In a low margin manufacturing environment a strategic imperative is to be able to use your assets more productively than your competitors. By increasing the utilisation of machinery, your fixed costs as a percentage of your average unit costs is lowered, which reduces the overall average unit cost. Additionally, by reducing scrap you are able to save on raw material costs which once again lowers the average unit cost. Both of these factors are accounted for in the Overall Equipment Effectiveness (OEE) figure. OEE is a function of downtime, uptime equipment efficiency and scrap, and is used extensively in manufacturing. The graphic shows baseline levels of OEE and ROA for a manufacturing company, and the subsequent hypothetical levels of OEE and ROA (Return on Assets) under differing changes in downtime, EE (Equipment Efficiency) and scrap. It can be seen that a 10% improvement in downtime, a 10% improvement in EE and a 5% improvement in scrap together would have the effect of almost tripling the ROA of this company.
