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Improving overall equipment cost loss adding cost of

quality
a
R. Wudhikarn
a
College of Arts, Media and Technology, Chiang Mai University, 239 , Chiang Mai, 50200 ,
Thailand
Published online: 07 Jul 2011.

To cite this article: R. Wudhikarn (2012) Improving overall equipment cost loss adding cost of quality, International Journal
of Production Research, 50:12, 3434-3449, DOI: 10.1080/00207543.2011.587841

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 International Journal of Production Research
Vol. 50, No. 12, 15 June 2012, 3434–3449

Improving overall equipment cost loss adding cost of quality

R. Wudhikarn*

College of Arts, Media and Technology, Chiang Mai University, 239, Chiang Mai, 50200, Thailand
(Received 27 May 2010; final version received 8 April 2011)

This research has the objective of improving indicators for evaluating losses of equipment. It also proposes a
newly developed computing methodology for estimating the quantitative losses in monetary unit. The
presented methodology is to calculate losses following overall equipment effectiveness (OEE) consisting of
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opportunity and production cost losses and also from cost of quality (COQ) approaches. This method
eliminates some of OEE’s weaknesses and expands scope from overall equipment cost loss (OECL).
The proposed calculating methodology is demonstrated by applying to a real manufacturer of
equipment. This newly improved model can prioritise problematic equipment more appropriately
than OEE and OECL.
Keywords: performance measurement; overall equipment effectiveness; overall equipment cost loss; cost of
quality; total preventive maintenance

1. Introduction
Nowadays, business organisations are confronted with a complex and competitive environment. This circumstance
forces manufacturers to improve their quality, price and also delivery time in order to have an advantage over their
competitors. In these circumstances, increased competiveness and demand stimulate manufacturers to increase
production capacity by replacing human labour with automatic machines. Machines have greater reliability,
capacity, and also lower error and operating costs, than humans. Nevertheless the advantages only arise when the
machines perform with higher effectiveness and efficiency. Therefore to attain higher prosperity a management
system is required and one of the management systems commonly used is total preventive maintenance (TPM).
TPM is adopted in order to strengthen the manufacturing business performance and to achieve world-class
performance (McKone et al. 2001, Swanson 2001). However, a management system necessarily requires an
appropriate information system to evaluate operating performance. The information gathered from operating
machines is crucial for sustaining organisations. Management levels are able to make better decisions from these and
also manage their production systems more effectively and efficiently. Appropriate measurement is necessarily
established for these purposes (Nachiappan and Anantharam 2001). Ericsson (1997) indicated that accurate
equipment performance information is essential to the success and long-term effectiveness of TPM activities. One of
the important and widely used metrics of performance in manufacturing is overall equipment effectiveness (OEE),
especially for firms applying TPM. OEE is a valuable tool that can help management to unleash hidden capacity and
therefore reduce overtime expenditure and allow deferral of major capital investment (Muchiri and Pintelon 2006).
Furthermore, it is not only as an operational measure, but also as an indicator of process improvement activities
within a manufacturing environment (Dal et al. 2000). OEE is a simple indicator but still comprehensive. Moreover,
it is an effective way of analysing the efficiency of a single machine and also an integrated machinery system
(Ljungberg 1998). Several studies (Kotze 1993, Lesshammer 1999, Wudhikarn and Manopiniwes 2010) implemented
OEE which resulted in major improvements. However, OEE and other adapted measurement are not suitable for
use in some conditions; for example, when applied to compare differences in machine type, capacity and also
operating cost. Therefore, many researchers attempted to improve its weaknesses.
A proposal of this study is to improve weaknesses of OEE by developing the existing calculating methodology.
For the remainder of this study, the theoretical concept of OEE measurement is considered first, then the problems
and development of OEE are examined and discussed, plus the literature regarding OEE are presented. After that,

*Email: ratapol@ieee.org

ISSN 0020–7543 print/ISSN 1366–588X online

ß 2012 Taylor & Francis
http://dx.doi.org/10.1080/00207543.2011.587841
http://www.tandfonline.com
 International Journal of Production Research 3435

improved methodology is presented and a case study application is then analysed and the potential of the new
calculating method is explored. This methodology aims to convert machine losses into monetary units.

