Promoting Asset Management policies by considering OEE in products' TLCC estimation

N. Z. Jabiri, A. Jaafari, R. Platfoot and D. Gunaratram,

Project Management Group The University of Sydney J05,2006, NSW, Australia

Abstract - The increasingly competitive nature of manufacturing market has created an increasing awareness of asset performance impact on profitability and competitiveness in asset-intensive organisations. This has encouraged organisations to adopt various approaches to measure manufacturing performance; most of them with a large number of measures on different hierarchical levels, some of them have been shown to be contradictory. This paper aims to address this concern by introducing a new approach to asset management discipline and how comprehensive measurement systems can assist in identifying asset performance and its consequential impacts on profitability and competitiveness. This approach provides required information for organizations that seek to create a competitive advantage through asset utilization.

I. INTRODUCTION In the current competitive environment, one of the key challenges facing asset-intensive organizations is to apply sound investment policies to face the global competitions, based on customer needs and market dynamics. There is an apparent dichotomy in the sense that capital-intensive assets are, normally long-term while customer needs and preferences are short term and driven by market. How to reconcile the investment on fixed assets based on the short-term nature of customer needs and preferences require sound investment policies. Although increasing capital investment is the key to both productivity and competitiveness; however studies show considerable emphasis is being placed on benchmarking the volume of investment, and a lot less attention is being paid to how effective this investment is. The challenge includes: Identifying the current performance of the existing assets, Investigating the opportunities for improvement, and Identifying the impact of investment on performance

enhancement and consequently competitive advantage. To respond to these issues, one potential solution for organizations is to manage their assets under a holistic Asset Management (AM) approach. Holistic AM empowers organizations to provide investors and customers with a cost-effective level of products. The primary goal of AM is to achieve an optimal investment strategy and the use of assets through their service life cycle. Hence, the investment in AM is a part of the refinement process to extract the last fine margins of improvement from the existing assets. To achieve these objectives, this complex procedure should deal with constraints and limitations on equipments, budgets and the dynamic nature of customer needs and market demands.

This article introduces holistic AM in the context of manufacturing asset management. It discusses how market opportunities can be considered as alternative projects and consequently attempts to make assets compete for the most value-intensive and profitable opportunity at a given planning horizon. In this regard, the paper argues the need for comprehensive measurement systems, which consider technical and financial performance of asset utilization simultaneously. It explains how these systems enhance investment policies by exploring the trade offs between investment opportunities and their impact on both financial and technical performance of the organizations. Hence, the article highlights the features of "overall equipment effectiveness" (OEE) and "total life cycle cost" (TLCC) per unit product, as conventional technical and financial measures. It also introduces an assessment system which helps organizations in evaluating different projects while considering efficient use of their available resources in responding to market demands, customer needs and their business objectives.

II. HOLESTIC ASSET MANAGEMENT In manufacturing industry, organizations generally take a primary input, add value to it, and dispose the output. The primary inputs are raw materials; value is added by converting these materials into products, and disposal entails selling them to customers. Therefore, at one end, there is raw materials procurement function, in the middle is the manufacturing department, which is responsible for operating the value-adding processes, and at the other end is the marketing and sales function, which has to locate potential customers and persuade them to acquire the output of the value-adding process. These three principal organizational functions are supplemented by major support functions associated with the management of assets. AM, as the core activity in the manufacturing link, is responsible for insuring a balance between utilizing installed capacity, market dynamics and, customer needs. This perspective has led to introducing "Holistic Asset Management Practice". Holistic AM seeks to achieve high returns on the organization's assets while considering the whole value chain process. [1, 2] Judging whether returns are adequate or could or should be greater requires a clear understanding of asset performance and its interrelationship with the other links in the process. Evaluating asset performance is, however, a complex task

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with multiple dimensions. There are social, environmental aspects of asset performance, as well as the more conventionally understood economic and financial aspects. Exploring to deal effectively with these broader aspects of asset utilization is the main focus of holistic AM practice. Holistic AM is founded on project-based management principles, which allow organizations to consider market opportunities as alternative projects and consequently attempts to make assets compete for the most value-intensive and profitable opportunity. In this regard, each AM alternative considers four key influential elements; (a) preferred suppliers, (b) specific asset configuration, (c) favoured distributors and (d) groups of customers. Figure 1 shows how these elements are involved with an AM alternative. Geometrical shapes in the manufacturing block show utilized equipment for each alternative.

