The three OEE factors from a line's own data, then the value of a point, which depends on whether the plant is short of capacity or short of orders, and on which factor moves.
OEE (overall equipment effectiveness) is availability × performance × quality, which equals good units divided by what the line could make at its ideal rate over the planned time. An illustrative line at 85.0, 80.0 and 95.0 per cent runs at 64.6 per cent. One point of OEE is worth 138,947 of EBITDA if the extra output sells and 54,878 if demand is fixed, and a point won through quality is worth more than either.
Worked in full in The Private Equity Operating Partner by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
| Input | Value |
|---|---|
| Planned production time | 6,000 hours |
| Unplanned downtime (breakdowns, changeovers, waiting) | 900 hours |
| Ideal rate | 1,000 units an hour |
| Units produced | 4,080,000 |
| Good units (first pass) | 3,876,000 |
| Price / material / other variable cost per unit | 6.00 / 2.80 / 0.70 |
| Cost of a staffed hour (labour, energy, overtime) | 600 |
| Exit multiple | 9.0x |
Availability = run time ÷ planned time = (6,000 − 900) ÷ 6,000 = 5,100 ÷ 6,000 = 85.0%
Performance = units produced ÷ (run time × ideal rate) = 4,080,000 ÷ 5,100,000 = 80.0%
Quality = good units ÷ units produced = 3,876,000 ÷ 4,080,000 = 95.0%
OEE = 85.0% × 80.0% × 95.0% = 64.6%
Check: good units ÷ (planned time × ideal rate) = 3,876,000 ÷ 6,000,000 = 64.6%. In Excel: =Good/(Planned_h*Ideal_rate)
The check matters. If the three factors do not multiply to the one-line formula, someone has used a nameplate rate in one place and a target rate in another, which is the commonest way an OEE report flatters a plant.
| Loss | Units | Typical cause |
|---|---|---|
| Availability | 900,000 | Breakdowns, long changeovers, material shortages |
| Performance | 1,020,000 | Running below the ideal rate, minor stops |
| Quality | 204,000 | Scrap and rework |
| Total lost against 6,000,000 | 2,124,000 |
Quality looks like the smallest loss. In value it is not, as the next step shows.
One point of OEE is 1 per cent of 6,000,000, or 60,000 good units a year. What those units are worth depends on two things the OEE number does not show: whether the plant is short of capacity or short of orders, and which factor delivered the point.
Capacity-constrained, availability or performance point: at 95.0% quality, 60,000 more good units means starting 60,000 ÷ 95.0% = 63,158 units, so 60,000 × 6.00 − 63,158 × 3.50 (2.80 + 0.70) = 360,000 − 221,053 = 138,947
Capacity-constrained, quality point = 60,000 × price 6.00 = 360,000, because a unit saved from scrap has already consumed its material and conversion
Demand-constrained, availability point: the same 3,876,000 good units need 3,876,000 ÷ (1,000 × 65.6%) = 5,909 hours instead of 6,000; 91.5 hours × 600 = 54,878
Demand-constrained, quality point: quality rises to 96.47%, 62,195 fewer units are scrapped at 3.50 of variable cost each, 217,683, plus the same 54,878 of hours = 272,561
| Situation | EBITDA a year | Value at 9.0x |
|---|---|---|
| Output sells, point from availability or performance | 138,947 | 1,250,526 |
| Output sells, point from quality | 360,000 | 3,240,000 |
| Demand fixed, point from availability or performance | 54,878 | 493,902 |
| Demand fixed, point from quality | 272,561 | 2,453,049 |
The same point is worth 2.5 times as much on a line whose output sells as on one waiting for orders. The demand-constrained figures also assume the saved hours are actually taken out, as overtime or a shift, not left as idle time; if they are not, an availability point is worth nothing at all.
| Share of extra output sold | EBITDA a year | Value at 9.0x |
|---|---|---|
| 0% | 54,878 | 493,902 |
| 50% | 96,913 | 872,214 |
| 100% | 138,947 | 1,250,526 |
A programme taking this line from 64.6 to 70 per cent, 5.4 points through availability, is worth 750,316 of EBITDA and 6,752,842 of value if the market takes the output. Before that number goes into a value creation plan, the sales team has to say who buys the extra units, and at what price; the same test applies to the initiatives in a run-rate EBITDA claim.
How operating gains like these are separated from leverage and the multiple in the return is shown in the free workbook for this book; the margin arithmetic is in what one point of EBITDA margin is worth.
It depends on the process. 85 per cent is often quoted as world class for discrete manufacturing, but the more useful benchmark is the line's own best sustained quarter. The illustrative line here is at 64.6 per cent; raising it to 70 through availability adds 5.4 points, 750,316 of EBITDA a year if the extra output sells, 6,752,842 of value at 9.0x.
No. Utilisation measures how much of the time a line is scheduled; OEE measures how well the scheduled time is used, net of stops, slow running and scrap. A line can be scheduled all 6,000 planned hours and still produce only 3,876,000 good units against an ideal 6,000,000, an OEE of 64.6 per cent.
Because a scrapped unit has already consumed its material and conversion. In a capacity-constrained plant, turning 60,000 scrapped units into good ones adds the full 6.00 price, 360,000, while 60,000 more good units from extra run time mean starting 63,158 units at 3.50 of variable cost each, a gain of 138,947. When demand is fixed, the quality point saves 272,561 against 54,878.
This article is one calculation from The Private Equity Operating Partner. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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