop times (with stop pareto) - Theoretical x executed - Production: good x rework x scrap

Drill-down analysis of each factor Comparison between calculated results and Nakajimas world-class OEE Considerations about calculated factors and process peculiarities

Root-cause analysis Identification and focus on bottlenecks Evaluate return on investment of effectiveness improvement - Sales increase - Workforce/material savings

Notes: Steps 1 and 2 involve the modeling and configuration of software tools to acquire and maintain the necessary data used in calculations and report generation. Steps 3 through 5 cover the indicator life cyclethe analysis of results, planning and execution of improvement efforts, which includes measuring the impact of such efforts and feeding those insights back into the cycle.

Each factor covers one dimension of equipment operation (thus, OEE = A x P x Q). Typically, a simple drill-down analysis of OEE factors will lead to an understanding of the causes of problems that limit potential. Although OEE is relatively simple, Accenture believes it is not necessarily a universal plugand-play KPI. A number of products on the market provide standard OEE formulas; however, as previously mentioned, OEE needs to be approached from a holistic perspective and tailored to the individual situation. To account for the differences between production processes, different formulas can be used in OEE and its underlying factors. For example, there are companies that do not consider the quality factor in their OEE calculations, because they do not deem it

important to their operations or because it is already monitored as a top-level KPI. Instead, they might use utilizationa subset of the availability factor that represents the ratio of total production time available to actual production timethereby providing greater visibility into idle times. In some cases, the OEE process may be given a different name by a company, depending on the organizational culture.

Accentures methodology for OEE

Given the numerous variables within a company, Accentures methodology for OEE defines the proper indicator and underlying factors for each specific case. As a side note, the software tools used to configure and manage the OEE indicator must be flexible enough to handle these differences. Figure 1 shows how a broad yet comprehensive methodology helps companies apply OEE management to any industrial process.

Case study: Applying OEE analysis

The question, then, is what kind of benefits could a company expect from such a methodology? To answer this question, it is useful to look at a specific example. Accenture examined the application of our methodology to a continuous casting machine in a plant operated by a major steel company. Accenture designed and configured an OEE management software module that was used to calculate the overall indicator and its factors, and generate reports. This calculation enabled an analysis, a recommendation of changes focused on the identified major cause of loss and an estimate of the possible increase in the companys return on asset. As depicted in Figure 1, the first step designed the data model for the overall equipment effectiveness software module. The most important points to consider are: Flexibilitythe indicator and its factors names and formulas must be customizable. Equipment status modeling productive time and downtime must be clearly defined so that there is no overlap. Standardizationthe data model should be ISA-95 compliant so that it is in line with market trends and easily applicable to different industrial processes. When it comes to acquiring process data (step 2 of Accentures methodology), automated solutions and systems integration play an important role because they reduce inaccuracies and human error, such as typing mistakes. Technologies typically used in this
4

Figure 2. OEE and factors calculated over a one-month period.

Value (%) 100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 56.84% 67.46% 84.87%

OEE indicator and factorscontinuous casting machine

99.27%

OEE

Availability

Performance

Quality

area are OPC (open connectivity via open standards), web services and message queuing. Meanwhile, master data, such as equipment characteristics and associations for the process of setting production lines or establishment of theoretical production speeds and ideal times, must be carefully configured and maintained. In particular, nominal speeds, which directly affect the performance factor and thus the final OEE calculations, must correspond closely to the process reality and be updated as changes occur. Sometimes, entire projects are created just to study the process and discover how those speeds behave. With a well-modeled software tool, reliable data acquisition and updated master data, OEE reports can be generated and the indicator life cycle can take place. Figure 2 shows a graph generated during an OEE indicator and factor analysis for the continuous casting machine applied over a one-month period. Each factor was calculated as:

Availabilitytotal productive time, total time Performanceaverage real speed, theoretical speed Qualitytotal good production, total production Here, the only difference from a traditional OEE approach was the way in which availability was calculated. Traditionally, the formula denominator is set as the planned production time instead of total time (24 hours/ day), meaning the formula does not consider planned stops as equipment losses. Both approaches have their value: When planned production time is used, the focus is on how well equipment operates in an actual functioning situation, while the use of total time highlights the impact of equipment scheduling. Deciding which of these approaches to use is an important step in defining OEE for a specific organization. Analyzing the calculated values and comparing the results to a typical OEE, it was clear that the operation was running below ideal

key performance indicator levels. According to typical OEE results, availability should be greater than 90 percent, performance greater than 95 percent and quality greater than 99 percent. Since two of the three factors were low, a drill-down analysis was conducted to identify hidden potentials. Minor operational stops were grouped into an other category because their influence on the total was not relevant. As previously mentioned, programmed stops were considered as losses, appearing here as the 7.71 percent availability loss due to daily stops in the evening, when energy costs are higher. When talking about a machines performance, a drill-down analysis typically compares theoretically estimated and real production amounts and speeds. In this case, the estimated production amount for the month was 81,400 tons of steel, while the actual amount was only 54,900 tons. Nominal speed (as obtained from the companys master data) was 133.33 tons/hour, while average real speed measured reached just 89.94 tons/hour. If such low performance rates persist for a few months, one can conclude that the master data may not be reliable or updated frequently enough, pointing to a need for process definition studies. The question, then, is: How fast are the machines truly able to operate? The results for the quality factor, on the other hand, indicate a different issue. During the month in question, 54,500 tons of steel met quality standards, while 17.06 tons needed rework and 382.28 tons became scrap.

