e-book: Drive high performance with asset management
Applying the measure of Overall Equipment Effectiveness
Within this context, Overall Equipment Effectiveness (OEE) has found wide application in the industry because it represents a true measure of the yield of process, factored to take due account of plant availability, plant performance, and quality achievement. The yield of a process multiplied by the selling price of the product creates revenue or with other words; the lifeblood of any business. Accurate measurements of Overall Equipment Effectiveness (OEE) provide management with a powerful tool for evaluating various business scenarios. The impact of improvements in Overall Equipment Effectiveness (OEE) can be easily calculated and converted to product output predictions. The result can then be translated into financial terms.
This approach may be of particular value when preparing financial justification for investments in maintenance technology.
The synergy of OEE and TEEP combined
Used in the same way, Total Effective Equipment Performance (TEEP) measurements can be used to evaluate changes in process scheduling. For example:
- Moving from single to multiple shift
- Reducing planned outages through improved shutdown management techniques
However, the objective of the business is not revenue at any cost. OEE (and TEEP) can be improved by measures, such as over maintenance or investment in over specified equipment. This may result in improved OEE but will not necessarily be beneficial for the business. This is the primary shortcoming of OEE: it takes no real account of cost.
As a result, an asset management program often employs a range of financial KPIs, typically dictated by the corporate accounting practices of the enterprise. A simplistic description of such accounting process is presented in the Producer Value Model below.
Producer Value Model explained
Most manufacturing companies can be considered to comprise three tiers of operation as illustrated in the model above. At the center is the manufacturing process itself, which takes in raw materials that it converts to saleable product. It is in this area of the business that OEE measurement have application. Supporting the manufacturing process is a lower tier of business processes, including:
- Operations and maintenance functions
- Administration functions
- Safety/compliance functions
- Environmental/effluent controls
The output of the manufacturing process feeds the upper tier of the operation comprising the financial processes.
The manufacturing process generates yield, which is converted into revenue. It also generates costs that must be paid from that revenue. From the residual a deduction must then be made to cover sales and administration costs. The amount that is left is known as operating income. Taxes are deducted from the operating income, to leave after tax operating profit.
This profit provides the basis for the principal financial KPIs typically employed at corporate level. Return on Net Assets (RONA) is the ratio between after tax operating profit, and the net assets value of the enterprise.
What is the cost of capital?
Return on Assets is widely used, although it ignores the cost of capital. Economic Value Added (EVA) is a financial performance indicator that addresses this issue.
Maintenance is often viewed as necessary cost, so the concept of value added may appear irrelevant to the maintenance situation. However, good maintenance practices do add value to a business. This especially by increasing availability as well as operating – and quality rate.
Furthermore, effective application of maintenance strategy reduces the need for capital by improving the reliability if existing assets and extending asset life. Ultimately, this reduces the amount of capital tied up in spare equipment as well as parts inventories and therefore, it has a direct and significant influence on Economic Value Added.
Would you like to learn more about how to drive high performance with Asset Management? Then complete the form here to download our e-book: Driving High Performance through Effective Asset Management.