Suppliers Manufacturer Disrtributors Customer

Alternative I

Alternative II

Fig. 1: An AM alternative is a combination of suppliers, manufacturer, distributor and customer.

To evaluate different alternatives, decision makers should define configuration of each alternative separately, and subsequently study the results of the evaluation under different criteria. Holistic AM classifies these criteria under four categories: "Financial", "Asset Performance", "Customer Satisfaction", and "Environmental Sustainability". Each category includes different criteria, for instance, TLCC and OEE are two key criteria under "Financial" and "Asset Performance" categories. Considering different criteria provides an effective competitive measurement system, which implies comparative information about how decisions must be combined to influence the end-to-end performance of the business. Comparative information provides insight into the performance of both the equipment and the organization compared to its competitors. This insight would be useful in identifying how different AM decisions and policies affect competitiveness; and consequently ensure that the organization invests wisely. For example, in a market opportunity where customers are looking for the lowest price, a management group that wants to improve the ROI of its organization can follow one or some of the following approaches: Increasing production volume by increase in capacity

utilization. Decreasing the business's fixed costs, Increasing the profit margin by reducing variable

conversion costs, or by selectively disregarding low contribution products from the product line; or

Reducing the asset intensity of the business by improving capital productivity and reducing work-in process inventories.

Observing how this management group chooses to manoeuvre its way through these possibilities recognizes a need for measurement systems, which provide required information for organizations that seek to create a competitive advantage through asset utilization. The following section discusses how holistic AM responds to this requirement.

III. INTEGRATED ASSET MANAGEMENT SYSTEM Holistic AM, due to awareness of asset performance impact on organizations profitability and competitiveness, introduces developing a system, which combines both technical and financial performances, while considering their trade offs. In this regard, the concept of holistic AM is being developed into a decision-support system, named Integrated Asset Management System (IAMS). IAMS provides information to assist in project selection and investment allocation. The allocations should be made to yield the greatest return on the organizations' assets. Another management objective might be to maximize value-in-use, i.e., to achieve the greatest possible difference between the benefits and costs of the projects. In this regard, IAMS generates reports and information such as Performance Balance Sheet (PBS), which is in particular useful as a statement of the value of those assets. [2, 3 and 4]

Computational andAnalyzing System

Business StrategyEOREquipment ID

PurposeFeatures

CriticalityCurrent Conditions

MaintenanceConsiderations

InventoryConsiderations

Supply ChainConsiderations

ProductionConsiderations

Opportunities forImprovement

Asset PerformanceRequirements

Limitations

Issues with theAsset

Cause of theconcern

Considerations

ProposedAlternatives

Proposed Works

Priority of Works

AlternativeAssessment

Proposed WorkConsequences

Supplier SupportRequirements

Fig. 2: Interaction between EOR, Business Strategy and Computational and Analysing System.

IAMS structure is made up of different components. These components can be categorised as "Existing Legacy Systems", e.g., CMMS and SCM Systems, and "Accompanying Systems". The second group plays the key roles in IAMS structure and makes it different from the conventional systems. This group includes: Equipment Operating Requirements (EOR) Business Strategy Computational and Analysing System

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The relationship between the EOR and the Business Strategy is a relatively one to one correspondence; opportunities for improvement or change in the EOR relates directly to issues considered by Business Strategy. Operational requirements such as plant performance requirements and limitations (either in throughput or in flexibility of operation) assist with identifying both causes of the concern and considerations associated with issues in the Business Strategy. The priorities of issues within the Business Strategy should be governed by considerations listed in the EOR such as criticality of assets and their performance requirements. Computational and Analysing System provides an environment to assess different alternatives while considering information from EOR, Business Strategy and legacy systems. This component is empowered by the application of sophisticated analytical tools and methods like process simulation and, probabilistic models for performance prediction and risk assessment, [2, 6]. Figure 2 shows the relationships between these key components.