Figure 3. Availability drill-down graph.

Production: 84.87%

Seasonal break: 7.71% Preventive maintenance: 2.42% Other: 5%

This means that almost 100 percent of production was meeting quality standard, which experience shows to be unlikely. There are generally three possible reasons for this kind of overly positive result: Process control is extremely well-tuned. Quality requirements are too flexible. Products differ from each other only in quality requirements. Thus, making product B when A was planned can be considered to be appropriate, since it also has high market value. In the case example here, the third reason was the explanation for the quality factor patterns.

When such high levels persist over months, OEE should be redefined. It should no longer consider the quality factor because it is artificially raising the overall OEE value and masking poor performance in other factors. In the methodology described, this type of issue would become evident in the feedback process, where it would lead to the redefinition and reconfiguration of the OEE indicator.

Step 5 of Accentures methodology: Improvement planning

The fifth step of Accentures methodology focuses on identifying major problems and hidden potential, using rootcause analysis and planningimprovement efforts. As previously mentioned, the return-on-asset indicator is commonly used for this kind of analysis and is used in this article as well. In this step, it is especially important to identify process bottlenecks so that the company can focus improvement plans on them. Increases in OEE performance levels for critical equipment will almost certainly have a positive financial impact. However, it is important that this be approached carefully and holistically. If the OEE model is not well-defined and supported by deep process knowledge, an increased level for one piece of equipment can sometimes create worse global results. For example, improved performance with one machine might lead to having huge and expensive amounts of intermediate stock on hand. Because return on asset is the ratio between the organizations operating profit and its total asset average, a simple mathematical analysis shows the impact of OEE improvements. The goal is to increase profits without having to invest in new physical assets. This goal can be achieved in two ways: through a sales increase, since more production is achieved in the same amount of time; or through material and/or workforce savings, since less effort is necessary to maintain the current production level. Considering a normal market scenario for

steel, the first proposition is more likely to be true. Referring back to the case-study example, Accenture saw that performance was the major factor responsible for losses in operational effectiveness. However, it is not easy to define whether the problem is in the equipment, process, master data or in a combination of all three. So, a more feasible and focused improvement plan was proposed: Increase equipment availability by eliminating the seasonal break (7.71 percent of equipment time). In a simulation context, reducing seasonal break and assuming that other stop causes keep the same pace (7.42 percent of this time span refers to equipments stopped time) will result in a real availability gain of 7.14 percent. Thus, the new values for this context will be: Availability92.01 percent (increased 7.14 percent) Performance64.46 percent Quality99.27 percent OEE61.62 percent (increased 8.4 percent) Increased uptime will obviously increase the production rate but will also incur higher costs. More material is needed, the workforce must be paid for the additional hours, and operational expenses rise to support increased selling activity. Figure 4 shows hypothetical financial data for a production line before and after OEE improvement. As income rises, sales-related assets also increase. On the other hand, physical assets are held constant once additional investment in them is no longer required. So, the impact on return

on asset will depend primarily on the organizations ratio between variable and fixed assets. In capital-intensive industries, such as steel production, the latter amount is commonly greater than the formerleading to better return-on-asset results through OEE improvement programs. Considering an original 10 percent return on asset and the $9 operating profit, the total asset average is equal to $90. In this case study, Accenture assumed a fixed asset amount over total asset amount to be 70 percent. See Figure 5 for the total asset average calculation. This means that in capitalintensive organizations with a high fixed-asset level, an 8.4 percent OEE increase would lead to a 31.2 percent returnon-asset increase, at the cost only of additional workforce hours. Obviously, many other factors affect the return over investment. It may not be so easy to eliminate seasonal breaks, for instance, because of labor laws or prohibitive energy costs.

Figure 4. Financial data comparison using hypothetical data.

Data Liquid sales Material Direct workforce General expenses Sales expenses Operating profit Before $100 $25 $24 $26 $16 $9 After $108.4 $27.1 $25.85 $26 $17.34 $12.11 % +8.4 +8.4 +7.71 0 +8.4 +34.56

Figure 5. Total asset average example using hypothetical data. Total asset average example = (0.7 x $90) + (0.3 x $90 x 1.084) = $92.268 The new return-on-asset value is then: Return on asset = $12.11 $92.268 = 13.12 percent

OEE for high performance

Based on Accentures experience, it is clear that aligning manufacturing management with business goals is very important to an OEE effort. Defining relevant indicators that bring bottlenecks and root causes of loss to light is crucial. Only then can efforts be properly aimed at increasing production effectiveness in the current statethat is, without large additional investments in factory capacity. To increase the effectiveness of equipment, it is critical to focus on creating the right OEE definition and measurements, and on having operators and managers perform rapid corrective actions. When approached correctly, Accenture believes OEE can play a vital role by providing the organization with the tools needed to improve

plant performance and help an industrial company on its journey to high performance.

Copyright 2009 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.

Contact the authors Carlos A. Laurentys carlos.a.laurentys@accenture.com Rodrigo Machado rodrigo.machado@accenture.com

About Accenture
Accenture is a global management consulting, technology services and outsourcing company. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the worlds most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With approximately 177,000 people serving clients in more than 120 countries, the company generated net revenues of US$23.39 billion for the fiscal year ended Aug. 31, 2008. Its home page is www.accenture.com.

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