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July, 2003

The government, DTI and CBI spend considerable energy convincing business that increasing capital investment is the key to both productivity and competitiveness. But while considerable emphasis is being placed on benchmarking the volume of investment, a lot less attention is being paid to how effective this investment is. A cursory glance around many factories reveals a capital investment process that is not working well: the purchase of plant and equipment that is not needed, the failure to commission new equipment to required performance levels and poor visibility of the true operational performance of existing equipment. This amounts to a paradox, as companies are being encouraged to invest more, but not encouraged to invest wisely.

Philip Godfrey
OEE Consulting Ltd
This article looks at way in which the Overall Equipment Effectiveness (OEE) measure can be used to enhance the capital investment process, starting with a fundamental questioning of whether the purchase is required in the first place. In our experience, this relatively straight forward proposition is often overlooked in the dash to invest, resulting in an adverse impact on cash flow and working capital. As such, we argue that the use of OEE as a key diagnostic for informing investment decisions should be high on the agenda of manufacturing managers and business leaders alike.

The effective operation of individual pieces of production equipment, assembly lines or whole factories is dependent on three dimensions of performance:

  • The speed of the equipment (its cycle time)
  • The quality of product it produces
  • The time that it is available to run

For equipment to operate effectively, it needs to achieve high levels of performance against all three of these dimensions. A machine that cycles at its design speed but produces rejects and/or is constantly breaking down is not effective in overall terms.

A metric can be applied to each of these three elements of performance as follows:

If a press operates at 80 strokes per minute but has a design cycle speed of 100 strokes per minute we can say that its Performance Rate is 80%, or 80 over 100. Similarly if it produces 90 good parts out of every 100 made, it has a Quality Rate of 90%. If we plan to run (load) the equipment for 8 hours and it breaks down for 2, its Availability is 75%, or 6hrs over 8hrs.

Viewed in isolation, these metrics are important indicators of plant performance, but they do not give a complete picture of the equipment's overall effectiveness. This can only be understood by looking at the compound effect of the three measures.

If a machine runs slowly, produces rejects and loses production time through breakdowns, the cumulative effect of this can be simply calculated by multiplying the 3 individual metrics together. In the example above, a 90% Quality Rate, combines with an 80% Performance Rate and a 75% Availability to produce an overall performance of 54%: (0.9 X 0.8 X 0.75) ie just over half the theoretical maximum performance of the machines.

When equipment performance is looked at in this way people are often surprised by the aggressive erosion of performance that occurs.

This combined metric gives powerful visibility to the overall effectiveness of equipment, and unsurprisingly, is known as the Overall Equipment Effectiveness measure, or OEE:

The OEE measure is the basic building block of a manufacturing improvement approach called Total Productive Manufacturing or TPM. Developed by the Japanese in the 1960's TPM is a "shop-floor" focused improvement programme whose primary objective is to maximise OEE. By getting operators to measure the performance of equipment at a detailed level, and to generate OEE 's, TPM attempts to do two things:

  • Use OEE to target prioritised improvement activities
  • Use improvement activities to increase the levels of operator "ownership" of the equipment they use

The 3 performance elements of OEE are clearly influenced by numerous events - or "losses" as they are known. For instance, availability may be lost because of breakdowns, material shortages, or operator absence. Each of these will account for a proportion of the loss, and each can be measured in percentage terms. By understanding both the types of loss and their duration, operators can focus their improvement activities on areas that will give them greatest benefits. The major losses can be grouped as follows:

Mathematically all the losses to the OEE performance can be expressed in terms of a unit of time - the design cycle time to produce 1 good part. So, a reject of 1 part has an equivalent time loss. In effect this means that an OEE value represents the valuable operating time over the total loading time expressed as a percentage, as the diagram overleaf illustrates:

The expression of OEE in terms of time is more than an intellectual nicety. The capital employed in assets such as manufacturing equipment is constantly subject to a cost, while the assets themselves perform for a percentage of the overall time. The higher the valuable operating time the better the return on the capital employed.

This linear relationship does not mean that equipment bought to provide for contingency, or to add capability/flexibility is a poor investment, merely that other aspects of performance, such as the degree of commercial risk clearly play an important role in investment decisions.

In recent years companies such as OEE Consulting, have recognised the power of the OEE measure to help inform the effective management of assets throughout their lifecycle. Business managers need this information to support the investment decision making process.

