What is the best way to evaluate different suppliers with low or high price differences?
There are two different approaches.
Price based on Cost of sole investment together with the start-up, as we call Capital Expenditure (CAPEX) or one can consider what a packaging machine supplier could offer to optimize specially the Operation Expenditure Cost (OPEX) and the Total Cost of Ownership.
The purpose of this article is to invite food manufacturers to work together with their preferred packaging supplier, using the TCO approach, to understand how the operation expenditure could be reduced along the life - cycle of the machinery.
The mission is to optimize the future cash - flow based on the efficiency, flexibility, availability and reliability of our equipment. TCO is important because CAPEX represents only 5 to 15% of the TCO. Based on experience in several projects delivered over the years, it is a must to deliver the right technology at the right price to optimize the 85% - 95% of your TCO.
A company approaching an investment in a wrapping line has to find and avoid the hidden costs that are usually beneath the surface and not clearly visible during the negotiation, but which usually represent, as an iceberg, the most critical and dangerous ones.
TCO was developed by the American Defence department to evaluate the Arms life cycle: when a packaging machine does not perform the target efficiency, we, as suppliers and customers are like soldiers at war with a tank break - down. 80% life cycle costs depend on how well the system/machine was designed, that is why a well-though process of joint design and testing is key to deliver superior returns on investment.
We could consider the TCO on two levels:
Capital Expenditure cost (CAPEX):
1) Engineering for developing ideas, the evaluation of technical solutions and customization:
2) Investment cost
3) Commissioning and start-up cost
Operation Expenditure cost (OPEX):
Company losses due to maintenance, sanitation or changeovers, unplanned corrective maintenance losses, speed losses and low quality, strongly impact costs, energy, as well as raw and packaging material consumption. There also are other hidden costs such as space occupancy or end of life cycle dismissing cost. Performance, availability and quality together are calculated by the OEE rate and they have a strong influence on operation expenditure cost.
OEE, Overall Equipment Effectiveness, is the rate between what a machine theoretically could produce and what it actually did.
For example: if we assume that our packaging system has a theoretical maximum speed of 60 products per minute, you know that at the end of a 480 minutes shift there should be 28.800 units.
1 shift = 8 hours = 480 minutes
480 x 60 = 28.800 units
Then we need to count what we produced at the end point in the production process, such as what’s on the pallet going to the warehouse. If there are only 25.632 units on the pallet, your effectiveness was 89 %
OEE = A x P x Q
OEE formula includes Availability (A), Performance (P) and Quality (Q)
Availability: if we lose 19 minutes of machine downtime during the shift.
RUN TIME = 480-19 = 461 minutes
A = 461:480 = 96 %
Performance: if the theoretical maximum speed of our system is 60ppm, the ideal cycle time will be 1 second per product.
This means in the remaining 461 minutes, the system can wrap 461 x 60 products = 27.660.
If production had been at a slower SPEED (cycle time = 1,053 sec), in the same time we wrapped 461 x 60 : 1,053 = 26267 products
P = 26.267 : 27.660 = 95 %
5 % x 461 = 23 minutes lost performance
Quality: at this point if from the 26.267 products, there were 525 out of specification, the quality rate of those products would be:
Q = 25.742 : 26.267 = 98%
525 scraps: 60 ppm = 9 minutes lost quality
(480 – (19 + 23 + 9)) : 480 = 89% OEE
25.742 : 28.800 = 89% OEE
A x P x Q = 96% x 95% x 98% = 89 % OEE
If we lose 3.058 products because the machine ran flawlessly, with no quality loss but at half the maximum speed, that’s completely different from producing 28.800 products at full speed and then dumping 3.058 out-of-spec products into the landfill.
Consequently OEE, when broken into its three main components, is going to track down where we lost it.
OEE is purely time based and as the ideal cycle equals one product, a stop of 5 minutes means a loss of 300 potential products we should have made.
Reaching a 94 - 95% OEE is a wonderful result. Even an 89% OEE system is a very good system!
We could split downtime of any machine or system into two parts:
• Planned downtime events
• Unplanned downtime events
Planned events can be defined as those events in which no output of saleable products results, and over which management controls the timing and extent of the activity. (Paul J. Zepf, 2014)
When writing this article, we have chosen to consider planned downtime events as part of the Global Efficiency and to consider only unplanned downtime events as those ones who can touch the OEE availability.
Consequently, Global Efficiency includes maintenance, sanitation and change-over time. This percentage is a rate lower than OEE: according to our experience, an 80% GE is a good value.
GLOBAL EFFICIENCY & OEE
In the following examples, we will compare the same system but with two different values of OEE:
• OEE 89%
• OEE 80%
We can appreciate how much OEE influences the costs of life cycle of the system.
Assumptions to calculate the TCO:
Plant is European based
Product: swiss - roll enrobed
Street-price: 0,17€ / 30 gr. a piece
Last but not least, it’s important to consider ALL the other operational costs such as:
• Labour cost for operators, maintenance and engineers
• Packaging and raw material
• Spare parts on stock
• And many others
Every day that we run 80 or 89% OEE, we can lose units in different ways and every loss has its own cost structure. Here is an example of TCO costs structure where we show differences in OPEX costs for the same system in two cases: 89% OEE and 80% OEE.
TCO takes into consideration all the CAPEX and OPEX costs along the life cycle of the plant, from its design, to its use and maintenance, to decommissioning the plant. Customers could use different life-cycle periods according to its strategy: 5 years, 7 years, even 15 years.
This example shows how important it is to choose a reliable partner for a packaging machine investment, one that makes expensive cheap.
How to leverage TCO strategically
Why is it important to approach a packaging investment with a TCO:
• To identify the different cost drivers
• To improve efficiency
• To evaluate and compare different investments and prices
• To have a guideline to support a maintenance global agreement
• To prepare a dedicated corrective and preventive maintenance plan
• To offer the right technology at the right price
• To improve A WIN-WIN partnership between customer and supplier