This is the whole calculation. It takes longer to schedule the meeting about it than to do it.
The four inputs
1. Design rate. Units per hour the asset was built to produce. Start with the nameplate or the original equipment documentation.
2. Scheduled hours. Hours in a representative month that the plant asked this asset to produce. Exclude unstaffed shifts and planned shutdowns.
3. Actual good output. Units in that same month that were saleable. Good output, not gross output. Anything reworked or scrapped consumed a constraint hour you cannot resell.
4. Contribution margin per unit. Price less variable cost, sourced from finance in writing.
The arithmetic
Design rate times scheduled hours gives design output.
Design output less actual good output gives the hidden plant in units.
Hidden plant units times contribution margin gives your hidden margin.
For our packaging line: 600 bags per hour times 417 hours is 250,000 bags. Less 162,500 actual gives 87,500 bags. At $10 per bag, $875,000 a month, $10.5mm a year, one asset.
When the design rate is a problem
This is where most people stall, so here is how to handle each case.
The nameplate is missing. Ask the original equipment manufacturer, who will usually have it against the serial number. Failing that, use the best sustained rate the asset has actually demonstrated, documented from a production log rather than from memory.
The nameplate is obviously inflated. Common, particularly where the asset was specified for a different product or package format than it now runs. Use the best sustained demonstrated rate instead and note the substitution in your assumptions.
Nobody agrees on it. Ask two people who have run the asset at its best what it does on a good day. Take the lower figure. You are not trying to win an argument about the ceiling. You are trying to establish a number that survives challenge, and the conservative version does that better.
The principle throughout: a defensible number you can hold beats an ambitious number you have to retreat from. Every point you concede on the design rate makes the remaining figure harder to dismiss.
Write down your assumptions as you go
Four lines is enough.
Design rate, and where it came from. Scheduled hours, and what you excluded. Actual good output, and whether it is good or gross. Contribution margin, and who at finance provided it.
Those four lines are what turn your figure from an opinion into a calculation. The first person who challenges the number will challenge one of them, and having the answer ready is what ends the challenge rather than starting a debate.
Expect it to feel too big
It will. Nearly everyone’s first reaction to their own hidden plant figure is that it must be wrong, because a number that size would surely have been noticed.
It has not been noticed because nothing in the reporting system was built to notice it. The P&L cannot see uncollected capacity. The plan has already absorbed the losses. OEE, where it is tracked at all, is frequently reported as a percentage without ever being converted into money.
Do not shrink the number to make it comfortable. Test it, which is exactly what the next two weeks are for. If your counted losses land within about ten percent of your calculated gap, the number was right.
Your twenty minutes
Run the four inputs. Write the four assumption lines. Put the result in one sentence: this asset gives away X dollars of contribution margin per year at current performance.
Then carry that sentence into next week, where we start finding out where the hours actually went.
