From shop floor to bottom line

Andy Bates, European Business Manager at Rockwell Automation recommends that the accountants talk to the factory engineers.

In today’s merger and acquisition driven market, it is vital that engineers and accountants are able to communicate effectively recognise the key role they play in the financial future of their companies.

At a recent series of DTi-supported seminars for manufacturing engineers, the audience was asked if their company had been taken over or had taken over another company during the past 12 months.

At each event, around two thirds of the participants raised their hands, and expectations of involvement in future takeover activity were even higher.

The price an acquisitive company would have to pay for a potential takeover target often bears little relation to its net worth. Perception of the future prospects of the company can be much more significant.

Share value is strongly influenced by analysts, who use their knowledge of a company’s structure, strategy, and performance to advise investors.

The key measurement of performance that impacts on the all-important price to earnings (P/E) ratio is return on net assets (RONA). This figure quantifies how well a manufacturing enterprise exploits its assets. Maximising output of high value product while minimising the value of assets shown on the balance sheet optimises RONA, and so boosts the P/E ratio.

This asset productivity typically comprises two measures – utilisation, or how intensively an asset is used in the manufacturing process, and effectiveness, or how much of the time an asset is capable of carrying out its function. The third latter is measured using and perhaps most important indicator that needs to be understood and improved is overall equipment eEfficiency effective-ness (OEE), the ratio of actual output from a particular piece of machinery compared with its theoretical maximum, and has a direct bearing on RONA.

Although OEE scores average around 40%, in many manufacturing enterprises OEE it can be as low as 20-30%, while a world class figure is 85-90% or above. Moving OEE from 20% to 80% effectively quadruples capacity without building three new factories, working wonders for RONA and P/E. An OEE score has two separate components – plant availability and utilisation.

An effective manufacturing execution system (MES) will yield the next big gains in OEE scores asset productivity.

Integrating such systems as scheduling, maintenance planning, condition monitoring and simulation into an effective manufacturing execution system (MES) will yield the next big gains in asset productivity.

The companies that succeed will be on the acquisition trail – those that fail had better hope for understanding shareholders.