2. Methodology
2.1 Overall equipment effectiveness (OEE)
OEE was originated by Nakajima (1988) as an analysis tool for evaluating the improvement achieved through the
development initiatives carried out as part of his proposed TPM philosophy. OEE is the core metric for measuring
the success of TPM implementation programmes (Jeong and Phillips 2001). According to Nakajima, OEE is based
on three performance aspects and each element is concerned with different losses (see Table 1).
From Table 1, these losses are defined as the ‘six big losses’ by Nakajima (1988). The definitions are described as
follows:
(1) Equipment failure/breakdown losses: These losses are categorised as time losses (reduced productivity), and
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quantity losses (occurrence of defective products). They are due to sporadic/chronic failure. Sporadic failures
happen when changes occur in some conditions (jigs/tools, work method, and equipment’s state). These
require measures to revert them to the original condition. Chronic failures occur when there are some hidden
defects in operating equipment. They cannot be corrected even if various countermeasures are taken.
(2) Set-up and adjustment losses: This refers to time losses that occur when production of one item ends and the
equipment is adjusted to meet the requirements of another item. Setting up means a series of operations from
the removal of jigs and fixtures to the end of production, clearing up and cleaning, through the preparation
of jigs and tools and metal fixtures necessary for the next product, to their attachment, adjustment, trial
processing, readjustment, measurement, production, and finally the ability to produce excellent products.
These first two losses are defined as time losses, which are used for calculating the availability rate of
equipment.
(3) Idling and minor stoppage losses: These occur when the production is interrupted by a temporary
malfunction or when a machine is idling. For instance, idling and minor stoppages caused by the
malfunction of conveyors and blockages of material in pipe.
(4) Reduced speed losses: These losses occur because the equipment speed is slow in terms of: (i) actual speed is
slower than design speed; (ii) the design speed is slower than present technological standards or the desirable
condition. Even if a machine is operated at the desired speed in many cases the speed may have to be reduced
because of quality or mechanical problems. Conversely, there are instances in which the standard speed is
not used because a problem that occurred previously or the service life of the equipment would become
shorter. Also, an operation is sometimes implemented without knowledge of the specification speed. The
third and fourth losses are speed losses that measure the performance efficiency of equipment.
(5) Defect and rework losses: Volume and time losses due to defect and rework (disposal defects), financial losses
due to product downgrading, and time losses required to repair defective products to turn them into
excellent products.
(6) Start-up losses: Start-up losses are defined as time and volume losses. For instance:
(i) Start-up after periodic repair.
(ii) Start-up after suspension (long-time stoppage).
(iii) Start-up after holidays.
(iv) Start-up after breaks.

Table 1. Performance aspects of OEE and relating losses.

Performance aspects Relating losses

1. Availability rate Equipment failure/breakdown losses

Set–up and adjustment losses
2. Performance efficiency Idling and minor stoppage losses
Reduced speed losses
3. Quality rate Defect and rework losses
Start–up losses
 3436 R. Wudhikarn

These last two losses are regarded as quality losses. These losses directly affect the quality rate of equipment.
Normally, OEE is measured in terms of these six big losses. These losses are functions of availability rate (A),
performance efficiency (P) and quality rate (Q) which can be calculated as follows:
Operating time
A¼ ð1Þ
Loading time
where loading time is the planned time available per time period (day, month, etc.) for production operations, and
operating time is calculated from loading time subtracted by time of equipment failures, set-up and adjustment
requirements, exchange of dies and other fixtures, etc. Availability can be expressed as the ratio of actual operating
time to loading time.
Net operating time
P¼ ð2Þ
Operating time
where net operating time is the time during which equipment is producing at the standard production rate.
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To calculate net operating time, subtract performance time losses from the operating time. Performance time losses
consist of normal production losses (production rate reduction due to start-up, shutdown, and changeover) and
abnormal production losses (production rate reductions due to abnormalities). In other words, net operating time is
the processed amount multiplied by the actual cycle time. Where the processed amount refers to the number of items
processed per time period (day, month or etc.)
Processed amount  Defect amount
Q¼ ð3Þ
Processed amount
where defect amount represents the number of items rejected due to quality defects of one type or another, and
require rework or become scrapped.
Combining Equations (1)–(3), the OEE for given equipment operation is determined from (4).
OEE ¼ A  P  Q: ð4Þ
OEE depends on availability rate, performance efficiency and quality rate. Therefore, OEE increases with the
increase of these three elements. Increase in availability rate reduces buffer inventories needed to protect
downstream production from breakdowns and increases effective capacity. Reduced buffer inventories lead to
decreased lead times since jobs are not waiting as long in queues. This capability of shorter lead-times improves the
firm’s competitive position in terms of delivery and flexibility since it is easier to deliver multiple products or
versions of products with shorter lead times. The reduced need for buffer inventory directly reduces inventory
costs and increasing effective capacity allows more throughputs and lowers the cost per unit. Increase in the
performance efficiency reduces the need for buffer inventories and increases effective capacity. This reinforces the
benefits gained from the increased equipment availability. Increase in the rate of quality products means that there is
less scrap and rework, which not only reduces costs, but also yields a higher rate of quality (Kotze 1993,
Frendall et al. 1997).
Although OEE seems to be a comprehensive performance measurement indicator, it still requires scope
expansion or modification to fit the individual needs of different industries. For extended scope, several studies have
also been expanded through the inclusion of more elements of performance than just availability rate, performance
efficiency and quality rate. For instance, overall process effectiveness (Sherwin 2000) was proposed to measure the
performance of whole processes, overall line effectiveness (OLE) is defined (Nachiappan and Anantharam 2001) to
evaluate the effectiveness of a continuous product line manufacturing system, overall equipment effectiveness of
manufacturing line to assess the performance of a production line was presented (Braglia et al. 2009) and overall fab
effectiveness to measure the performance of an entire factory was developed (Oechsner et al. 2003). Muthiah and
Huang (2006) indicated OEE lacking consideration of factory level, and hence the overall throughput effectiveness
(OTE) was developed. OTE has the potential to automate the entire factory-level performance diagnostics and
therefore drive continuous productivity improvement quantitatively. For other modified studies, Garza-Reyes et al.
(2008) developed overall resource effectiveness, which also considers material efficiency and variations in material
and process cost as part of the evaluation of overall effectiveness. In addition, OEE does not take into account all
factors that reduce the capacity utilisation (Ljungberg 1998). For instance, for planned downtime, lack of material
input, lack of labour, etc. This issue gives an opportunity for the production managers to consider some of the losses
 International Journal of Production Research 3437

