Proper Equipment Utilization Reduces Costs and Improves Margins

When it comes to reducing cost or improving margins, the first place many companies go is their suppliers. Although there may be opportunity there, sometimes the most cost-saving and margin-improving benefits can be found on one's own factory floor. A good tool to measure this is to calculate your Overall Equipment Effectiveness (OEE).

What is OEE?

OEE is a measurement that indicates how effectively equipment is being utilized by identifying the percentage of planned production time that is truly productive. In its simplest form, the calculation is (Good Parts Produced x Ideal Cycle Time)/Planned Production Time. A world class operation would typically have a score of 80% or better. Scores below 60% indicate substantial room for improvement. Measuring OEE is relatively simple and can indicate the scope of the improvement opportunity as well as provide the baseline to track improvement.

An obstacle that some companies face in capturing and analyzing OEE improvement is the cost of software and hardware to implement a full blown Manufacturing Execution System or some other software based solution. However, numerous approaches can provide similar benefits with minimal capital investment.

First step: Calculate the baseline

You need to know if there is a problem, how bad it is and what to measure improvement against. A good example is a company that recently contacted me for help in consolidating its supplier base and negotiating cost reductions to improve margins. Although there was opportunity to reduce supplier costs, a tour of the facility revealed that a number of idle machines and operators. As part of the project, we calculated OEE and found it to be 55%! Nearly half of the available manufacturing time was non-productive. No amount of cost savings in purchased materials could overcome that deficit and deliver the margin improvement they needed or could achieve. For that, they needed to look inside of their own four walls.

Here are examples of low capital investment recommendations that have been shown to be effective in improving OEE:


The quickest and highest return comes from a committed and engaged team with shared goals.

  • Have programmers and process engineers on the floor to listen and assist the operators in identifying and implementing improvements. The emphasis is on listening and observing outcomes, that is, moving from theory to the reality of actual manufacturing. Observations should include, among other things, loading and unloading technique, tooling selection, program sequencing and rejection analysis. Metrics should include improved yield and cycle time reduction.
  • Transition Quality Assurance from policing to partnering as a means to identify conformance issues as they occur. In addition to optimizing measurement tools and techniques, they should review the appropriateness or deficiency of the measurements as they relate to the finished product requirements, not just the intermediate manufacturing step or component to an assembly. Metrics should include both quality yield and reduced measurement time, especially if it is impacting OEE.
  • Educate the planners in the manufacturing process and optimize production planning by including changeover and transition time in the order sequencing decision. Simple planning methods often only include supply and demand in the calculation. This can lead to multiple, lengthy changeovers and can increase non-productive equipment time. Adding factors that optimize equipment uptime will reduce idle time and increase overall output and OEE. This would include scheduling families of parts, not individual sizes, and changeover requirements between families to minimize tooling and line clearance requirements. Rate based planning methods are well suited for this type of planning optimization. Metrics should include reduced idle time for setup and changeover, as well as first article yield.


This is an area where I have found management involvement and simple visual methods to be more effective than expensive hardware and software collection and reporting systems. The goal for operators as well as management and supporting departments, such as engineering and quality, should be to make it easy to see if you are on track or falling behind.

  • Drum – Buffer – Rope (DBR). This is an operations scheduling methodology based on Dr. Eli Goldratt’s Theory of Constraints. Implementation does not require a large capital investment. It is not the intention of this article to get into the details of DBR, but in its simplest form, it can be white board fodder for monitoring constraint operations using visual green/yellow/red pins, flags or cards to clearly identify the status of each order as it moves through the manufacturing process.
  • Gemba walk. Sometimes referred to as “management by walking around,” this practice takes management to the production floor to look for opportunities for improvement. As with all lean practices, it is based upon the principle that it is better to observe what is happening than respond to post-activity reports. A best practice would be to combine this with DBR and conduct walks daily or during each shift to see where you are vs. where you need to be.
  • Issue notification system. This can simply be a light or flag that the operator can activate to indicate that an issue that has stopped or slowed production. This is most effective when the supporting departments, such as quality and engineering, are located in the manufacturing area. Once activated, it should be all hands on deck to resolve the issue.


Analysis and reporting are most effective when used in combination with participative monitoring. They should be used to measure the results of changes that have been implemented and identify new opportunities for improvement. As with monitoring systems, analysis can be done without significant capital investment and is most effective when the entire operations team is involved in capturing and using the information.

  • Machine tool life management impacts both cost and quality. Changing out tooling prematurely increases cost in dollars and time. Using suboptimal tools, or running for too long, can impact cost and quality. Thus, choosing the right machine tools and determining the optimal numbers of parts to produce before changing can have a significant impact on OEE. The upfront work requires involvement and cooperation among the operators, engineering and quality, but once determined, the monitoring can be as simple as a manual log kept by the operator. Incidents of premature failure need to be addressed as they happen and should encourage communication between the operators and engineering through shared goals and metrics.
  • Cycle times are another area where manual systems can be effective without significant capital investment. Requiring operators to measure and record activities also has the advantage of personal engagement and identification of issues as they occur, vs. review of post-activity reports. Engineering and quality should review and discuss results with the operators on a continuous basis.
  • Analysis and reporting is most effective when it is openly communicated and frequently updated. Responsibilities and rewards should be shared to encourage cooperation and engagement between departments. Graphs posted centrally in the manufacturing area and updated by operators with pens and markers can actually have a greater impact than reports generated from expensive Manufacturing Execution Systems.


In conclusion, to realize the maximum margin improvement and cost reduction, companies need to expand their focus to look at their suppliers and their own internal operations. A useful way for both benchmarking and establishing a baseline measure is to calculate OEE. Improving OEE can be accomplished without significant capital investment and is most effective when management and all departments are engaged in a continuous and purposeful manner to identify, monitor and review progress of improvement opportunities.

David Finch is the President and founder of Insight Collaboration Partners, consultants that assist companies in improving inter-departmental communication, supplier collaboration, strategic sourcing and overall operations efficiency and cost reduction. Mr. Finch has over 25 years of hands-on responsibility in global supply chain and manufacturing operations in the medical device and the orthopaedic industry with Becton Dickinson, Johnson & Johnson, Wright Medical Technology and MicroPort Orthopedics. He can be contacted by This email address is being protected from spambots. You need JavaScript enabled to view it.