Guestpost by Rudolf Burkhard
At first glance, how can it be bad. After all, the more we get out of our expensive equipment and employees the lower the cost of our product. The lower the cost of our product, the more money we make from a sale.
The market does not always play our game. We can only sell as much as the market wants to buy from us. If we make more than market demand, all we are doing is creating inventory. OEE deals with this by using ‘planned utilization’. Maybe so, but in practice most factories everywhere do overproduce in order to show good efficiency and reduce product cost. This may reduce their materials cost per unit, but altogether they will have spent more money on raw materials and components for products that they now have to store somewhere.
The way accounting works means that not only do we create physical stock, but we also create a financial inventory. The calculated value of the product – materials and labour end up as a working capital investment – basically hiding a part of our cost of production (labour and some overhead) in inventory.
So, OEE encourages personnel to over-produce to get a good OEE score and our working capital increases.
Could OEE and other efficiency measures be the root cause for at least part of the economic cycles we regularly suffer? Companies have created so much stock that management (eventually) dictates a stop.
Since most supply chains are quite long with many companies practicing OEE metrics it is easy to see the impact cascading back all the way to raw materials – the mines and other raw materials. The economy gets into a certain level of panic.
Until the surplus inventory has been flushed out (often through margin destroying discounts) TV networks will fuel the panic with their stories. That fuel will almost certainly cause more not so good decisions (check out this video).
Ask yourself what the impact of overproduction is on profitability. In the short term a company can show greater profit. But what is the picture over the longer term? How much damage does over-production cause to a company and to an economy?
Use market demand to guide what to produce and what not to produce. OEE and other efficiency metrics are fine as tools used in the right place and in the right way but must not guide factories to over-production!
Here is an experiment to try. Abolish OEE as a metric, make due date performance (make to order environments) or product availability (make to stock) your key metrics.
Your costs will not go up – it will just not sit, unused (for a sale) in your inventory.