which are not their responsibility. In order to make the OEE measurement meaningful, the losses should be
subdivided into subgroups. Moreover, several improved methods of computing OEE were proposed. De Ron and
Rooda (2005) identified OEE lacking a proper framework, therefore they proposed the equipment effectiveness (E).
In contrast to OEE, this methodology developed measuring stand-alone equipment and using the availability
effective time as a basis. In addition, there are three studies (Raouf 1994, Wudhikarn 2010, Wudhikarn et al., 2010)
identifying the weakness of the original OEE concerning its statistically equal weight, so these researches differently
proposed methods to calculate the changeable weight of OEE’s elements. Raouf’s study showed and concluded that
traditional means of evaluating maintenance management systems could not yield higher capital productivity.
Factors affecting OEE are not equally important in all cases and different weights of each element should be
established. Furthermore, Kwon and Lee (2004) presented the calculating method proposing how to calculate
increasing profits or decreasing costs from an increasing percentage of OEE. Therefore all results are shown in
monetary unit thus the problem priorities can be easily ranked by identical unit. The last two studies tried to solve
OEE weaknesses which can lead management level to make critically wrong decision. However, these methods also
are inappropriately improved, so the newest indicator has been proposed (Wudhikarn et al. 2009). This modified
method is called overall equipment cost loss indicator.
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2.2 Overall equipment cost loss

Overall equipment cost loss is a calculating method established for eliminating some weaknesses of OEE. Normally,
management decides to improve equipment effectiveness by using prioritised OEE. Usually, the lowest OEE
machine will be improved first. Despite that, from other studies, the lowest OEE may not represent the highest losses
while the equal in availability rate, performance efficiency or quality rate does not exactly mean the same losses.
So Raouf (1994) specified the weight of each element in OEE that made final OEE differ from the former method.
The original OEE calculating method sets the same weight in every element. This method is more reasonable as a
result of losses of each element is not equal generally. Then, the weight setting should not be the same. However, this
study has not specified how to set the weight. In other research Kwon and Lee (2004) presented the calculating
method. This research shows how to calculate increasing profits or decreasing costs from an increasing percentage of
OEE. All results are shown in monetary units, thus the problem priorities can be easily ranked by an identical unit.
Anyway this method does not compute saving cost correctly because it assumes that an increasing percentage will
affect cost reduction in specific loss conformation, but in fact OEE consists of three main elements, so if all elements
increase a percentage, their saving cost will be different. Furthermore, OEE is generally not suitable for comparing
with the similar machine type that have different capacity and different machine type due to several factors; for
example, production capacity, cost of material, quantity of operator, etc. (Wudhikarn et al. 2009).
To eliminate the above-mentioned problems, overall equipment cost loss was proposed which prioritises
problems by showing losses in monetary units. This method analyses losses into three elements following the OEE
approach, but the result is shown in cost. However, losses in each element are dissimilar and depend on resource
usage. The relating cost is determined in Table 2.
Overall equipment cost loss can be calculated as follows:
Loss calculating method for availability rate element computes from loss time multiply with expense per time
unit. Each relating cost calculation follows below.
OLA ¼ LT  Mcap  PPU ð5Þ
By,
LT ¼ breakdown time þ set up and adjustment time ð6Þ

X  LT  EPi,A 
PCLA ¼ ð7Þ
Loading time
where,
OLA Opportunity loss for availability rate element (US$)
LT Loss time (hour)
Mcap Maximum capacity (unit/hour)
 3438 R. Wudhikarn
Table 2. Relating cost with three elements of OEE.

OEE elements

Types of cost A P Reject (Qrej) Rework (Qrew)

Opportunity cost X X X 5
Production cost Direct material cost 5 5 X 5
Direct labour cost X X X X
Overhead cost Indirect material cost 5 5 X X
Indirect labour cost X X X X
Facility cost 5 X X X
Depreciation cost X X X X
Maintenance cost X X X X
Renting cost X X X X
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Insurance cost X X X X
Welfare cost X X X X
Rework cost 5 5 5 X

PPU Profit per unit (US$/unit)

PCLA Production cost loss for availability rate element (US$)
EPi,A Expense (US dollar/month) of concerning production cost i for availability rate (A) element
follow Table 2.
Total losses of availability rate element can be calculated from the following equation.
Availability lossesðALÞ ¼ OLA þ PCLA ð8Þ
Loss calculating method for performance efficiency element computes from number of product that is not able
to produce maximum capacity of machine or calculates from time used to produce loss product multiply with
expense per unit. Each relating cost calculates follow below.
OLP ¼ LU  PPU ð9Þ
By
LU ¼ Maximum capacity  Actual production ð10Þ

