The overall equipment effectiveness (OEE) is a measure often used to calculate the return on assets in a business. Did you know it can help you measure the performance of your ERP system?
Calculating and Utilizing OEE
Well known by thousands of manufacturers, OEE allows to identify which processes need improvements by considering many different factors that influence the efficiency of their operations. To calculate OEE, we must multiply 3 distinct performance indicators:
Availability Rate
X
Performance Rate
X
Quality Rate
= Overall Equipment Effectiveness Rate
An example of how OEE can be calculated follows:
- Availability Rate of 80%
- Performance Rate of 90%
- Quality Rate of 95%
The OEE would be 68.4% (80% X 90% X 95%).
Although each category was over 80%, the overall rate is lower than expected. A company with ambitions to operate at a world class level would not be satisfied with this result.
The Overall Equipment Effectiveness of an ERP System
The concept of analyzing the return on assets also applies to our information systems. To measure the performance of an ERP using the OEE framework, we can calculate the following:
Usage Rate / Availability of Functions
X
Quality Rate of Transactional Data
X
Quality Rate of Master Data
= OEE of an ERP
Master Data vs. Transactional Data
The accuracy of information provided by the ERP system depends greatly on the quality of the input data. The two types of ERP inputs include: Master Data and Transactional Data.
Master Data is generally static. However, it is important to update it periodically to ensure accuracy. This data can be used as a reference to the different transactions of an ERP system, such as materials, customers, vendors, bill of materials, routings, etc.
Transactional data changes over time and deals with day to day activities of the business. It is dynamic data sustaining several aspects of the business: purchase orders, customer orders, invoices, production orders, stock levels, etc.
This data is often generated through basic business activities. For example, production orders can be generated according to inventory management parameters on the material master file and from the routings, which specifies the operations to perform. On the other hand, the purchase orders of raw materials can be generated based on the bill of materials of the product to be manufactured.
ERP Functions in Supply Chain Management
Managing supply chain functions are often at the core of daily operations, and this is heavily sustained by the ERP. This data is leveraged all across the supply chain, including processing customer orders, invoicing, production planning, purchasing, and distribution and warehouse logistics. It’s through these functions that companies can monetize their investment in technology.
Remember, in order to be effective, these functional improvements must be based on accurate data.
Why Master Data is Critical
Since transactional data and ERP functionalities are largely based on Master Data, it is crucial that it remains accurate in order to generate added value expected from an ERP system. Continuous updating of Master Data is a recurring challenge that most organizations fail to meet.
Business decisions are much easier to justify when we can rely on accurate information and insights provided by our ERP. However, due to data uncertainties, the ERP can often be put into question by its users.
How to Calculate the OEE of an ERP?
Usage Rate / Availability of Functions
Many ERP users have limited knowledge of the functionalities available to them. Consequently, this creates underutilization of the system and results in them completing low value activities. Measuring the system usage rate allows us to determine if any changes are needed to the system configuration or if an update to training is needed in order to improve the user’s efficiency.
In some cases, the required functionality is simply not present in the ERP system. If too many important features are missing, it might be a great idea to re-evaluate your current ERP system. Experience shows us that more advanced systems generally have the necessary functionalities needed, and there is little need for custom workarounds.
As an example, imagine a company that is currently using and disposing of 180 out of 200 available features that are important to their business. Their ERP usage rate would be 90%.
Quality Rate of Transactional Data
Once you’ve assessed the use of your ERP system functionalities, you must ensure that the data on which its functions are based are accurate. Quantities of stock, production orders and delivery orders are examples of supply chain inputs which must be accurate for the ERP system to work correctly.
For example, if 48 out of 60 items of transactional data are accurate, then their input data quality level would be of 80%.
Quality Rate of Master Data
Like we said before, the functionalities of an ERP take their foundation from Master data. It’s imperative that this data remains accurate and updated throughout time. The determination of the values of Master Data is certainly a key element, but the frequency on which we update this information is essential.
For example, if a company can confirm that 4,250 records of a total of 5,000 records contain accurate values that are revised on a fixed calendar, then at their Master Data quality rate would be of 85%.
In this example, the OEE of our ERP is calculated by:
Usage Rate / Availability of Functions
90%
X
Quality Rate of Transactional Data
80%
X
Quality Rate of Master Data
85%
Operational Equipment Effectiveness = 61.2 %
Too often, we see companies that don’t realize the full value that an ERP system can offer. The approach we’re proposing is first designed to measure their current usage and highlight the performance issues of the ERP.
Our methodology contains a step of diagnosis, where we analyze processes, functionalities, users’ skills and the data accuracy. Based on the gaps we identified between your current model and your business objectives, recommendations will be formulated in an ERP improvement plan. Contact us!
