Competition and Operations
Overall Equipment Effectiveness (OEE)
also called Overall People Effectiveness (OPE)
or Overall Asset Effectiveness (OAE)
volume = OEE(%)* Maximum Sustainable Throughput
if OEE increases
unit cost (= variable cost + fixed_cost/volume) decreases
OEE differences can be classified as
ΔCs
ΔCOE
OEE = Production volume of sellable goods ÷ Maximum theoretical production volume
OEE = Availability x Performance x Quality
= (net running time ÷ Total available time) x (Current volume ÷ Max. demonstrated volume) x [(1 - % Waste) ÷ (1- 0% waste)]
3 Key Elements of OEE
OEE Levers
Performance
Quality
Availability
The amount of time a given asset is actually manufacturing product
Ensuring that production is running with the proper cycle times and at the design production rate
Ensuring that Availability and Performance goals are met with the highest levels of quality
Sources of loss
Sources of loss
Sources of loss
Scheduled breaks and lunches
Maintenance breakdowns
Scheduled meetings
Setup / changeovers
Material shortages
Crewing issues
Cycle times
Equipment speed vs. design rates
Shop floor scheduling & planning
Process capability
Product quality
Process capability
Scrap
Levers for Performance (speed) losses
Levers for Quality losses
Levers for Availability losses
Equipment condition
Equipment condition
Equipment condition
The best practice performance in each industry achieved ranges between 85%-95%
Operating procedures
Process capabilities
Scheduling
Operating procedures
Scheduling
Process capabilities
Process capabilities
Operating procedures
Scheduling
Mechanically caused failures
Emergency interruptions
Failures of up- and downstream lines
Cleaning
Adjustments/change-over
Quality control
Staff meetings
Business status
Lack of material
Lack of transportation capacities
Poor quality
Frequent production changes
Sup-optimal processes
Lack of staff
Reduced production rate due to follow-up processes (e.g. wrong product mix)
Interruption due to preceding change-over
Interruption due to succeeding change-over
Uneconomical lot sizes
Mixed lots
Non-optimal working processes (breaks, ...)
Management decisions
Changing conditions (heat, dust, humidity, ...)
Limited demand
Poor production scheduling
Losses at start of production line
Process waste (material drops from conveyor belts, inappropriate handling, ...)
Losses due to production interruptions
Inclusions (type of defect)
Rework
Poor quality due to changed process parameters
Transportation damages
Excessive high humidity, dust, ...
Human errors
Deviation from formulas, standards, ...
Key to Operations Strategy
Understanding you & your competitors' trade-offs
To support Value Maximization, operational systems need to
Be operationally efficient
ΔCOE <= 0
Avoid competing directly with competitors’
Be difficult to copy by competitors
and Produce products/services that are preferred by a large enough customer segment
ΔCOE << 0
Trade-off Curves
Measure operational efficiency by
Iso-utility curves
estimating the largest cost advantage (ΔCOE)
any of our competitors would have over us
were they to use their operational systems
to deliver the same non-cost capabilities as we do
if ΔCOE of our most threatening competitors is 0 or -ve
Otherwise we are operationally inefficient
we are operationally effective
at the rate of the cost advantage of our most threatening competitor
We can use trade-off curves to evaluate a competitive threat
Valuing non-cost capability vs C strategy
behind the trade-off curves
for operational systems of different companies
(Cost) Variety : Setup/ changeover costs
(Cost) Time : Excess capacity
(Cost) Quality : Inspection/ Rework/ Warranty
Break ΔC into
ΔCs : competitive strategy-driven cost differential
ΔCOE : operational efficiency-driven cost differential
ΔCv,us or ΔCv,rival : volume-(or utilization) cost differential
ΔC = ΔCOE + ΔCs + ΔCv,us - ΔCv,rival
measures how one company is more efficient in their
operations and management than another
even if both were to run at their desired utilizations
and to provide identical value proposition
remainder of the cost differential after controlling for volume and strategy
cost difference inherent in the way each company chooses tocompete
expect that the cost of a strategy emphasizing product innovation
and customer responsiveness > a pure low-cost strategy
extra costs incurred by operating at less than
the strategically-targeted utilization level
because of spreading a fixed cost over fewer units
Trade-offs
capability trade-offs within the use of an operational system
trade-offs within the set of possible operational systems
for own operating system
lines show indifference curves for different types of customers
Customers make different trade-offs for products & services
this facilitates market segmentation
To align the OS with the competitive strategy
the positioning, or value proposition
needs to be translated into operations capability targets
Operating system design roadmap
Is the operating system aligned with the firm's strategy?
Is the current position defensible using the current OS?
(are we on the efficient frontier?)
Priority-performance chart
Performance for y-axis
Competitive priorities/capabilities for x-axis
Examples of capabilities
Variety
Durability
Availability
Conformance Quality
Cost
Environmental Impacts
Bottom (from left) to top (right)
"order qualifiers to order winners"
E.g., Overkill, Superior, Acceptable, Lacking
OS needs to be on the efficient frontier for capability position to be defensible!
Efficient frontier
Non-cost capability for y-axis
How to derive it?
Unit Cost for x-axis
Improvement
is the outer envelope of the potential performance of existing OS in the industry
(The frontier is the outer envelope of all capability trade-off curves)
note: it's inverted, so the right side means lower cost = more cost savings
Remember: Unit cost = variable cost + fixed costs / volume
e.g., flexibility, variety, carbon emissions
trade-off curve
traces the best cost of a given operating system
as we change the non-cost capabilities
best = assuming OS runs at designed volumes
volume cost = delta ΔCvol (for any deviations)
Improvement (e.g. setup cost reduction)
creates options to increase differentiation or cost-efficiency
for > 2 capabilities