IV. HOW IAMS INTEGRATES TECHNICAL AND FINANCIAL PERFORMANCE

IAMS considers OEE and TLCC as key diagnostic indicators for informed AM decisions. This section explains features of these two indicators and explores the trade offs between their components. Technical performance indicator – OEE: OEE is a comprehensive matrix for evaluation of asset performance. OEE is often used as a driver for improving performance of the business by focusing on quality, productivity and equipment availability issues and hence aimed at reducing non-value adding activities often inherent in manufacturing processes. Figure 3 reveals the areas, which affect or are affected by asset performance [5]. OEE is calculated by the following formula: OEE = Availability × Production Rate × Quality (1) The components are defined as follows: Availability is a comparison between the amount of time the process is actually producing and the amount of time it was scheduled to produce. Production rate is a comparison between the real production of the process and the expected production for the same time. It represents the associated speed losses. Quality rate is a comparison between the number of produced units that fits the specifications and the total units produced. Financial performance indicator – TLCC: TLCC, which is always expressed in current dollar, is made up of the total cost involved in producing a product. The main cost components in calculating TLCC are revealed in Figure 4. TLCC considers all current and future costs and reduces them to their present value by the use of the discounting techniques, through which the economic worth of an alternative can be assessed [6]. Key elements of TLCC include: Asset ownership cost: this element includes life of the equipment, initial cost or book value, discount rate, taxes and insurances, depreciation, salvage value and disposal costs.

Operation Repair & Maintenance (OR&M) costs: OR&M is essential for analysing the TLCC of any alternative project. Maintenance expenses include all the costs associated with maintaining the asset. The operating cost of an asset would include direct labour, direct material, indirect labour and indirect material costs. It also includes both standard and overtime labour costs associated with troubleshooting, repair and preventive maintenance, as well as parts and the opportunity cost of personnel.

Availability

Production Rate

Quality Rate

Affectasset

Performance

Equipment Failure

Setup & Adjustment

Idling & Minor Stoppages

Reduced Speed

Defects in Process

Reduced Yield

Production Rate

Repair & Maintenance Cost

Downtime Cost

Operating Cost

Equipment Usage

Production Process Duration

Customer Satisfaction

Inventory Cost

No of Sellable Product

Waste Cost

AssetPerformance

affects

Fig. 3: The trade offs between asset performance and major cost components.

Fig. 4: Required information for TLCC analysis. The trade offs between technical and financial performance: For making AM decisions it is important to have a thorough insight into all involved costs and their impacts on the profit and competitiveness. Managers need to consider the trade offs between the amount of investment and its impact on the OEE and TLCC as an indicator required for competitiveness analysis. As Figures 3 and 4 depict good AM decisions can be considered from two different perspectives; asset technical performance improvement and conversion costs. Good AM decisions improve OEE. However its impact on conversion cost is not always clear. For instance, improving OEE can be a result of management decisions such as : “Changing maintenance policies” ,”Equipment replacement”, “Equipment upgrade”, “Hiring” and “Outsourcing”.

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Initializing these decisions influences the conversion cost of the projects and consequently the TLCC. Figure 5 illustrates how IAMS looks at the ways in which OEE is being used in parallel with financial measure TLCC to enhance AM policies. It starts with a fundamental question of whether for instance replacement, upgrading or outsourcing is required. If so what the consequential impacts are.

Start

Define an alternative

- Define asset configuration

- Define production chain- Define funds and policies

- Define available resources/ constraints

Simulate production process

Is theprocess technically

feasible ?

Calculate OEE & TLCC

Satisfyobjectives?

Anyimprovement

potential?

Disregard the alternative. Accept the alternative.

YES

YES

NO

YES

NO

NO

ManagementDecisions

Problemidentification

Problemidentification

Dtatbase

Fig. 5: Simplified flowchart represents decision-support process in IAMS. The following example identifies the aforementioned features of IAMS.

V. A CASE STUDY RESEARCH A manufacturing plant, company A, serves the local market by producing a type of white goods product, product A. The production line of this company is made up of a series configuration of three equipment, referred as “Equipment One”, “Equipment Two” and “Equipment Three”. This organization has recently undertaken a strategic study to analyse market condition in the next 3 years. The study reveals due to the competitor activities, the average price of product A will decline from $27 per unit product to $25.80 in the mentioned period, which means a lower profit margin for the organization. This organization has targeted profit margins more than 12%. In this situation company A has two alternatives: Alternative I: Continuing with the existing situation, or Alternative II: Improvement the performance of the organization by investment and better utilization of the asset. In this regard, company A has utilized IAMS to study the performance of the existing asset and calculate TLCC considering all probabilities involved in TLCC estimation. [6] The reports of IAMS for alternative I show, the OEE rate of the current process is 30% and no equipment operates at higher than 75%. As company A has not previously attacked the “big six losses” principles, this low level of OEE performance is not unexpected. Figure 6, shows OEE elements for the process equipment. For each equipment, the column bars show availability, production and quality rates. IAMS also estimates the probability that TLCC per unit product less than $23 is 70%. This leads to the conclusion that there is 30% risk of profit margin less than 12%. Figure 7

shows the TLCC cumulative contribution. Contribution of main cost elements to TLCC is depicted in Figure 8. As this figure shows 17% of TLCC is due to asset utilization cost.