X  LU EPi,p

PCLP ¼  ð11Þ
Mcap Operating time
where,
OLP Opportunity loss for performance efficiency element (US$);
LU Loss unit (unit);
PCLP Production cost loss for performance efficiency element (US$);
EPi,P Expense (US dollar/month) of concerning production cost i for performance efficiency (P)
element follow Table 2.
Total losses of performance efficiency element can be calculated from the following equation.
Performance lossesðPLÞ ¼ OLP þPCLP : ð12Þ
Loss calculating method for quality rate element can be divided into two types and consists of reject and rework.
Loss of each type is different as follows below.
Reject is the quality loss that product cannot be repaired. Calculating method computes from number of reject
or time that produce reject multiply with expense per time unit. Each relating cost calculates follows below.
OLQrej ¼ Rej  PPU ð13Þ
 International Journal of Production Research 3439

DMLQrej ¼ Rej  EPDMC ð14Þ

X  Rej EPi,Qrej

PCLQrej ¼  ð15Þ
Mcap Net operating time
where,
OLQ-rej Opportunity loss for quality rate sub reject element (US$);
Rej Number of reject (unit);
DMLQ-rej Direct material cost loss for quality rate sub reject element (US$);
EPDMC Expense of direct material cost (dollar/unit);
PCLQ-rej Production cost loss for quality rate sub reject element (US$) excepts direct material cost loss;
EPi,Q-rej Expense (US$/month) of concerning production cost i for quality rate sub reject (Qrej) element
follow Table 2 excepts direct material cost loss.
Total losses of quality rate element sub reject can be calculated from the following equation.
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Reject losses ðRejLÞ ¼ OLQrej þ DMLQrej þ PCLQrej : ð16Þ

Another sub element of quality loss is rework.Rework is product which does not conform to specification, but
can still be repaired. Calculating method computes from number of rework or time to produce rework multiplied by
expense per time unit. Each relating cost calculates follows below.
X  Rew EPi,Qrew

PCLQrew ¼  ð17Þ
Mcap Net operating time

RwkLQrew ¼ Rew  EPrew ð18Þ

where,
Rew Number of rework (unit);
PCLQ-rew Production cost loss for quality rate sub reject element (US$) excepts direct material cost loss;
EPi,Q-rew Expense (US$/month) of concerning production cost i for quality rate sub rework (Qrew)
element follow Table 2 excepts rework cost;
RwkLQ-rew Rework loss (US$);
EPrew Expense of rework (US$/unit).
Total losses of quality rate element sub rework can be calculated from the following equation.

Rework losses ðRewLÞ ¼ PCLQrew þ RwkLQrew : ð19Þ

Quality losses are summation between reject losses and rework losses as follow:
Quality losses ðQLÞ ¼ RejL þ RewL: ð20Þ
Therefore, overall equipment cost loss can be computed by summarising the following equation.
Overall equipment cost loss ðOECLÞ ¼ AL þ PL þ QL: ð21Þ
Moreover, this method can be applied with machines producing several products due to the cost completely
separated; for example, opportunity cost is calculated by using each product quantity directly. In another way, the
other costs can be separated by using machine hour (loading time, operating time and net operating time) or
production quantity.

2.3 Cost of quality (COQ)

Several business organisations gradually promote quality as the central customer value, regarding it as a key concept
of business strategy in order to achieve high competitiveness (Ross and Wegman 1990). Measuring and reporting the
 3440 R. Wudhikarn
Table 3. Typical cost of quality elements.

Categories COQ elements

Prevention P1 – Quality control and process control engineering

P2 – Design and develop control equipment
P3 – Quality planning by others
P4 – Production equipment for quality – maintenance and calibration
P5 – Test and inspection equipment – maintenance and calibration
P6 – Supplier quality assurance
P7 – Training
P8 – Administration, audit, improvement
Appraisal A1 – Laboratory acceptance testing
A2 – Inspection and test
A3 – In-process inspection (non-inspectors)
A4 – Set-up for inspection and test
A5 – Inspection and test materials
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A6 – Product quality audits

A7 – Review of test and inspection data
A8 – On-site performance testing
A9 – Internal testing and release
A10 – Evaluation of materials and spares
A11 – Data processing, inspection and test reports
Internal failure IF1 – Scrap
IF2 – Rework and repair
IF3 – Troubleshooting, defect analysis
IF4 – Re-inspect, retest
IF5 – Scrap and rework: fault of supplier
IF6 – Modification permits and concessions
IF7 – Downgrading
External failure EF1 – Complaints
EF2 – Product service: liability
EF3 – Products returned or recalled
EF4 – Returned material repair
EF5 – Warranty replacement
EF6 – Loss of customer goodwill
EF7 – Loss of sales

