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FLEXO Magazine : February 2014
In Chart 3, Ernst & Young compares earnings before interest, taxes, depreciation and amortization (EBITDA) with capex. While the overall trend indicates more investment yields higher earnings, “the outliers are suggestive of what can happen when companies get this wrong.” Capex should be analyzed on a printer by printer basis. QUESTIONS TO ASK: • Am I investing in new technologies to improve process efficiency? • What is the true “sustaining” capex requirement of my business and what drives this? • Am I assessing the payback of major capex projects effectively and what paybacks am I getting? Ernst & Young, instead, proposes “the concept of ‘sustain- ing’ capex as the expenditure required to support the revenue and EBITDA margin of the business as it stands. ” T his sustain- ing capex can affect future cash flows, and not meeting the targeted sustaining capex spending will lead to what Ernst & Young calls a “capex backlog.” Determining what sustaining capex is, is an important and ongoing mission for a printer. Ultimately, approving expenditures should incorporate these ideas as well as return on investment requirements and post investment reviews. OPERATIONAL PERFORMANCE Measuring key performance indicators (KPIs) is essential to ensuring continuous operational improvement (See Chart 4). The question then becomes: What indicators should be measured? “Not all packaging businesses use the right metrics, have consistent measurement across production sites or even the means to collect and analyze the data,” Ernst & Young reports. “Some have the means, but don’t do anything with the information.” A metric hierarchy used by a number of top performers is overall equipment effectiveness (OEE). Ernst & Young says this is especially applicable to the packaging sector. OEE is expressed as a percentage, with 100 percent “representing perfect conversion of the inputs into product without any loss- es.” T he loss sources and the areas they stem from are: • Availability losses, coming from machine downtime, due to changeovers, maintenance or repairs • Performance losses, coming from machinery operating slower than it is expected to, due to inexperienced crews or product mix and formulation changes • Quality losses, coming from scrap produced but not suitable for sale Some companies use automated systems to collect OEE data, which is analyzed through enterprise resource planning systems. Regular review sessions are also conducted, where underperforming areas are scrutinized and improvements are spotlighted. Other metrics that companies pay attention to are days sales outstanding, days payable outstanding and days inventory outstanding. QUESTIONS TO ASK: • Are we utilizing the potential of installed shop floor systems to simplify and harmonize the collection of KPI information? • Are OEE and other key metrics consistently measured and applied across my business? • Are these being used to monitor and drive performance improvements and diagnose issues? Of course, all of the data analyzing and production streamlining are for naught if they are not implemented on a company wide level. “Pivotal to the success of working capital initiatives is the implementation of a culture whereby all staff, including those on the factory floor, are aware of the initiatives Chart 3: Comparing earnings before interest, taxes, depreciation and amortization (EBITDA) and capital expenditure (capex) can provide insight in returns on investment. Chart 4: Measurements like total waste and on time in full delivery (OTIF) help paint an accurate picture of a company’s efficiency and build the right key performance indicators (KPIs). 60 FLEXO FEBRUARY 2014 www.flexography.org