2 Dec
2019

How CFOs Can Increase EBITDA by Improving OEE

As a CFO of a manufacturing business you are probably aware of the value of measuring EBITA. What you may not know is how EBITA and OEE are related.

OEE
How CFOs Can Increase EBITDA by Improving OEE
OEE
OEE
Food & Beverages Processing
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Consumer Product Goods
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Material Building & Construction
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Original Equipment Manufacturer (OEM)
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Pharmaceuticals & Supplements
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Packaging & Co-manufacturing
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Woximity SaaS software provides an easy and cost effective way to monitor manufacturing machinery performance directly. Clearly it’s of benefit to manufacturers to gain instant notification that machinery is down so that downtime response times can be compressed. However, by gathering machinery performance data across an entire line or factory, significant insights can be gained beyond whether a machine or line is ‘on’ or ‘off’. Smart Factory Analytics powered by machinery performance data can do things like improve lean manufacturing efforts, enable machinery predictive maintenance and increase OEE (Overall Equipment Effectiveness). Today we’re going to focus on the latter, OEE, and how it is directly related to manufacturing company business valuations.

OEE is a tool which measures productive manufacturing time using three metrics that include quality, performance, and availability.

These factors are defined as follows:

  • Quality: the percentage of defective parts created during production time
  • Performance: the actual production speed versus the fastest theoretical time per part
  • Availability: the total amount of stop time (both planned and unplanned during the anticipated production time

OEE produces a percentage value, up to 100%, based on the data collected from these three metrics to quantify the total efficiency of a manufacturing area or business. This efficiency can be calculated for an entire shop, a shift, or a single machine. Thus, OEE has a wide range of potential uses that allow factories to identify exactly where production inefficiencies are coming from.

Because the Worximity Solution is so closely tied to machinery performance and efficiency and relating machine analytics to manufacturing improvement methodologies, as you can imagine, we study, and write about OEE quite a bit!

If you aren’t familiar with OEE, to help you with this article, below here are foundational resources that you can use to get started with your OEE journey so that this article makes more sense to you.

OEE - Availability, Reliability & Maintainability

OEE and Predictive Maintenance

Top KPIs You Should Be Measuring to Compliment Your OEE Calculation

OEE & Smart Factory Analytics - The Game Changer for Manufacturers

Average Manufacturing OEE - Overall Equipment Effectiveness - in the US

How improving OEE translates into savings for food manufacturers

OEE and Profitability

As you review the articles listed, you'll see that OEE is related to improving a variety of business outcomes including machinery maintenance and business profitability.

However, in a manufacturing business, creating growth often means significant investments in new plant and machinery. As we explain in our article How CFOs Can Increase EBITDA using IIoT, it’s possible that a significant investment in new business growth can actually reduce apparent profitability or even produce reported losses using standard profit and loss calculations. This can be the case even if intuitively you may know that in an investment you are considering it's not true. You may feel that a business capital investment must make sense, even though it might produce lower profitability or even losses. How can this be?

Manufacturing capital investments can skew apparent profitability and make new investments seem like they are negatively impacting profitability when they are actually increasing business value.

That’s why as a CFO, it's important to be able to make the case for investments using the right analysis and measurement tools. 

From the article referenced above:

“EBITDA can accurately show the performance of a manufacturing company overtime, and many analysts and investors see it as a preferred method for representing a company’s real earnings. Generally, EBITDA displays the amount of available cash flow a company possesses to either reinvest in itself or pay dividends. The efficiency of a company’s production activity is revealed and overall, EBITDA provides an accurate representation of a manufacturing company’s performance by removing many factors which can distort its actual value.”

Because EBITDA reveals the efficiency of a manufacturing company’s production activity, and measuring OEE is designed to help businesses increase the production efficiency of machinery, the two are directly linked.

So as a CFO using an EBITDA model to justify a significant capital investment, you'll need to be able to validate after the fact that the investments are paying off. Smart Factory Analytics tools such as Worximity enable you to measure the actual productivity of new equipment vs old equipment and prove that the investment is paying off.

As a CFO, you should be asking your Operations Management team, how can we be measuring OEE now? Ask for a demo and invite your team in to learn more!

 

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