Lean Execution > Advanced Lean Manufacturing > OEE, Labour, and Inventory

OEE, Labour, and Inventory

Almost every manufacturing facility has a method or means to measure labour efficiency.  Some of these methods may include Earned versus Actual hours or perhaps they are financially driven metrics such as “Labour as a Percent of Sales” or as “Labour Variance to Plan”.  As we have learned all too well through the latest economic downturn, organizations are quite adept at using these metrics to flex direct labour levels based on current demand.  This suggests that almost every company has access to at least a  financial model of some form that can be used to represent “ideal” work force requirements based on sales.

It is not our intent to discuss how these models are created, however, I can only trust that the financial model is based on a realistic assessment of current process capabilities and resources required to support the product mix represented by the sales forecast.  At a minimum, the assessment should include the following standards and known variances for each process:  Material, Labour, and Rate.  You may recognize these standards as they form the basis of our OEE cost model that we have discussed in detail and offer in our Free downloads page.

Analyzing the Data

Many companies use both Labour Efficiency and Overall Equipment Effectiveness to measure the performance of their manufacturing operations.  We would also expect a strong correlation to exist between these two metrics as the basis for their measurement is fundamentally common.  As you may have already observed in your own operations, this is not always the case in the real world.  The disconnect between these two metrics is a strong indicator that yet another opportunity for improvement may exist.

For example, it is not uncommon to see operations where OEE is 60% – 70% while labour efficiencies are reported to be 95% or better.  How is this possible?  The simple answer is that labour is redirected to perform other work while a machine is down or, in extreme cases, the work force is sent home.  In both cases, OEE continues to suffer while labour is managed to minimize the immediate financial impact of the downtime.

Set up and / or change over may be one of the reasons for down time and another reason why there is a perceived discrepancy between labour efficiency and overall equipment effectiveness.  Some companies employee personnnel specifically trained to perform these tasks and are classified as indirect labour.

Redirecting labour to operate other machines presents its own unique set of problems and is typically frowned upon in lean organizations.  Companies that follow this practice must ensure that adequate controls are in place to prevent excess inventories from building over time.  I reluctantly concede to the practice of “redeployment during downtime” if it is indeed being managed.

Some would argue that the alternate work is being managed because the schedule actually includes a backup job if a given machine goes down.  If we probe deep enough, we may be surprised to learn that some of these backup jobs are actually “never” scheduled because the primary scheduled machines “always” provide ample downtime to finish orders of “unscheduled” backup work.  As such, we must be fully aware of the potential to create the “hidden factory” that runs when the real one isn’t.

Pitfalls of Redirected Labour

This practice easily becomes a learned behavior and tends to place more emphasis on preserving labour efficiency than actually increasing the sense of urgency required to solve the real problem.  In all too many cases the real problem is never solved.

Too many opportunities to improve operations are missed because many planners have learned to compensate for processes that continually fail to perform.  Experience shows that production schedules evolve over time to include backup jobs and alternate machines that ultimately serve as a mask to keep real problems from surfacing.  From a labour and OEE perspective, everything appears to be normal.

Redirecting labour to compensate for Process deficiencies may give rise to excess inventory.  “Increased inventory” is an extremely high price to pay for the sake of perceived efficiency in the short-term.  Higher inventory has an immediate negative impact to cash flow in the short-term as real money is now represented by parts in inventory until consumed or sold.  Additional penalties of inventory include carrying and handling costs that are also worthy of consideration.

Three Metrics – Working Together

You will note that we deliberately used the term labour efficiency throughout our discussion and presents an opportunity to demonstrate that efficiency and effectiveness are not synonymous.  Efficiency measures our ability to produce parts at rate while effectiveness measures our ability to produce the right quantity of quality parts at the right time.

Overall Equipment Effectiveness, Labour Efficiency, and Inventory are truly complementary metrics that can be used to determine how effectively we are managing our resources:  Human, Equipment, Material, and Time.  Our mission is to safely produce a quality part at rate, delivered on time and in full, at the lowest possible cost.  Analyzing the data derived through our metrics is the key to understanding where opportunities persist.  Once identified, we can effectively solve the problems and implement corrective actions accordingly.

Until Next Time – STAY lean!

Vergence Analytics

Posted in Advanced Lean Manufacturing, Cost Control, Eliminate Waste, Lean Metrics, Performance Tagged with: , , , ,

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