A Conversation about "Operational Excellence" - so what do you mean by "Performance"

A Conversation about "Operational…

A Conversation about “Operational Excellence” – So what do you mean by “Performance”?

In my previous articles about OpEx I wrote about conversations between colleagues as a method of defining OpEx for your particular business and outlined a framework of Practices and Performance to guide the conversation. The premise for the framework being that sustainable excellence in performance is fundamentally underpinned by excellent practices. Article No. 3 gave a brief outline of key practices that are common in excellent organisations, here I talk about some of the key performance measures that will provide the “balance on the scorecard”, and why they’re important.

Once again, I remind you of the caveat in article 1 “what OpEx means to your business has essentially to be defined by you and your colleagues, understanding your particular circumstances, the maturity of your business, your customers and competitors”. This is not a cut and paste list, it provides suggestions that should be understood within context and applied if meaningful.

This is not the place to fully describe the calculations required in the performance metrics, I trust that I’ll give enough information so that you can understand their importance as part of your discussions. For more details and some representative operationally excellent values please give me a call.

The 14 key performance metrics are arranged under six general headings – Customer Service, Run Operations, Employee Engagement, Supplier Performance, Working Capital and Licence to Operate. There are many more measures, sometimes too many, which can lead to a loss of focus, however if you’re controlling and improving the one’s shown below you should be on the journey to excellence.

Customer Service

If you’re not measuring customer service levels, you should be! This is reputational and jeopardises future business. Without good customer service, such as  high OTIF and low Complaints, business growth will be difficult. Time, effort and cost will all be incurred to make good the order by both you and the customer. Penalty losses may be incurred and there is risk of relationships becoming strained.

There are two key metrics: -

% On Time In Full (OTIF) to customer delivery performance or Perfect Order Fulfilment (POF).

The OTIF or POP calculations are based on the performance of each component (attribute) of an order line and for it to be perfect, the product, quantity, quality, and condition must be delivered to the customer at the specified time on the specified date. One component failure means that the order is not perfect. The order is measured against customer request date although it is not penalised if the request date is earlier than the agreed lead time.

Customer Complaints
This should reflect the number of complaints received of any sort, “justified” or otherwise, as a percentage of the total orders despatched. Each complaint on an order is counted separately and formal complaints received include justified and unjustified complaints.

Run Operations
There are many suites of measures available to use with Run Operations, frequently I have seen claims for more than 100% performance against some nominal figures! Something is not quite right; the figures tend to get twisted over time. It’s good to take a step back and check that the metrics are giving you the correct picture.

Start with Overall Equipment Effectiveness (OEE), a measure of how much time on your asset you’re using effectively. The calculation is shown below.

OEE should be measured at the bottleneck of your operation since this represents the critical resource and “time lost at the bottleneck is time lost forever”. Problems on all units before and after the bottleneck will show up as a loss at the in the availability, productivity and quality rates at the bottleneck.

OEE is a powerful measure since it accounts for all the time (8760 hrs per annum) on your asset. It improves on most traditional utilisation measures since it looks not only at availability but also time losses accumulated when not running at the maximum proven rate and time losses associated with running faulty product.

A good indication of OEE is to look at the last year’s production and ask how much did we make? Divide this figure by 8760hrs at you MPR/hr and you will get a good indication of OEE - how much of the time you’re using effectively – and how much more potential you have within the asset. Initially, don’t get hung up on whether your OEE is 67.8% or 69.3%. In both cases it’s telling you that there are improvements available. World class figures for OEE are generally accepted as 95% for single product plant and 85% for batch plants.

The discussion about OEE can (quite correctly) go on for a while for several reasons. It’s not always obvious where you bottleneck is and product changes mean that calculating the MPR can be more complicated. There are cases where external influences mean that the OEE figure is reduced (e.g. lack of sales.) Additionally, the reaction to a “low” figure has the tendency to make people feel defensive and it’s difficult to have a constructive conversation. Excellent operations get over this hurdle and see the opportunity to improve!

Whilst we’re talking about bottlenecks, if you’re not using 24hrs 7 days per week (minus maintenance time) making product, it’s interesting to ask - where is your bottleneck? Sales? Marketing? The Market?

Process Capability

Cpk reflects the quality performance of the business for some key parameters that are important to your customer. A high Cpk indicates that there is a low variance relative to the product specification and there is good centering within the specification limits. Keeping on top of Cpk means that you are assuring product quality.

Don’t be put off by the formulae, the quality department or the internet will have software to do the calculations. What you need to understand is the impact on your operation.

Obviously excellent operations strive for the renowned “6 Sigma” level where defects are virtually eliminated

Adherence to Production Plan

A high level of adherence to production plan will bring stability within the production environment. It brings predictability to resource and material planning and reduces the conflicts generated between sales and production when justified changes occur.

Good planning will also reduce unnecessary changes and their associated losses. Nothing starts the day off worse than coming into work for an unnecessary change - it’s a real productivity killer!

Maintenance Spend as % of Replacement Asset Value

This measure is important to ensure that you’re not consuming your assets, that maintenance levels are sufficient to keep the plant in good condition so that it can perform it’s function correctly.

The total cost is defined as all the costs incurred annually in maintaining the production assets including, Own Labour (fully over-headed cost), Spares holding costs, other internal maintenance costs, bought-in materials and bought in services. Capital projects in the maintenance budget are excluded.

The Asset Replacement Value is defined as “The value of a new plant of the same capacity & same technology if it were built today” or "How much would it take to put it down on the ground today?" If this is not available, the insured asset value can be used – but do a sanity check before you use it!