cost of quality (COQ) is the first step in a quality management programme. Even in service industries, COQ systems
receive considerable attention (Bohan and Horney 1991, Ravitz 1991, Carr 1992). COQ information can be used
to indicate major opportunities for corrective action and to provide incentives for quality improvement.
Since Feigenbaum (1956) categorised quality costs into prevention-appraisal-failure (PAF), the PAF scheme has
been almost universally accepted for quality costing. The failure costs in this scheme can be further classified into
two subcategories: internal failure and external failure costs. Oakland (Oakland 1993) describes these costs as
follows:
(1) Prevention costs: These costs are associated with the design, implementation and maintenance
of the total quality management system. Prevention costs are planned and are incurred before actual
operation.
(2) Appraisal costs: These costs are associated with the supplier’s and customer’s evaluation of purchased
materials, processes, intermediates, products and services to assure conformance with the specified
requirements.
(3) Internal failure costs: These costs occur when the results of work fail to reach designed quality standards and
are detected before transfer to customer takes place.
(4) External failure costs: These costs occur when products or services fail to reach design quality standards but
are not detected until after transfer to the customer.
 International Journal of Production Research 3441
Table 4. Relating cost with three elements of OEE.

Categories COQ elements Calculated elements Allocating method

p
Prevention P1 p By production
P2 p By production
P3 p By production
P4 p By production
P5 p By production
P6 p By production
P7 p Actual cost
P8 Actual cost
p
Appraisal A1 p By production
A2 p By production
A3 p By production
A4 p By production
A5 p By production
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A6 p By production
A7 p By production
A8 p By production
A9 p By production
A10 p By production
A11 By production
Internal failure IF1 5 –
IF2 5
p –
IF3 p Actual cost
IF4 Actual cost
IF5 5
p –
IF6 p Actual cost
IF 7 Actual cost
p
External failure EF1 p Actual cost
EF2 p Actual cost
EF3 p Actual cost
EF4 p Actual cost
EF5 Actual cost
EF6 5 –
EF7 5 –

In order to calculate total quality cost, the quality cost elements should be identified under the categories of
prevention, appraisal, internal failure and external failure costs. BS 6143: Part 2 (1990) and ASQC (1974) have
identified a list of quality cost elements under this categorisation. These lists just act as a guideline for
quality costing. Most elements in these lists are not relevant to a particular industry, while many elements
identified by practitioners are peculiar to an industry, or a company (Dale and Plunkett 1991). Some typical COQ
elements are shown in Table 3.

3. Proposed methodology
This research develops the overall equipment cost loss methodology by adding losses from COQ. First, calculated
COQ elements are identified, since some of elements, such as lost customer sales and goodwill, cannot be quantified
effectively (Johnson and Kleiner 1993). Moreover, some elements are already calculated in overall equipment cost
loss (scrap and rework and repair). After that incurring COQ as a generally recognised central cost will be allocated
to two categories as the first method is divided by production, because the incurred costs cannot be directly
identified to specific machines, therefore these costs will be divided according to pertaining equipment. The more
goods are produced, the higher cost equipment will apportion. The second type of allocating method is actual cost.
If the cost can be absolutely determined to a specific machine, the concerning cost is charged to the identified
machine. Calculated COQ elements and allocating method are shown in Table 4.
 3442 R. Wudhikarn
Table 5. Overall equipment effectiveness of machines.

Machine A P Q OEE

ST1 88.32% 83.04% 99.02% 72.62%

ST4 92.29% 81.43% 98.32% 73.89%
ST5 92.51% 81.53% 98.46% 74.26%
CC3 91.43% 84.02% 99.20% 76.20%
CC4 92.32% 85.91% 99.02% 78.53%
CC5 94.51% 81.14% 98.96% 75.89%

After associating COQ elements and allocating method were identified, the losses from this approach will
be consolidated with overall equipment cost loss and named as overall equipment and quality cost loss (OEQCL).
All relating equations can be calculated as follows:
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Calculating methods for COQ elements are divided into two forms. The first is for elements allocated by using
production and can be computed as follows:

EPi  Pj
CQPi,j ¼ P ð22Þ
P

where,
CQPi,j Cost of quality of element i and machine j for production allocating method (relating elements
follow Table 4);
EPi Expense of element i;
Pj Number of production from machine j.
Another equation is effortlessly calculated by using actual cost incurring on machine or following equation.

CQAi,j ¼ incurred cost of COQ element i machine j: ð23Þ

Cost of quality losses (COQL) can be calculated by consolidating summation of Equation (22) and (23) as follows
X X
COQLj ¼ CQPi,j þ CQAi,j ð24Þ

Therefore, after OECL and COQL were known, OEQCL can be calculated by combining COQL or Equation
(24) with OECL or Equation (21) as follows
OEQCLj ¼ OECLj þ COQLj : ð25Þ

Implementation of OEQCL definitely requires an appropriate accounting system which accurately identifies not
only ordinary cost accounting but also cost of quality accounting.