Fig. 6: OEE elements for Company A production process equipment.

Fig. 7: TLCC cumulative contribution for Alternative I.

The concerns highlighted by IAMS reports show that a cross-functional approach to solving the low OEE problem and the risk of low profit margin is necessary. By assessment of the trade off diagrams, Figures 3 and 4, company A noticed that the main area of concern is the availability of “Equipment One”, which currently brings the OEE figures down to a low rate. Company A also recognized that the part of this unavailability is due to poor maintenance and the other part is due to unreliable supply of raw materials. Which the latter one, also creates some financial penalties as the delivery to the customer is often missed. [7] After analysing the circumstances, company A decides to: 1. Upgrade Equipment One, which has the major impact on the availability of the whole system. The total cost involved with this decision is between $10,000 and $12,500, considering normal distribution. 2. Improve the maintenance policies by investing on the PM activities. This decision affects both availability and quality rate of the process, which subsequently provides higher production rate in a fixed operation window. 3. Hiring a new supplier. This supplier provides a more expensive raw material, which may increase the conversion cost; however, it increases the availability of the process and

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also saves on the late delivery penalties and enhances customer satisfaction. [2]

Fig. 8: TLCC elements contribution to the total cost for alternative I.

The new management decisions are introduced to IAMS as alternative II. IAMS report on the new alternative shows OEE will improve up to 40%, refer to Figure 6. Furthermore, it determines the risk of low profit margin, which will be dropped from 30% to 20%, as the probability that TLCC per unit product is less than $23 increases to 80%. Figures 9 and 10 reveal the IAMS reports on the second alternative. Comparing Figures 7 and 9 also revel, in the case of highest TLCC, the first alternative will provide just 1% profit, whereas it is 5% for the second alternative. Furthermore, comparison of Figures 8 and 10 illustrate a rise in manufacturing cost contribution to TLCC compared to the first alternative.

Fig. 9: TLCC cumulative contribution for Alternative II.

VI.CONCLUSION This paper introduces a practical AM approach, Holistic AM, in the context of manufacturing industry. It explains how asset performance affects profitability and competitiveness of

the organization and consequently the need for systems, which includes this concern. In this regard it introduces a decision support system, so-called IAMS, which streamlines hard and soft issues influencing AM decisions. IAMS provides an assessment environment, which helps organizations to evaluate different projects while considering efficient use of their available resources in response to market demands, customer needs and their business goals. The IAMS reports provide not only useful information, but also a basis for considering what might happen under alternative assumptions about the future.

Fig. 10: TLCC elements contribution to the total cost for alternative II.

It should be recognised that IAMS is only a tool to aid decision makers in evaluating alternative opportunities. It is not a substitute for managerial competency and holistic mindset that is needed to achieve successful outcomes in real life situations.

VII. RFEFERENCES [1] N. Z. Jabiri, A. Jaafari, D. Gunaratram and B. Platfoot, "A New

Approach in Developing Asset Management Systems", Proceedings of the 2nd International Conference on Project Management, pp. 260-266, 2004.

[2] N. Z. Jabiri," Project-based Management of Asset Intensive Organizations", Pmday 2005, Vienna, in press, 2005.

[3] C.J. Bamber, P. Castka, J.M. Sharp and Y. Motara, "Cross-functional team working for overall equipment effectiveness (OEE)", Journal of Quality in Maintenance Engineering ,vol. 9, n 3, pp. 223-238,2003.

[4] S. DellaVilla, R. Steele, "Risk & Asset Management -an industry focus on reliability", Joint Power generation conference, vol. 2, pp.337-345, 1997.

[5] S Costa, E. Lima, "Uses and misuses of the Overall Equipment Effectiveness for production management", IEEE, pp. 816-820, 2002.

[6] A. Jaafari, "Probabilistic unit cost estimation for project configuration optimization", Journal of project management, vol. 6, n 4, pp. 226-234, 1988.

[7] K. Kaizen “Focused equipment improvement for TPM teams / edited by the Japan Institute of Plant Maintenance”. Productivity Press, c1997.

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