OEE and investment decisions
The most important application of the measure is the identification of opportunities to improve existing equipment and plant before new capital investments are made. For example, there is little point in buying a new press to increase capacity if existing presses are running at 30% of their potential (a not untypical performance in many press shop environments). In the absence of a true understanding of their equipment performance (i.e. without the OEE measures) many organisations unknowingly and paradoxically invest in more capital to "compensate" for poor performance. Using databases of historical and benchmarked OEE performance, Business Managers can challenge investment submissions much more effectively than in the past.

OEE can also be used to drive overall supply chain effectiveness, by identifying bottlenecks and challenging sub-optimal investment decisions in "isolated" parts of the total manufacturing process.

But where new equipment is necessary, for reasons of capacity or capability, an understanding of OEE helps managers identify the operational performance that is needed if the investment is to be profitable i.e an OEE/breakeven point can be calculated. Better still, historical OEE data can be used to anticipate the risks associated with achieving a given OEE and hence the risk to profitability. This information adds a valuable dimension to the traditional capital appraisal approach adopted by companies, who often use a theoretical assumption of performance based solely on cycle times.

Using OEE to improve supplier performance
Contractual agreements with equipment suppliers often do not define the exact performance requirements for new plant and machinery. The contract is deemed fulfilled once the machine is powered up and has been shown to correctly cycle a few times. But in many cases, the performance of the new machine fails to meet expectations once volumes are increased. OEE can be used to provide an output-driven measure of performance that can be contractually linked to the machine performance levels that must be attained before full payment is made to the supplier. This considerably reduces financial risk, and helps avoid two commonplace traps that equipment purchasers fall into: firstly, paying the supplier before the performance of the new machine has been demonstrated, and secondly, being left with no choice but to accept expensive maintenance contracts, often from the supplier of the equipment!

In summary, this approach forces the supplier to work with the purchaser, to jointly demonstrate the required throughput of the equipment. It cuts through the blame issues that are often associated with equipment purchasing as highlighted in the following example.

A manufacturer of automotive components had a history of buying CNC machines that failed to achieve planned levels of output. Faced with the need to buy a machine for a specific contract, they demanded supplier payment terms linked to OEE targets. Not surprisingly this initially made the supplier extremely nervous, because it was concerned that many of the issues that would impact on operability were not directly within its control, such as operator capability and material specification. Supported by OEE Consulting, both the supplier and customer grew to realise that exposure of these issues was precisely what was required if the new machine was to work effectively. In this instance, the supplier and the company had a vested interest to ensure that a training regime was put in place for operators and maintenance staff, and material issues were sorted out in advance.

Using OEE to optimise commissioning
The commissioning of new plant and equipment is often judged from a project management perspective: does it meet time and budget targets? OEE can be used to create performance milestones, which the equipment must achieve before it leaves the commissioning phase. This focuses the project team and suppliers on a business measure, rather than a project plan measure, which pays little attention to the underlying performance of the asset. Using OEE in this way ensures that once commissioning has been completed, the performance of the asset meets the business case for the investment - it often doesn't when time and cost are the only targets used during commissioning.

By using OEE as a measure of performance during commissioning, the business can anticipate and rectify areas of poor performance (losses) before moving into steady state operations. This is important for 2 reasons:

  • A low OEE during operations will have a direct impact on cost and customer service, and
  • Plant modifications and rectification work to improve OEE is much more expensive to make during full scale production

While many companies have begun to understand the power of the OEE measure to improve the operational performance of their current equipment, few are aware of the benefits of using OEE to inform decision making throughout the lifecycle of their assets. This can be summarised as follows:

To return to the central issue that the article started with: the link between capital investment, productivity and competitiveness.

The OEE measure is a simple tool that can be used to inform decision-making at all stages of the investment life cycle. Unfortunately it is often overlooked. Of all of the decisions that can be supported using the OEE measure, the most important one is whether or not to invest in more equipment in the first place. Put simply, many businesses unknowingly operate their machinery, process lines and whole factories at substantially below their true potential. They invest money that they cannot afford, to supplement capacity that they already have but do not exploit. Ironically companies that run equipment ineffectively, are often the most prolific investors in equipment that is not needed!


Philip Godfrey is Managing Director of OEE Consulting Ltd, based in the United Kingdom. He can be contacted by email at, or by telephoning (0044) 1608 811900.

A further presentation on this subject can be found at

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