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.

How much can i do?

One of the clarity, most of the small, emerging organizations CEO / Business head should have is " How much sales turnover I can make? 

From a long term perspective, with existing and new market potential, the answer could be that sales turnover is infinite. 

However, realistic clarity is that with given the facility, infrastructure, installed equipment, with existing resources like working capital and people, how much sales turnover I can make?

Why the business head need have clarity?

• The sales turnover potential with given facilities will give the potential to be tapped.
• The clarity will provide the gap in existing performance and potential sale turnover
• Helps to drive the team towards achieving the potential target with conviction

How does the business head estimate the potential?

Data collection and analysis on the following aspects will help you to arrive at your potential capacity. 

1. The capacity of  all machines based on cycle time and existing Utilisation & efficiency
2. Understanding the constraint machine and its capacity  
3. Exact working capital required for an existing volume 
4. Function-wise human resources details and capacity 

The data may vary depends on the product mix and cost structure. Hence, the CEO or Business head must periodically ask this question and needs to understand his real capacity and existing status!

Why is Lost Order Analysis important for Organization?

Keeping continuous order pipeline is one of the healthiest indications of the organization. Even though ensuring order pipeline is perceived as accountability of marketing or sales function, it is actually cross-functional deliverables. 

Typically in a medium size organization, the following functions involved in order procurement process

1. Marketing or customer relationship 
2. Sales 
3. Engineering & 
4. Finance / Cost estimation 
5. Business head or pricing committee

Order procurement process indicates the speed, flexibility in decision making, teamwork, cost competitiveness and disciplined approach of the cross-functional team and management. One of the analysis indicates the organizational speed, decision making is "Lost Order Analysis."


What is meant by Lost order Analysis?:

Even though Lost Order Analysis is reactive, it analyses the reason for losing the prospective customer order. The reason could be a technical reason or regret from a technical perspective, pricing issues, delay in response from the organization, perception of the customer and so on.

This analysis will give clarity of why the organization is losing the potential customer's order.

What are the parameters to be analyzed? :

As said, this is cross-functional deliverables, and the business head must review the cross-functional team on the following parameters and the gap 

1.No of potential customers asked for queries  Vs. No of queries responded on time
2.No of quotes responded Vs. No of quotes converted into a sales order
3.Reasons for losing the potential orders

this analysis will give an insight about the organization on the following 

1. The effectiveness of marketing function to identify, grasp the opportunities
2. The cross-functional effort in ascertaining technical, commercial feasibility on time
3. decision-making ability on pricing 
4. Speed in responding and followup with prospective customers
5. Cost & Quality competitiveness in the market from customer's perspective


How frequently the organization needs to do  Lost order Analysis?

The frequency depends on the industry type, customer 's profile, lead time to respond. Generally, we suggest to our client to do the lost order analysis at least once in a quarter, as it is a reasonable time frame to understand the losses.

Role of business head:

The role of a business head is critical to conducting lost order analysis reviews as typically the functions point each other for losing orders and most of the time from our experience, the organization losing the orders due to both strategic and operational reasons.

The frequent review by business head will help the organization to improve the policies, business processes and of course to improve sales turnover of the business.

For example, when we initiate this analysis in one of our client, the team had realized that the majority of the orders lost due to High pricing. When we did deep analysis on the pricing, the cause identified was on the "cost estimation method" in which "lot size" was given overemphasis while costing in engineering function as well as at business head level. Once team identified the mistake and policies were framed on " lot size" in costing. After the corrective action,  we could see the reduction in the quote value and subsequently order conversion rate was increased significantly. 

The point is as a business head, if you do the lost order analysis frequently along with your cross-functional team, you will get a lot of insights about your order procurement process, and you can improve your business turnover.

 Also, this type of analysis will improve your cross-functional working cultures towards speed on decision making and execution