REVISITING OEE AND TCO: PARAMETERS THAT AFFECT CRITICAL PURCHASE DECISIONS

One of the cornerstones of any production enterprise is technology: the latest and best technology. Technology has influenced production by improving productivity while using less time, human resources and materials. Often, these are the same factors that are considered while evaluating any capital equipment. Mechanization not only offers a standard output of a given product, but it also reduces the influence of human skill and training.

Recently, Nice Insight conducted a global survey of 560 purchasing decision-makers from various types of buying groups in the pharmaceutical and biotech industries in North America (47%), Europe (25%) and Asia (28%)[1]. The survey highlighted the need for new types of equipment and technologies to meet the changing nature of drug development, with an accelerating growth rate of specialty drugs, biopharmaceuticals, biosimilars, and increased use of genetics. These therapies have also reflected in a change in purchase patterns: a 69% increase in equipment budgets from 2013 to 2015. Markets around the globe need safe, high-quality, consistent, and highly efficient operations. Spending on equipment is focused on highly targeted technology and services.

With increased demand for pharmaceutical equipment and machinery, capital investments and purchase decisions have become to be made carefully to achieve cost-optimization. The aim of this article is to understand and analyze two of the most fundamental factors that are considered while making key purchase decisions like buying of pharmaceutical processing and production machinery: overall equipment effectiveness (OEE) and total cost of ownership (TCO).

OEE

OEE is an important parameter used for a pharmaceutical equipment buying decision. OEE, originally described by Seiichi Nakajima in the 1960s, determines the effective utilization of manufacturing operation.

OEE is calculated using the formula[2]: OEE (%) = Availability rate × Performance rate × Quality rate

Availability rate2 (percentage of time the machine is ready to produce, working properly, and not during changeovers or adjustments) = Available time (scheduled operating time − downtime) 

                                                                   Scheduled operating time

Performance rate2 (ratio of output produced compared to a standard) = Actual output 

                                                                                                                                   Standard output

Quality rate2 (ratio of good output compared to actual output) = Right-first-time output

                                                                                                                           Actual output

As the outcomes of OEE are stated in generic terms, OEE allows one to compare manufacturing units in different industries. However, care should be taken while implementing OEE as it is not an absolute measure.

The ISPE document mentions that:

“Levels of OEE performance are highly variable and it is important to set expectations accordingly. A continuous processing plant in oil or chemicals will often have OEE rates in the high 90%s. A multi-product, sterile pharmaceutical packaging line will often have OEE rate less than 10%. It is therefore important to recognize the target levels achievable for the equipment on which you are focused.”[3]

Thus, OEE works best when utilized for determining the scope and steps for process performance improvement1 and not for an individual machine or component. Further, it is important to factor-in substandard production and other production factors while calculating OEE. These include:

  • Operator Efficiency/ Human factor: During cleaning and changeover, a crucial part of the batch pharma manufacturing process, it is the skill and expertise of the operator that affects both Availability and Quality. Despite giving the same training to all personnel and keeping other variables constant, it is likely that two operators will demonstrate a different level of proficiency and speed.
  • Numerous stages where material transfer and storage are involved. Buffering of production is not a characteristic of a true online system. For such a system, OEE is an adjusted metric and not truly representative.

Although OEE alone is not a true and accurate performance characteristic or metric that can be applied to a single piece of equipment, over time it has become an integral part of the equipment purchase process. Pharmaceutical equipment manufacturers need to acknowledge that OEE calculations and improvements are to be done in situ at the plants where these machines are installed and the production is ongoing.

Further, factors other than OEE should also be considered. One such factor is the cost or price of the equipment determined by assessing TCO.

TCO

When evaluating capital goods, purchase cost receives maximum consideration. Its impact on the total life cycle of the equipment is also considered. The analysis of equipment’s projected output versus the total estimated inputs is the crux of the TCO analysis of that piece of equipment. TCO analysis can provide valuable information on the viability of any capital investment. (Note: TCO is extensively used in other industries as well, such as computer software and services, but to the extent of this article, only capital goods are considered.)

TCO takes into account the total cost of acquisition and operating costs including the costs related to replacement or upgrades at the end of the life cycle.

