If not, it is a good idea to figure out how much a 1% increase or decrease in reliability is worth. Here is a couple of ideas on how to do so.
- Reliability is most interesting to measure on current production bottlenecks. For some of you the bottlenecks shift depending on product you run, if so, we suggest you take your most critical product runs and make 3-4 scenarios using bottlenecks for those products.
- Reliability is measured by OPE (Overall Production Reliability), some may use the term OEE, but OEE is misleading since some of the losses are process/ manufacturing related, not just equipment related, so we use the term OPE. OPE= % time availability * % Quality and scrap * % speed to capability.
- Decide what 1% increase in production volume is (use full year). For example; production in 2007 was 800,000 tons, a 1% increase would be 8,000 tons. This means if you can improve OPE 1%, you would produce 8,000 tons more with the same fixed costs.
- Next, find out what sales price (I suggest using a forecast average) less the Variable cost is. This is called Contribution to fixed cost and is the actual additional profit you will make if you produce 1% more product since your fixed costs are the same. Assume sales price is $1,000 per ton and variable cost is $700, the contribution to fixed cost is $300/ ton. Note, for each additional ton, you will have to pay variable cost to produce it.
- A 1% increase in reliability (8,000 tons) is worth $300 * 8,000 = 2.4 M annually.
If you have a product mix, accounting should be able to give you weighted (depending on volume, price, and variable cost) averages on the numbers.
In this short video, Christer Idhammar discusses overall production efficiency across industries and what good reliability looks like.
Tor Idhammar is the president & CEO of IDCON, INC.
He has a Masters Degree in Mechanical Engineering and a B.S in Industrial Engineering. Tor has worked with more than 60 organizations in 20 different countries.
He is the author of 4 books, co-editor for TAPPI 360, blogger at reliableplant.com and now here at Paper Advance.
IDCON is a reliability and maintenance management consulting firm. IDCON help organizations find and implement their true reliability potential through improved work management, preventive maintenance, spare parts management, root cause and more.