Paying The Cost of Poor Overall Equipment Effectiveness (OEE)

By Mike Terry
Posted In : downtime, point of purchase, OEE, reduce downtime, overall equipment effectiveness

Producers examine many factors when purchasing packaging equipment. Delivery time and production rate (how fast will the packing machine run?) rank high on the list, but there is always one element that seems to determine the final decision to buy: price.

The initial investment cost has become the primary driver for so many packagers that the purchasing process can often be centered around the lowest bid for similar machinery. Many Original Equipment Manufacturers (OEMs) will even make similar claims concerning capabilities and efficiency to earn the business without being able to deliver on those promises.

But how did that happen? What makes price the crucial component above all others?

When packagers don’t have the knowledge, insight, or established process to evaluate or appreciate the differences in equipment, they might rely primarily on price. Others set low equipment budgets too early, leaving little room for innovation, depend on legacy equipment training and knowledge, or possess a crippling fear of purchasing failure and risk.

When this happens, they miss the single most important truth about purchasing packaging equipment:

Long-term performance matters most.

Better long-term equipment performance not only translates to a lower Total Cost of Ownership (TCO) over time but also commands an even more essential factor that sits at the heart of equipment TCO: Overall Equipment Effectiveness (OEE).

This one measurement can be either your saving grace, earning you MILLIONS in payback over the lifespan of your equipment, or your biggest obstacle, preventing you from achieving higher revenue in the hundreds of thousands every year. The outcome always depends upon what priority you place on OEE.

Negating the Purchasing Cost Differential

“Alright, so we simply make overall equipment effectiveness a prime purchasing consideration along with price, and we’re set for life.”

Sounds easy, doesn’t it?

The truth is packagers making equipment purchases seldom think this way or even measure OEE in their own facilities. Many don’t know how to measure it or even what to calculate for, so OEE falls by the wayside.

What you might not understand is that your initial spend becomes less relevant when you achieve consistent, long-term equipment performance and optimize your OEE according to your unique needs.

Let that sink in.

There will always be a cost differential among OEMs for the cost of packaging equipment. However, if you closely examine and improve overall equipment effectiveness, what you spent on your initial purchase will be long forgotten when compared to lifetime payback.

How Do I Calculate OEE?

All packagers want to optimize OEE for their equipment. But you may not know what it is, what factors affect overall OEE, or consider it too long and complex a process that requires sophisticated computing tools and specialists.

Though OEE data does have a detailed story to tell, anyone can and should calculate OEE based on a single simple formula:

This equation can be the key to enhanced equipment performance and a better bottom line. It is perfect for comparing two or more packing machines – flow wrap, vertical packing machine,  thermoformer packaging machine, tray sealer  – and their effectiveness over a specific period.

Let’s look at the factors that affect OEE in brief:

  • Availability: Actual Run Time / Planned Production Time (Ideal: 90%)
    • e. 389 minute actual run time / 480 scheduled run time = 81%
  • Performance: Actual Output in Cycles Per Minute (CPM) / Ideal Output in Cycles Per Minute (CPM) (Ideal: 99%)
    • e. 60 cmp / 70 cpm = 86%
  • Quality: Good Count of Sealed Units/ Total Count of Units Produced (Ideal: 99%)
    • e. 15,000 sealed units / 20,000 total units produced = 75%

Availability (81%) x Performance (86%) x Quality (75%) = 52% OEE

Comparing Overall Equipment Effectiveness to Improve Revenue

Calculating these figures on existing and potential equipment can highlight the value of the features so you can justify the cost of a higher quality system. You will see firsthand that the performance of a superior packing machine is better than the one you’re currently using, and you can make a more informed decision for purchasing replacement equipment to give you higher OEE and Return on Investment (ROI).

Additionally, this process allows you to fine-tune your operations by plugging in your unique values – staffing units on the line, hourly rate of the equipment, and hours you want to run – and show the actual financial benefit of OEE on your existing equipment. A piece of equipment that creates a better yield than another offers you direct savings on materials, cost per product, labor, and overall production.

Overall Equipment Effectiveness (OEE) Standards

International industry standards for OEE developed in Japan in the 1970s still apply today. Though world-class OEE is 85% on most packaging lines, most companies operate at an industry average of about 60%.

However, while it is important to know the benchmarks for reference, it is more important to focus on maintaining positive OEE and making future progress through OEE investment rather than the industry standard number itself.

Direct Impact of Poor Overall Equipment Effectiveness

As a producer, simply striving toward standard OEE levels of 60% isn’t enough. 85% or better is quickly becoming the status quo for mid-to-large-sized packagers as technology and packaging automation continue to advance.

For these reasons, purchasing packaging equipment with poor OEE, all based on price instead of performance and product quality, means you’re losing the opportunities to earn more. More packages per hour, lower overtime costs for labor, fewer delivery penalties from your customers, lower maintenance costs – these elements all factor into missed opportunities for increased annual revenue.

Let us explore some of the direct, real-world impacts poor OEE can have on your operations:

Lost Revenue

The importance of OEE, especially when amplified at high volume, cannot be overstated. In fact, equipment audits have shown that even a 1% loss in OEE can result in HUNDREDS OF THOUSANDS of DOLLARS in lost annual revenue.