Few other costs associated with TCO in pharma equipment manufacturing are:

  • Space cost: footprint and volume displaced by the equipment
  • Spares cost: a function of both, the cost of the spares and frequency of replacement
  • Power consumption
  • Water consumption
  • Ease of operation: this is a complex variable that includes
    1. Ease of changeovers, speed, and time
    2. Training required for operators to be proficient in the system
    3. Ancillary equipment required to run the equipment at peak efficiency
  • Number of scheduled maintenance stops

TCO is often used by equipment manufacturers to show how their equipment, though of higher initial cost, is more cost-effective in the long run. Thus, TCO is gaining more relevance given the rising cost of power, greater concern over consumption of water and the resulting effluents, the impact of these on the planet, and the ever-rising human cost.

There are, however, certain trends that equipment buyers must be wary of:

  • Under the pretext of a lower TCO, equipment manufacturers offer unnecessary features and options. For example – An expensive direct drive where a geared one does not make much of a difference in performance but adds substantially to the cost.
  • Place of origin: Many manufacturers take a country premium i.e. for a machine of similar capacity, they may charge more if made in a developed country in comparison with the one made in a developing country.
  • Sometimes there will be minor specification changes made to justify the differences, such as multiple certifications, a higher rating of motors, newer models, and more comprehensive warranties. Not all specifications have an impact on productivity. Buyers should evaluate each of these in terms of cost vs benefits.

What affects TCO?

There are many routes to attain an accurate TCO. The best one is an all-around approach to lower TCO. But sometimes certain factors contribute more. A few examples will illustrate the point:

  1. Consider a fully automatic bin washing system (B) that saves up to 50% of water. In comparison with a manual washing system (C), B costs twice as much. However, there are other automatic washing systems (A) that are twice as expensive as B but do not conserve water as much.

Here, the lower input cost of the manual system (C) is offset by the fact that it is not an automated machine. The more expensive systems (A) provide efficient cleaning with validation. However, they are twice as expensive as B and do not conserve water as much as B. Thus, in this case, all other factors being equal, option B emerges stronger, despite the high initial cost as compared to C, lower manual cost than A, and more water-saving than A and C.

 

  1. A tablet press buyer needs the machine for pilot and test batches only and does not need to run the press around the clock. A key concern of the buyer is that the material used is in short supply. Machines that lead to wastage will not be preferred. He compares two presses and finds that both (A and B) are similar in capacity. While both are from reputed companies, there is a large price discrepancy: press A has an established performance and is made in a developed country. Thus, it commands a premium price. Press B is a new introduction from a reputed company from a developing country. Press B offers the same features as A, but in addition saves almost 3 times as much powder due to its design. Thus, the reputation of the company, design and lower initial cost makes the buyer decide in favor of B as it meets the specific requirements.

 

These are just two examples of when the concept of TCO needs to be applied in an unorthodox fashion. The purpose of these examples was to convey that the mix of each piece of equipment, application, and circumstance is almost unique, and hence, needs to be approached as such.

 

Summary

 

OEE and TCO are important tools that buyers can use for effective purchase decisions. While OEE is more specific in that it concerns itself only with performance, TCO includes both cost and productivity in the data analysis.

 

However, the two tools described in this article only scratch the surface of the process of choosing the right pharmaceutical equipment that can improve production in a cost-effective manner. It is important for buyers to expand their knowledge on this subject. Some organizations such as The Association for Packaging and Processing Technologies (PMMI) and the International Society for Pharmaceutical Engineering (ISPE) have actively made resources available that can assist buyers for effectively approaching critical buying decisions.

 

 

References:

[1] Nice Insight Pharmaceutical Equipment Report, April 2015. Available from: http://www.niceinsightpharmaequipment.com

 

[2] Calculate OEE. Available from: http://www.oee.com/calculating-oee.html

[3] Overall Equipment Effectiveness (OEE) and its Application in Phar ma/Biopharma Manufacturing.

Available from: https://www.ispe.org/omcop/oee-oct2010-oee-basic-philosophy-definitions-part1-4.pdf

 

 

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