How do you measure your business or plant effectiveness as a Business Head?

As you are aware the famous quote, "what you measure is what you get."

Measuring is very significant for business performance, and what and how you measure is very critical. If you measure wrong or suboptimal or standalone, then your business performance will also be suboptimal.

Typically, we use to measure our business or plant in the following ways.

1. Utilization perspective :

2.Efficiency perspective :

3. Capacity perspective :

4.Machine hour rate perspective:

5. Yield performance perspective:

All those measures are right and serve the purpose to some extent for what it is intended. For example, you may be measuring capacity utilization as the ratio of production qty/capacity installed, which measures say, for example, 80 %, that means you may conclude that 80 % of the installed capacity is utilized. It may not give the other information like the efficiency during the production and how much actively passed through quality specification and how much cost you incurred and so on.

Likewise, all the above typical measurements will give you standalone, suboptimal information to you about each function, and you need to look at altogether to arrive at some common conclusion about your overall business or plant performance.

To overcome the above limitations only, smart organizations adopt one measure, which will give a holistic view of your plant or business effectiveness rather than standalone performance or utilization or yield performance.

Introduction to Overall Plant Effectiveness  or Overall Equipment Effectiveness :

OPE 

In case your plant is small, one or few lines is determining your business profitability. You can take that line for measurement, which will have a direct correlation with your business performance. You can measure as Overall Plant Effectiveness.

OEE:

In case your plant is relatively large and consists of many types of equipment and lines, you can identify the most critical or constraint equipment, which you can measure holistically. There you can measure as Overall Equipment Effectiveness

In a small, emerging organization, if we apply OPE or OEE rightly, this will have a direct correlation with delivery performance, sales turnover, and profitability, as I have seen in my client organizations irrespective of their manufacturing industry classification.

The measure either OPE or OEE will consider the importance of EFFECTIVENESS rather than any standalone measure like efficiency, utilization, or yield performance. 

Now let us discuss the elements of OPE or OEE :

It consists of 3 parts namely, Plant Utilization, Output efficiency, and product yield performance 

 detailed working is given in OEE Introduction to OPE / OEE measurement

In the picture above, 

the plant utilization is given as 75 % as it is derived from the ratio of working hrs ( 6 hrs)  to available hrs  ( 8hrs)

The output efficiency is given as 83 % as it is derived from utilization data. For example, in a given 6 hrs, the plant supposes to deliver 600 nos ( assume 100 per hour), whereas, the plant produces the actual output as 500 no's. hence plant efficiency is  500 / 600 equals to 83 %

the quality performance is given as 80 % as it is derived from efficiency data, For example, 500 no's produced and 400 no's only pass through the quality test, and the final yield is 400/ 500 equal to 80 %

Hence, Overall Plant Effectiveness (OPE) is a multiplication of Plant Utilization and Output efficiency and Yield improvement, ie, 49 %

So, instead of looking at standalone measure either 75 % plant utilization or 83% people or output efficiency or 80 % yield performance, we are getting a HOLISTIC MEASUREMENT to say  EFFECTIVENESS  as 49 %.

This measure will give you a HOLISTIC idea about your plant's Effectiveness at the end of the day.

Business Implication of EFFECTIVENESS measure:

what does 49 % OPE or OEE indicate?

Given your current sales turnover or profitability, whatever you achieve is due to operating the plant at 49 % effectiveness. If you want to improve sales turnover or profitability, it is only possible by enhancing plant effectiveness measures. Improvement of plant effectiveness measures can be working on plant utilization losses, people efficiency losses, and improving quality issues.

Benefits of Holistic measurement :

1. As this measure encompasses utilization, efficiency, and quality performance, you will get a holistic idea about your plant effectiveness at the end of the day

2. Easy to communicate to all FUNCTIONS 

3. Since all functions involved in the improvement of this measure, this measure enhances engagement

4.Helps to focus on the overall performance of the plant rather than standalone areas

5. It has a direct correlation with sales turnover, profitability 

The action point is to understand your current plant or equipment effectiveness and the reason for the losses and the improvement actions to improve the Effectiveness and, in turn, your business performance.

Importance of Key performance indicators (KPI’s) for organizational transformation and the role of business head

As renowned management guru Peter Ducker says “what gets measured gets improved.”

In an organization, there are so many interactions, activities, transactions are happening across the functions or value chain.At the end of the day, only a few activities result in performance. The performance could be productivity improvement, profitability increase, sales increase, morale improvement etc.Some performances are not negotiable, vital for organizational profitability and growth and those performances are called Key performance indicators (KPI's). That means those performance indicators measure the organizational health. 