4. OEQCL model application

In this part, the application of the OEQCL model previously presented is exemplified through a case study. In the
newly improved calculation model, the production data such as processed products, good products, loading time,
operating time, etc. must be collected. Moreover, a complete accounting system is required especially for COQ data.
Fortunately, the focused company already establishes collecting data system for both of the desired data. In case of
the lack of data, or the insufficient data, the data will be ignored for all equipments. For example, if machine ST1
lack of retest data, all machines will also ignore these data. OEE and COQ data of implemented company, fibre
cement manufacturer, between July and December 2009 are demonstrated as Table 5 and Table 6 respectively.
To show the calculation method of the OEQCL in the processing equipment, the model manually calculated by
the data of CC.4 production line is presented.
 International Journal of Production Research 3443
Table 6. Cost of quality for all machines.

Cost (thousand US dollars)

Categories COQ elements Central cost ST1 ST4 ST5 CC3 CC4 CC5

Prevention P1 143.24 – – – – – –
P2 42.46 – – – – – –
P3 22.34 – – – – – –
P4 52.94 – – – – – –
P5 78.13 – – – – – –
P6 5.61 – – – – – –
P7 – 5.12 34.42 55.21 58.32 59.41 56.23
P8 – 5.21 8.34 9.42 12.20 14.73 15.11
Appraisal A1 23.29 – – – – – –
A2 55.39 – – – – – –
A3 33.10 – – – – – –
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A4 8.92 – – – – – –
A5 69.35 – – – – – –
A6 50.27 – – – – – –
A7 10.56 – – – – – –
A8 5.43 – – – – – –
A9 15.82 – – – – – –
A10 11.34 – – – – – –
A11 6.29 – – – – – –
Internal failure IF1 – – – – – – –
IF2 – – – – – – –
IF3 – 0.54 0.82 0.79 0.92 1.12 1.04
IF4 – 0.03 0.14 0.19 0.21 0.32 0.52
IF5 – – – – – – –
IF6 – 0.43 0.87 1.01 2.31 2.87 4.21
IF 7 – 2.31 3.23 3.56 8.32 6.42 6.94
External failure EF1 – 0.83 1.13 3.01 2.09 2.56 4.21
EF2 – 0.34 0.87 0.72 1.28 1.54 1.73
EF3 – 5.32 15.29 68.51 30.23 27.48 95.59
EF4 – 0.12 0.29 0.34 0.56 0.41 0.85
EF5 – 3.22 16.32 49.45 54.32 12.32 21.89
EF6 – – – – – – –
EF7 – – – – – – –
Production (million units) Total production ¼ 48.87 2.61 9.51 9.55 5.34 11.21 10.66

OEE data
. Product: Artificial wood plank Type A
. Availability rate: 92.32%
. Performance efficiency: 85.91%
. Quality rate: 99.02%
. OEE: 78.53%
. Maximum capacity: 3200 units/hour
. Loading time: 4416 hours
. Loss time: 339.15 hours
. Operating time: 4076.85 hours
. Loss unit: 1,838,171 units
. Net operating time: 3502.42 hours
. Actual production: 11,207,753 units
. Reject: 92,618 units
. Rework: 17,218 units
 3444 R. Wudhikarn

Cost data
. Profit per unit: 2.03 US$/unit
. Direct material cost: 5.31 US$/unit
. Direct labour cost: 78,912 US$
. Indirect material cost: 8754 US$
. Indirect labour cost: 16,992 US$
. Facility cost: 333,030 US$
. Depreciation cost: 313,194 US$
. Maintenance cost: 45,114 US$
. Renting cost: 59,652 US$
. Insurance cost: 78,294 US$
. Welfare cost: 11,838 US$
. Rework cost: 0.31 US$/unit
COQ data are demonstrated as Table 6. From three sources of data, these sufficient data can be used for
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computing OEQCL. Therefore, the calculation of OEQCL is exampled as the following sequence.
Availability losses are calculated from Equations (5), (7) and (8) as follows.
OLA ¼ 339:15  3200  2:03
¼ 2, 203, 118:40
339:15  ð78, 912 þ 16, 992 þ 313, 194 þ 45, 114 þ 59, 652 þ 78, 294 þ 11, 838Þ
PCLA ¼
4416
¼ 46, 387:06

AL ¼ 2, 203, 118:40 þ 46, 387:06

¼ 2, 249, 505:46
Performance losses are calculated from Equations (9), (11) and (12) as follows.
OLP ¼ 1, 838, 171  2:03
¼ 3, 731, 487:13

1, 838, 171  ð78, 912 þ 16, 992 þ 333, 030 þ 313, 194 þ 45, 114 þ 59, 652 þ 78, 294 þ 11, 838Þ
PCLP ¼
3200  4076:85
¼ 264, 054:05

PL¼ 2, 248, 872:78 þ 264, 054:05

¼ 3, 995, 541:18

Quality losses sub reject element are calculated from Equations (13)–(16) as follows.
OLQrej ¼ 92, 618  2:03
¼ 188, 014:54

DMLQrej ¼ 92, 618  5:31

¼ 491, 801:58

92, 618  ð78, 912 þ 8754 þ 8754 þ 333, 030 þ 313, 194 þ 45, 114 þ 59, 652 þ 78, 29Þ
PCLQrej ¼
3200  3502:42
¼ 7815:69
RejL ¼ 188, 014:54 þ 491, 801:58 þ 7815:69
¼ 687, 631:81
 International Journal of Production Research 3445

Quality losses sub rework element are calculated from Equations (17)–(19) as follows.

