- OEE is a vital metric to most manufacturers, but it is even more beneficial when you view OEE as a financial KPI.
- When converted to a dollar amount, OEE is more widely understood by everyone in the factory.
- Learn how to calculate the cost of OEE using downtime, performance, and quality. (See below for formulas.)
- The cost of OEE helps identify the financial impact of running faster, reducing downtime, and reducing scrap.
The Cost of OEE: Without Context, A Number is Meaningless
We talk a lot about OEE at SensrTrx. (See this OEE flawed metric blog, this experts agree OEE is flawed blog, and this OEE magic number blog.) It’s not that we dislike OEE as a metric, quite the contrary actually. OEE is vital to the world of manufacturing, but let’s not forget that in order for that number to be effective, context is key. Our blog posts and rants on the topic are more in line with the need for context when using OEE because it seems to be, at some times, forgotten. Without context, any number, including OEE, doesn’t mean much.
A percentage is basically meaningless. To understand if 80% or 90% is good or not, you have to understand the numbers that form the percentage. Are those numbers good? (Again, we’re referring back to context, here.)
OEE follows the same concept. If you don’t understand quality, availability, or performance first, OEE is otherwise a flawed metric that can give skewed results. If the underlying metrics are understood, then, those and OEE can provide an immense amount of value to a manufacturer. When OEE is converted to a financial KPI, it provides even more.
OEE as a Financial KPI
For example, let’s say for a particular day, the production line is reporting 98% quality. Most people would think that is a great result and move on – operators, executives, everyone. But, if each part is worth $6,000 and out of 100 parts, 2 were scrapped, the manufacturer lost $12,000. That number doesn’t sound as good when shown in a dollar amount, right?
The manufacturer is looking at 98% and thinking it’s a good result, but in the end, they still lost $12,000.
$12,000 is a big oops, and one that needs to be fixed sooner rather than later because if 2 parts are scrapped every day for the next year, the manufacturer is looking at a very costly problem.
Seeing that number in a dollar amount versus a percentage offers a different perspective.
OEE Can Provide Other Financial Benefits, Too
If the numbers on the line look good and an operator is routinely excelling at their particular role, why not give a bonus related to those numbers? It’s another motivating factor to produce quality products, consistently.
We’ve personally seen many of our own customers using the data gathered and contextualized from SensrTrx to reward employees based on floor numbers.
When performance numbers are turned into dollars, it’s much more impactful for the company and for its employees.
“How do I Calculate the Financial Impact of OEE?”
Sound confusing? It’s not. We’ll explain step by step how to calculate each metric and in turn, calculate financial OEE.
To calculate the cost of downtime, follow the formulas listed below. Simply find a piece of paper and a pencil and jot down your numbers as you read through this blog. We’ve compiled real-life examples that will help guide you through, step-by-step.
Example of Calculating Downtime
- Total Downtime = 90 minutes
- Hourly Cost with Labor and Overhead = $80
Downtime in Minutes / 60 = Cost of Downtime in Hours
90 / 60 = 1.5
Downtime in Hours * Hourly Cost = Cost of Downtime
1.5 * $80 = $120.00
While downtime is never an ideal situation, it does happen, and unfortunately, it is more common than many of us would like to admit. That being said, it’s crucial for the health of your company to know and understand the cost of downtime, when it does happen.
Example of Calculating Performance
- Ideal cycle time = 30 seconds per part or 2 parts per minutes
- Operating time = 390 minutes
- Actual quantity produced = 730
Operating Time * Ideal Cycle Time in Parts per Minute = Total Target Quantity
390 * 2 = 780
Total Target Quantity – Actual Quantity Produced = Production Deficit
780-730 = 50
Production Deficit / Ideal Cycle Time in Parts per Minute = Minutes to Make Up Part Deficit
25 / 60 = 0.4167
Hours to Make Up Part Deficit * Hourly Cost = Cost of Performance
0.4167 * $80 = $33.34
For clarity, the target total quantity is based on the standard. For example, if you can produce 60 parts an hour and you’ve been running for 1 hour, you should have produced 60 parts. In reality, you’ve only produced 41 which means your 19 parts short of your target.
Once, you’ve calculated the production deficit, it will be applied to the next formula of determining quality.
Example of Calculating Quality
- Part Cost = $121
- Total Scrap = 980
Total Scrap * Part Cost = Cost of Quality
9 x $121 = $1,089.00
The Cost of OEE
OEE Can Have a Profound Financial Impact
To calculate different results, you plug different numbers into the formula and presto, you know how much money each part costs in total. Then, you can calculate how much more money you can make by improving those things.
Like we said before, OEE is important to manufacturing, but only if there’s context. The same applies to the cost of OEE. If you know why the cost of something is too high or too low, it will be that much more valuable and insightful to you.