Even though key performance indicators will vary industry to industry and organization-specific, but most of the KPI’s fall under the broad categories of productivity, quality, cost, delivery aspects only.

Why is Key performance Indicators (KPI's) required?

Identifying and setting the KPI targets helps the organization 
1. To focus on the important deliverables
2. To bring the people together towards one goal
3. To improve the accountability
4. To improve the communication among the stakeholders
5. To know the reality against the desirables target at any point in time
6. To take course correction based on the reality vs target

How to implement Key performance Indicators or performance management for the organization?

Even though KPI and target setting can be done at the business level, functional level and individual level, the organization (especially SME organization) can start with business level .Once the organization becomes familiar with the business level performance management system, they can further deploy down to functional and individual level.

Assuming that SME organization like to implement the Performance management system at the organization level, the following steps would be useful.

1. Identify the Criteria under which key performance indicators (KPI’s) are measured. For example, SME organization can classify the business objectives into criteria like Productivity, Quality, Cost, Delivery, and Engagement.
2. In each criterion, identify the key performance measurements which are important to the business. For example, under productivity, one of the key performance indicators could be OEE (Overall Equipment Effectiveness) or sales per employee.
3. For each of the KPI’s, realistic target can be fixed.This target can be arrived based on historical performance or futuristic aspirations.
4. For each KPI's, people responsibility can be assigned 
5. Once target is fixed for all key performance indicators in each category, it can be tracked every month against the reality or actual performance

Role of Business head or CEO in performance management 

Setting the business goals and showing the direction is one of the prime responsibilities of the business head or CEO.While setting the target, the head must have done his homework and set the target with conviction. The target should not be too much aspiration and unrealistic, it must be achievable by the team in a given time, resource and capability. Also, the target should not be too lenient with incremental increase as this may not be too much motivation for the team to work upon.

In most of SME’s as we use to observe that the CEO or business head himself not convinced about the target, but would like to push the team by giving too much unrealistic target and sometimes he is also pessimistic about the target achievement and set very low. In both cases, CEO or business head’s communication tone, body language would reflect his uncertainty mindset to the team.

If CEO or business head set the target with conviction, he would be more certain about the target and he would drive them by any means to achieve the target. In addition, his conviction would help to grab the opportunity to meet the target. In addition, the team gets motivated when they are working for real, aspirational goals under the visionary leadership.

For example, in one of our SME client organization, the business head set the production target as 10 T / day with conviction and taking into the confidence of his entire team.In the mid of the financial year, when uncertainty happened in the existing customer's demand, his business plan got disturbed.Since he was very firm and convinced about the production KPI of 10 T / day, he went ahead with a different approach with his new customer in a short time to achieve the target of 10 T/ day.That achievement increased his confidence as well as improved the morale of his team.

       Eventually, Performance management helps to build an organization culture with the winning mindset towards solutions, performance and this will become a competitive advantage to the organization.

Overall Equipment Effectiveness ( OEE) -Introduction

What is OEE?

Overall Equipment Effectiveness (OEE) is one of the best METRICs used for monitoring and improving the Efficiency of manufacturing processes.

The manufacturing processes can be machining, fabrication, assembly line etc

OEE is a simple, holistic, and powerful metric.

OEE takes into account the typical sources of manufacturing productivity losses and groups them in THREE categories like AVAILABILITY, PERFORMANCE, and QUALITY. By grouping so in different categories, it distills the complex manufacturing losses into simple metrics .It helps us to understand the losses with clarity and helps to choose the right lean tool for each loss. In addition, it helps us to verify the effectiveness of action against each manufacturing productivity losses

 Elements of OEE :

Availability:

It measures manufacturing productivity losses from down time .i.e. the events that stops planned production like machine breakdown, changeover, material not available, operator not available etc.

Performance:

It measures manufacturing productivity losses from slow cycles .i.e. the factors that cause the process to operate at less than the standard or possible speed.

Quality:

It measures manufacturing productivity loss from manufactured parts do not meet the specification or quality requirements.

Together all three measure like Availability, Performance and Quality combine into one FACTOR as OEE

Score .This one complete measure OEE reflects the manufacturing efficiency and effectiveness.