17, 218  ð78, 912 þ 8754 þ 8754 þ 333, 030 þ 313, 194 þ 45, 114 þ 59, 652 þ 78, 294 þ 11, 838Þ
PCLQrew ¼
3200  3502:42
¼ 1452:96

RwkLQrew ¼ 17, 218  0:31

¼ 5337:58

RewL ¼ 1452:96 þ 5337:58

¼ 6790:54

Total quality losses are calculated from Equation (20).

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QL ¼ 687, 631:81 þ 6790:54

¼ 694, 422:35

Then, OECL are calculated from Equation (21).

OECL ¼ 2, 249, 505:46 þ 3, 995, 541:18 þ 694, 422:35

¼ 6, 939, 468:99
The remaining example is part of COQ losses calculation following Equations (22)–(24) as Table 7.
Therefore, after two main parts of losses were done, OEQCL can be computed by Equation (25) as follows.

OEQCLCC4 ¼ 6, 939, 468:99 þ 274, 687:54

¼ 7, 214,156:53
OEQCL of machine CC4 is 7,214,156.53 US$. In the same period the OEQCL of the remaining machines are
calculated and presented in Figure 1.

5. Discussion
Figure of OEQCL and OEE relation have already been calculated. In Figure 1, the losses in monetary form and
percentage form are shown for a number of equipments evaluated by the proposed methodology. It can be seen, for
the highest OEQCL machine, that the machine also has the highest OEE. This irrelevant outcome was not
surprising. Normally, OEE does not directly relate to OECL, because the relation depends on several aspects
consisting of machine capacity, price of product and production cost (Wudhikarn et al. 2009). Therefore, OEE also
possibly differs to OEQCL. Problematic machines can be prioritised by alternatively using OEQCL, OECL and
OEE. All the results are presented in Table 8.
From Table 8, It can be seen that the problematic machine ranked by using the OEE approach is totally different
from not only OEQCL but also OECL. From the newly proposed method and OECL methods, machine CC4
should be the first improved machine whereas OEE identified completely opposite; because CC4 is the last improved
machine when prioritised by using OEE. This difference is caused by dissimilar consideration on incurred losses.
A result of availability rate, performance efficiency, quality rate and OEE is represented in percentage and this
rational outcome is unable to determine the difference of magnitude between elements and also between equipments.
OEE assumes a percentage of all elements are identical, therefore, OEE prioritisation is supposed to be equally
influenced by six big losses or in other words by OEE’s element, even though it should not be considered as similar.
For example, a percentage of availability loss is assumed to be similar to one percentage of quality loss, but in fact,
equipment breakdown should cause lower losses than production reject. Unlike OECL and OEQCL, these
calculations show the dissimilarities of magnitude among OEE’s elements and machines. These indicators are
 3446 R. Wudhikarn
Table 7. Cost of quality losses calculation example.

Cost (thousand US dollars)

Categories COQ elements Central cost Equation Calculation COQ of CC4

Prevention P1 143.24 (22) ¼143.24  (11.21  48.87) 32.85

P2 42.46 (22) ¼42.46  (11.21  48.87) 9.74
P3 22.34 (22) ¼22.34  (11.21  48.87) 5.12
P4 52.94 (22) ¼53.94  (11.21  48.87) 12.14
P5 78.13 (22) ¼78.13  (11.21  48.87) 17.92
P6 5.61 (22) ¼5.61  (11.21  48.87) 1.29
P7 – (23) ¼59.41 59.41
P8 – (23) ¼14.73 14.73
Appraisal A1 23.29 (22) ¼23.29  (11.21  48.87) 5.34
A2 55.39 (22) ¼55.39  (11.21  48.87) 12.70
A3 33.10 (22) ¼33.10  (11.21  48.87) 7.59
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A4 8.92 (22) ¼8.92  (11.21  48.87) 2.05

A5 69.35 (22) ¼69.35  (11.21  48.87) 15.90
A6 50.27 (22) ¼50.27  (11.21  48.87) 11.53
A7 10.56 (22) ¼10.56  (11.21  48.87) 2.42
A8 5.43 (22) ¼5.43  (11.21  48.87) 1.25
A9 15.82 (22) ¼15.82  (11.21  48.87) 3.63
A10 11.34 (22) ¼11.34  (11.21  48.87) 2.60
A11 6.29 (22) ¼6.29  (11.21  48.87) 1.44
Internal failure IF1 – – – –
IF2 – – – –
IF3 – (23) ¼1.12 1.12
IF4 – (23) ¼0.32 0.32
IF5 – – – –
IF6 – (23) ¼2.87 2.87
IF7 – (23) ¼6.42 6.42
External failure EF1 – (23) ¼2.56 2.56
EF2 – (23) ¼1.54 1.54
EF3 – (23) ¼27.48 27.48
EF4 – (23) ¼0.41 0.41
EF5 – (23) ¼12.32 12.32
EF6 – – – –
EF7 – – – –
COQ losses (thousand US dollars) 274.69