It is also important to be aware that a high maintenance spend does not necessarily mean high plant availability, the money must be spent wisely.

Unplanned Maintenance as % of Total Maintenance

This is a leading indicator of the health of maintenance management, a high value signals high costs associated with premium rates, overtime, rework and the disruptions caused by what is essentially a chaotic process.

Employee engagement

Absenteeism %

Unplanned, unauthorised absence can be an indicator of lack of employee engagement at work. Engagement is characterised by employees being committed to the organisation, believing in what it stands for and being prepared to go above and beyond what is expected of them to play their part in the team.

Aside from estimates that levels of low engagement can significantly reduce people productivity, there are costs associated with high levels of absenteeism including disruption to the quality and continuity of delivery, an increased workload and pressure for team members who take on other’s work, the time invested by managers and team leaders in resourcing and HR issues and the costs involved in hiring temporary or replacement staff.

If you have some form of Employment Engagement survey, this may supersede this measure, if not it’s good one to keep your eye on.

Average Training Days per Manufacturing Employee

This includes both “On-the-job” or informal training and development, activities that would be recognised as training by staff and training undertaken away from the individual’s immediate work position, whether on the employer’s premises or elsewhere.

Obviously competent people are necessary for operational excellence and cross skilling people will increase the resilience and robustness of you workforce. Excellent companies tend to go further in developing people outside of their immediate skill requirements – another motivation for people to be engaged.

Supplier Performance

If we’re giving excellent service to our customers, we should expect it from our critical suppliers therefore Supplier OTIF and Supplier Cpk as discussed in the Customer Service and Run Operations sections should be applied. There’s nothing worse than a disruption caused by a supplier – as your customer will be keen to tell you! Conversely businesses which are suppliers (including yours) can be proactive in supplying this data to their customers to enhance their relationships.

Working capital

With all the drives towards lean and just in time production, it’s almost unthinkable that people don’t know their Total Stock Turns and haven’t been driving the number up.

There are two main comments here. Firstly, excellent operations have stock turns in the high teens (what’s the average for your industry, what’s the best?).

Secondly removing stock in the form of Raw Materials, Work in Progress and Finished Goods introduces risk. Excellent businesses manage this risk thoroughly, looking at the system rather than stock in isolation. They look at implications throughout the supply chain, at their suppliers, at their processes, equipment and spares, and at the implications of loss of supply to their customers. When it comes to reducing stock at varying stages, they plan the process and use techniques such as “ghost warehouses” to test the theory before they fully commit.

It is of course worth the effort, removing stock can be a serious cash boost to a business in terms of working capital reduction and also represents a significant reduction in the ongoing business costs when the rate of interest, cost of warehousing, risk of obsolescence and damage are factored in.

Licence to Operate

Safety performance – Recordable Case Rate

An old favourite, but nonetheless important. The organisation required to provide a safe working environment has many parallels with the organisation required to provide a productive environment. I don’t need to remind you of the downsides of poor safety performance so here’s the measure.

Environmental loss containment

This looks at the Number of Loss of Containment occurrences (LOC events) in 12 months. These unplanned releases can include spillages, gaseous emissions to atmosphere or unauthorised outlet of material to a river. These can lead to drain on senior management time, fines, prosecutions and ultimately closures.

A. Unplanned, contained on site, readily controlled. e.g. reactor bursting disc failure, vessel overflow via overflow system
B. Unplanned, contained on site, less readily controlled, e.g. pipe, vessel, valve failure, inadequate isolation, any escape greater than 1 ton.
C. Detected or detectable off site, planned or unplanned but not giving rise to significant public concern or environmental damage. e.g. release greater than 1 ton; releases of particular toxic or visible material even if less than 1 ton.
D. Any release giving rise to clearly defined public concern, media attention or identifiable environmental change. e.g. material spillage that requires removal of contaminated land.

The metric is the numerical sum of A+B+C+D.

There are many more performance indicators that could be included, Major Feedstock Conversion Efficiency, Energy Efficiency, Unit Cost….

There are a whole host of engineering indicators, Weekly Maintenance Schedule Compliance %, Planned Maintenance Schedule Compliance %, Maintenance weeks of backlog, % of Technicians Time scheduled on a weekly Schedule, Overtime Maintenance as % of regular hours, Planned Maintenance hours as a % of total……… similarly with Safety and Environmental metrics.

Many of the major metrics breakdown e.g. OEE breaks into availability rate, product rate and quality rate, these may be more meaningful at a departmental level.

The performance metrics described are high level and as with the practices are certainly not new. Once again excellent operations have recognised that knowing the values and trends of the metrics allows you to understand the trajectory of the business, they also understand that metrics are not an end in themselves.

They, like you, must recognise that what is important is agreeing and then actually manipulating the levers that can be pulled to improve your practices and therefore performance.

Remember that your business does not need to be the best in all the performance metrics. What’s important is considering the ones I’ve proposed (and others), recognising and agreeing and actioning the critical ones in your environment that can help you to improve.

I hope that during your conversations about Operational Excellence, these Performance Metrics will help to set a relevant agenda for discussion.

Once again, I trust that this has been a worthwhile investment of your time. I’m planning to publish two more articles, about “culture” and about “how to pull the levers”. If you would like to join the conversation or add to this one, please leave a comment or give me a call on
0788 5524 208.

Mike Johnson

I am a seasoned Consultant with 16 years' experience in delivering results through diagnosis, planning and execution across a range of industries. My career path has been though Engineering…

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