Let’s examine the numbers:

You are producing 160 packages per minute, for 20 hours a day, 300 days per year, at a selling price of $3 per package. Your gross margin is 35%. If your OEE slips by even 1% during a production year, that equates to more than $600,000 in lost revenue.

These numbers are precisely why OEE is such a powerful lever in TCO. That $600,000 could easily be compared to the cost of equipment ownership itself and the innovative investments you could execute to improve OEE in your equipment over time.

Performance Costs

Examining OEE as it pertains to overall performance elicits an important consideration:

“What production did you achieve versus the predicted rate, minus the bad packages you made?”

The answer to this question provides insight into the various features of your packaging equipment and the benefits they provide. Once you discover that value, and its relationship to better overall equipment effectiveness and performance, you will also see the financial value – based on similar calculations in competitive equipment testing – and what it can mean to your production.

Long-term performance uptime and quality packages are how your company makes money. If you don’t have this data, you are at a significant disadvantage.

When is your equipment running? How often is it running? Availability and performance are linked, and both also create a direct financial payback to you. If you are paying employees an hourly rate, and they’re producing less on one machine versus another, you’re paying more per pound of product to the lower-performing equipment.

Live Testing for Improved OEE Performance

How can this be tested? First, run the same application on two of the same pieces of packaging equipment side by side in real-time. Then collect the data and see what higher increments of OEE – 5%, 10%, 15% – would yield in terms of performance revenue.

Let us show you what we mean:

Your packaging equipment is presently running at 50% OEE. Let’s increase that OEE percentage conservatively by 5%.

If you have ten labor units at $24/hour, including benefits, you will see a $250,000 payback in less than two years. Based on those numbers, you would see a $147,000 payback every year going forward after that. Over ten years, you’re looking at $1.3 million. Over 20 years? It is around $2.6 million!

Your acquisition costs may have been more initially, but that is offset within the first two years of ownership with better OEE performance and yield. If you strictly purchased on price, compare how much you saved on price differential vs. revenue you lost with more maintenance and mediocre performance.

Labor Costs

The importance of OEE isn’t relegated only to performance revenue. There can also be earning opportunities from labor savings as well.

More staff members mean more shifts, and efficient operational shifts are directly connected to optimized OEE and the ROI it can generate.

For example, if you have a thermoformer packaging line with 20 employees working in two shifts, that is 40 labor units. If those workers are on the line 260 days per year, eight hours per day, making $50,000 annually, you are still paying them hourly, even if they are not working.

What does ONE hour’s worth of downtime cost you per employee? Approximately $24. Start multiplying that by hours of downtime per week from inferior OEE, and you’re losing hundreds of thousands of dollars per year.

But what about the upstream employees preparing the product for processing? What about the employees working on the backend of the line on case packaging? They must be accounted for as well, leading to more expenses and missed revenue from poor overall equipment effectiveness.

As you can see, your equipment’s uptime efficiency is critical to labor savings.

Downtime Costs

Ask yourself, what type of efficiency do you get from your packaging equipment presently? How do you measure those downtime costs and assign downtime to the proper equipment?

If you answered, “we don’t,” you’re not alone.

Most companies don’t record downtime logs for their production, or the method by which they diagnose downtimes can be faulty. They may have daily production goals they want to reach, but they may work the machines for longer hours to hit those goals, changing downtimes per shift.

Not understanding your downtimes through precise reporting can directly and negatively impact your production efficiency, ancillary equipment needs, and packaging line performance auditing. Additionally, not knowing where your downtimes are coming from and how to address them properly can delay almost every packaging stage and decrease your OEE (and revenue opportunities), long-term.

Indirect Costs of Poor Overall Equipment Effectiveness

In addition to direct revenue opportunities, your company’s reputation can suffer as a result of poor OEE. Customers have expectations that they will get everything they ordered, complete and on the schedule to which they agreed. If you’re running inefficiently, you could run the risk of shorting your customers, subjecting yourself to fines and penalties from those retailers. You will have to produce more product over more cycles to make up for that, creating waste and incurring more labor costs.

Not only are you at risk of not selling the complete order, but customers will always be reluctant to do business with a brand or business with a reputation for poor results. Many companies even have “on-time delivery requirements” to which their suppliers must adhere.

In some cases, missing your delivery times, even only more than once, can have you dropped from the program.

Go Beyond the Purchase and Perfect Your OEE

Poor overall equipment effectiveness doesn’t have to damage your reputation or bottom line. By looking past initial capital investment and planning for the lifespan of your packaging system, you can improve your OEE, increase your annual revenue, and better your brand’s relationship with your customers.

Whether testing your equipment yourself and calculating your overall equipment effectiveness needs, or searching for an expert equipment audit, you will need an OEM with the right resources to go beyond the numbers, make sense of the data, and improve your packaging line efficiency from start to finish.

Talk to the experts at Harpak-ULMA Packaging about optimizing your OEE for the future.

We bring the tools you need to the table – system audits and engineering, AutoCAD drawings, package prototyping, and so much more – to ensure you have the right single-source solutions and an expert partnership that makes dollars and sense.

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