JMAC Consultant Tips: Concept of Loss Improvement #3 ~Quantitative Evaluation of Loss (Cost Evaluation and Efficiency Evaluation)~ Total Productive Maintenance - TPM

Monetary Evaluation of Loss

Loss must be quantitatively understood (evaluated monetary). Of course, some losses are difficult to evaluate in monetary terms. For example, for man-hour losses in indirect departments and purchase cost losses, even if cost calculation is possible, it is difficult to evaluate the cost of periods to create PL (Profit and Loss Statement). Therefore, a simple and easy-to-understand method for calculating the monetary evaluation of losses will be explained here.

For example, let's assume there was a breakdown loss that caused a 60-minute stop per day. Three operators are working on this line. Some may argue that there is no waste of time because when it stops, they assist other lines or help until the recovery, but in this case  we will calculate assuming it was wasted time.

60 minutes × 3 people × @charge rate (designated value) 

The charge rate (designated value) varies depending on the workplace, so please set it arbitrarily. In this case, let's consider it to be around 30 to 50 USD. For other losses, if actual costs have been incurred, you can simply add that amount separately. For the strictness and accuracy of cost evaluation, please refer to other information sources on Loss and Cost.

Reference: JMAC Consultant Tips

Concept of Loss Improvement #1 ~ What is Loss? ~ Total Productive Maintenance - TPM /news/details/6526.html

Concept of Loss Improvement #2 ~ 16 Major Losses (+α) ~ Total Productive Maintenance - TPM /news/details/6529.html

Losses are evaluated in terms of monetary value, and there is a management approach called Loss Cost Management for reducing costs. This method focuses on reducing costs across the entire factory.

The steps are as follows:

• Set cost reduction goals

• Identify losses to reduce costs

• Implement loss improvement

• Confirm the contribution of loss improvement

In this example, costs are categorized into fixed costs, variable costs, and logistics costs, and the relationship between losses and costs is represented in a tree structure. Each graph is designed for management purposes to show the improvement targets and achievements. As the improvement of losses is associated with costs, when improving losses in the tree's lower-level, the upper-level cost graphs will change accordingly. It is important to visualize and manage the relationship between losses and costs in a way that contributes to cost reduction.

Productivity evaluation according to the size of losses (Overall Equipment Effectiveness)

There is an efficiency evaluation (productivity evaluation) that has been traditionally used as a loss evaluation.

For equipment, indicators such as equipment utilization rate and overall equipment effectiveness, for labor, labor productivity, and for materials, material yield rate are mentioned. Each of these indicators is an important measure to understand the occurrence ratio of losses even without monetary evaluation.

As a reference, Overall Equipment Effectiveness calculates equipment losses to determine how effectively equipment is being used and assesses the operational status of the equipment.

The calculation method involves multiplying the following three rates together to calculate. Generally, the value often falls between 50% to 60%.

Overall Equipment  Effectiveness = Time Utilization Rate × Performance Utilization Rate × Yield Rate

(1) Time Utilization Rate 

The Time Utilization Rate is expressed by the following formula, which represents the ratio of actual operating time to the loading time (time when the equipment needs to be in operation): 

Time Utilization Rate = (Load Time - Downtime) / Loading Time

The loading  time refers to the available operating time in a day (or month) minus the planned downtime for production scheduling, planned maintenance, and daily management (morning meetings, etc.) Downtime, on the other hand, is the time stopped due to issues like breakdowns, setups, adjustments, and tool changes. For example, if the daily loading time is 460 minutes and there was 60 minutes of downtime due to breakdowns (20 minutes), setups (20 minutes), and adjustments (20 minutes), the daily operational time would be 460 - 60 = 400 minutes. In this case, the Time Utilization Rate would be approximately 87%.

(2) Performance Utilization Rate 

The Performance Utilization Rate consists of Speed Utilization Rate and Net Operating Rate. Speed Utilization Rate indicates the difference in speed, representing the ratio of actual speed to the capacity the equipment inherently possesses (cycle time/strokes). It assesses whether the equipment is operating at the designated speed (reference speed or cycle time). For example, if the reference speed is 0.5 minutes per piece and the actual speed is 0.8 minutes per piece, the Speed Utilization Rate in this case would be 62.5%. It highlights the size of the loss if the equipment is operating at a reduced speed, and it is expressed by the following formula:

Speed Utilization Rate = Reference Cycle Time/Actual Cycle Time

Furthermore, Net Operating Rate reveals whether the equipment is operating at a constant speed within a unit of time. It does not assess whether the equipment is faster or slower than the reference speed. Even if the speed is slow, it evaluates if the equipment can stably operate at that speed for an extended period. For example, if the processed quantity is 400 pieces with 8 defects, the Net Operating Rate in this case would be 80%. This enables the calculation of losses due to minor stops, and losses caused by minor issues that may not be reported in daily logs.

Net Operating Rate = (Actual Cycle Time × Processed Quantity) / Operating Time

And, the Performance Utilization Rate can be calculated by the following formula:

Performance Utilization Rate = Speed Utilization Rate × Net Operating Rate = 0.625 × 0.8 = 50%

(3) Yield Rate 

Yield Rate is the ratio of the actual number of good products produced to the total processed or input quantity (raw materials, materials, etc.). For example, if the processed quantity is 400 pieces and there are 8 defective pieces, the Yield Rate in this case would be 98%. The defective quantity includes not only scrapped defects but also reworked products

Yield Rate = (Processed Quantity - Defective Quantity) / Processed Quantity

Overall Equipment Effectiveness = Time Utilization Rate × Performance Utilization Rate × Yield Rate 

= 0.87 × 0.5 × 0.98 ≈ 42.6%

In this example, the Overall Equipment Effectiveness is at 42.6%, which is in a very poor state. This is due to the low Speed Utilization Rate and Net Operating Rate. Therefore, the corresponding measures would involve increasing the speed and addressing minor stoppages.

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●Author profiles

Nobuhiro Otsuka, Chief TPM Consultant

After joining the Japan Institute of Plant Maintenance (JIPM), Nobuhiro has been working on projects to improve productivity, reduce costs, and improve quality in the metal products, electrical and electronic parts, automotive, food and beverage, pharmaceutical and medical products, and paper industries. Nobuhiro provides consulting support from both a Gemba (shopfloor) perspective and a management perspective. Supports many companies both domestically and overseas. Currently works on a wide range of projects including TPM, cost management/cost reduction, quality improvement, industrial engineering, factory layout planning, purchasing/procurement, etc.

Katsunori Kanegae, Chief TPM Consultant, Director of TPM Consulting Business

After working as a production engineer at an electrical manufacturer, Katsunori became a consultant. As an expert in production strategy, production methods, and equipment management, he has been supporting domestic and international manufacturing companies in productivity improvement, cost management, defect reduction, inventory reduction, and lead time improvement projects. His expertise extends to researching advanced equipment maintenance technology and working on digital transformation in equipment maintenance. He also has authored numerous articles on digital transformation.