OEE provides simple, consistent, and proven way of measuring the effectiveness of any productivity initiatives or lean manufacturing programmes or TPM programmes

World class OEE for discrete manufacturing process

Generally, world class OEE for discrete manufacturing process is considered 85 % or greater than 85 %

It is arrived from Availability (90 %) * Performance (95%) * Quality (100 %) = 85 %

Generally, from the study, it is indicated that average OEE score for discrete manufacturing process is around 60 %.If we aim for excellent OEE standard of 85 %, then we can realize that there is so much opportunity to move from 60 % to 85 % through loss elimination or reduction initiatives.

  

Calculating OEE :

OEE is calculated from three categories like availability, performance, and quality

OEE = Availability * Performance * Quality

Pl note that OEE is not calculated as addition or average of three categories, it is calculated by multiplying three categories

For example

Availability = 75 %

Performance =90 %

Quality = 89 %,

Then

OEE= 75 % * 89 % * 90%

       = 60 %

Availability:

Availability is the ratio of actual operating time to planned operating time ….

It measures the downtime loss

Availability = Operating Time / Planned Operating Time

Operating time = planned operating time – downtime loss

For example

Availability =Operating Time (300 min) / Planned Operating Time (400 min)

                   =75 %

Planned Operating time:

Available time per shift – planned shutdown time

Available time per shift

Say 8 hrs i.e. 8 * 60 = 480 min

Planned shutdown time

It is planned shutdown for valid reasons like morning meetings, lunch break; refresh break, scheduled maintenance check etc

For example

Morning meeting – 10 min

Lunch break – 30 min

Refresh break – 20 min

Scheduled maintenance check – 10 min

Hence planned shutdown time = 10 + 30+20+ 10

                                                       =70 min

Hence, planned operating time is 480 -70 = 410 min

Actual Operating Time

Planned operating time – down time

=410 – 110

=300 min

Break up  of down time (110 min ) can be

Machine breakdown -20 min

Operator not available – 30 min

Material not available – 10 min

Changeover loss – 50 min

Hence,

Availability = actual operating time / planned operating time

                   =300/ 410

                  = 73 %

Performance:

Performance is the ratio of actual qty produced during operating time / standard qty can be produced during operating time.

From above example,

Actual operating time = 300 min

Say std time per piece = 3 min

So standard qty can be produced during operating time = 300/3 =100 pieces

Suppose, in a given operating time, actual qty produced is 270 pieces, then

Performance = 270 / 300

                       =90 %

Quality:

Quality is the ratio of good qty produced to total qty produced.

For example,

Total qty produced = 270 pieces

Good qty = 240 pieces

Quality = 240 / 270

             =89 %

Are you running your business effectively?

Answering to the question of whether you are running your business effectively, most of the business leaders connect to profitability. If the profit is moderate, then they think   that they are running the business effectively. However, profitability is one measure, and consistent profitability is a function of many parameters.

On a dipstick level, we can measure the effectiveness of running the business effectively. Some basic measures are the indicators of the effectiveness.

Customer order fulfillment: 

                     Customer order fulfillment is one of the most important measures of your effectiveness i.e. How you are servicing your customer’s requirement on time every time. Meeting the customer’s demand on time with 100 % fulfillment guarantees to some extend about your business's longevity. Servicing the customer’s requirement is the reflection of your internal process robustness and the culture of the organization. In most of the small and medium size companies, meeting the customer requirement itself is the biggest concern.Inability to service the customer on time would eventually affect the profitability and survival. Fulfilling the customer’s requirement is hygiene factor that should not be compromised. If you are delivering the customer’s requirement on time and every time, then you can assume that you are running the business effectively.

Quality target fulfillment:

             In today’s competitive environment, delivering the product or service with quality requirement is assumed as a way of living from the customer’s perspective. Meeting quality target is a reflection of your internal quality assurance and control systems. One of the major irritant from the customer‘s point of view is delivering the products with inconsistent quality. If you are meeting customer‘s quality target with your internal quality control and assurance system, then you can assume that you are running the business effectively.

Cost Efficiency:

 You may be meeting the customer’s delivery, quality target, but if you are not making decent net profit, then you are not effectively managing the business. The reason could be your cost of running the business may be more than the revenue. Creating the surplus in the form of profit is vital for long term sustainability of business. Cost efficiency reflects how you are running the business effectively.

People engagement:

Ultimately, people working for the organization are a real asset and they determine the growth of the organization. If the people engagement is high, eventually it drives better order fulfillment, quality targets, cost efficiency and safety environment. If the loyalty and employee engagement is high, then you are running your business effectively.

   Relook your organizational existing customer service level,quality targets achievement, cost efficiency and people engagement level to assess your effectiveness level of running the business effectively.