calculated by using both six big losses and cost and then resulted to monetary unit, so their losses directly depend on
six big losses, production cost and opportunity cost.
From Tables 8 and 9, which compare the results of OEE, OECL and OEQCL altogether, it can be shown that
OECL and OEQCL are influenced by the price of produced goods and the capacity of equipment. However, they
still depend on six big losses. If equipment produces an expensive product and also has high capacity, whereas it has
very rarely losses or no loss, consequently OECL and OEQCL probably have low monetary losses. Conversely if the
machine has moderate to considerably higher six big losses, it maybe has higher OECL and OEQCL than an
equipment manufacturing a cheap product and has low production capacity. For instance, machine CC4 has the
highest OEE which normally means it has the lowest losses, but on the contrary has the highest OECL and OEQCL,
which means it has the highest cost losses, since the machine operates with expensive products and also high
production capacity. In contrast, machine ST1 has the lowest OEE percentage which means it has the highest six big
losses, but it inversely has the lowest OECL and OEQCL, because it produces a cheap product and also has low
capacity as well.
However, there are still some divergences between the OECL and the OEQCL, because the OEQCL takes the
costs of quality into consideration, hence, the result is different to those of OECL. From Table 8, it is discovered
that most problematic sequences are similar, except for a difference between machines ST4 and ST5. In the case of
OEQCL, this new method identified that machine ST5 is more problematic than machine ST4, on the other hand
 International Journal of Production Research 3447
L os s es (US dollar) O E E (% )

10,000,000 78.53% 80%

9,000,000 78%
75.89% 76.20%
8,000,000 76%
7,214,157 74.26% 73.89%
7,000,000 6,524,113 72.62% 74%

6,000,000 72%

5,000,000 70%

4,000,000 3,331,754 3,314,320 68%

3,000,000 66%
2,147,778
2,000,000 64%

1,000,000 241,561 62%

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0 60%
CC4 CC5 ST5 ST4 CC3 ST1
QOCL 274,688 346,721 316,142 205,204 240,081 57,304
OECL 6,939,469 6,177,392 3,015,612 3,109,116 1,907,697 184,257
OEQCL 7,214,157 6,524,113 3,331,754 3,314,320 2,147,778 241,561
OEE 78.53% 75.89% 74.26% 73.89% 76.20% 72.62%

Figure 1. Comparison of OECL, OEQCL and OEE results.

Table 8. Machine priority by alternative methods.

(million US dollars) *Ranking by

Machine OEQCL OECL OEE OEQCL OECL OEE

ST1 0.24 0.18 76.62% 6 6 4

ST4 3.31 3.12 73.89% 4 3 1
ST5 3.33 3.02 74.26% 3 4 2
CC3 2.15 1.91 76.20% 5 5 3
CC4 7.21 6.94 78.53% 1 1 6
CC5 6.52 6.18 75.89% 2 2 5

Note: *Less number means high priority to improve.

Table 9. Maximum capacity and product cost by machine.

Max capacity
Machine (million pieces/year) Cost of product

ST1 14.02 Low

ST4 28.03 Medium
ST5 28.03 Medium
CC3 14.02 High
CC4 28.03 Very high
CC5 28.03 High

OECL says differently. This dissimilarity from OECL does not associate with COQ. Actually, the quality cost
normally relates to the business operation. When a machine has QOCL far higher than another, but meanwhile
OECL is slightly different, it will probably change the problematic priority. For example, in the case study, machine
ST5 has OECL smaller than ST4 for 93,504 US$ while ST5 has QOCL higher than 110,938 US$. Then, OEQCL
 3448 R. Wudhikarn

of the ST5 is greater than ST4 and it should be critically improved moreover than machine ST4. From this case
study, ST5 has products returned or recalled and warranty replacement higher than ST4 for 53.22 thousand US$
and 33.13 thousand US$ respectively. These make both QOCL and OEQCL of ST5 higher than ST4 and moreover
also change machine priority.

6. Conclusions
The performance measurement for operating machines is very important for sustaining firms. Managers make
decisions from this correct evaluation. Therefore appropriate measurement is necessarily established. Moreover, the
accuracy of performance measurement is essential to improve and succeed in a business goal. One of the important
and widely used metrics of performance in manufacturing is OEE, especially for firms applying TPM. The original
OEE method does not appropriately prioritise problematic equipment, which differ in terms of capacity, produced
product, production cost, etc. In a recent study, the OECL method was shown to eliminate some weaknesses of
OEE. Anyway this method is not perfectly developed, because it does not deal with cost of quality which normally
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consumes more of the resources used in companies. Since this hidden cost greatly affects machine priority, this
research proposes the newly improved method named OEQCL combining COQ with OECL. In order to implement
this developed method, both general cost accounting and cost of quality accounting must be completely provided.
This research also discusses a well-developed and implemented method, with the result shown that it correctly
prioritises problematic machines better than OECL and especially OEE.

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