Balancing OEE with Other Supply Chain KPIs: Navigating the Tradeoffs

In the world of operations, few metrics get as much attention as Overall Equipment Effectiveness (OEE). OEE measures how effectively a manufacturing asset is utilized by combining three factors: availability (uptime), performance (speed vs. ideal cycle time), and quality (good units produced vs. total units).

In simple terms, it’s a snapshot of how close a machine or line is to running at its theoretical maximum potential. Improving OEE is often seen as a direct path to better productivity and lower costs, but like many metrics, focusing on it in isolation can create conflicts with other critical supply chain goals.

For instance, pushing OEE higher often means striving for longer production runs and fewer changeovers. That’s good for machine efficiency, but it can hurt inventory turns and customer responsiveness. A plant that maximizes OEE by producing large batches of a single SKU may end up tying up working capital in excess stock and reducing the ability to adapt to shifting demand. Similarly, prioritizing OEE can clash with on-time delivery if equipment schedules are optimized for efficiency rather than customer requirements.

Another tradeoff emerges with flexibility and innovation. To keep OEE high, operations teams may resist frequent product launches or engineering changes, both of which introduce downtime, lower yields, and slower cycle times. Yet in today’s market, agility and product variety often matter just as much as asset utilization.

So how do you balance these competing priorities? The key is to treat OEE not as an end in itself, but as one piece of a broader performance puzzle. A mature operations strategy aligns OEE with business objectives by:

• Defining the right horizon: Short-term dips in OEE may be acceptable if they support long-term goals like faster customer response or product diversification.
• Using tiered KPIs: Pair OEE with customer-facing measures such as fill rate, lead time, and service level, ensuring that equipment efficiency doesn’t come at the expense of market performance.
• Driving continuous improvement, not perfection: The pursuit of 100% OEE is unrealistic. Instead, focus on targeted improvements that also strengthen supply chain resilience.

In the end, OEE is a powerful tool for uncovering hidden losses and improving operations, but it should never overshadow the broader mission: delivering the right product, at the right time, at the right cost.

Balancing OEE with other KPIs ensures that efficiency gains translate into true supply chain value.

A deep dive into Cost to Serve

 
Cost to Serve or Cost to Deliver has been a concept that we have explored in the past, you can find the last post we published in this link: The importance of Cost to Serve in Supply Chain.

In this post, we are going to deep dive further on this concept and shed some light around the different components that can impact cost to serve.

First things first, a quick reminder of what is cost to serve; It is the total cost of providing a product or service to a customer including all direct and indirect costs.

Direct costs are those that can be directly traced to the production or delivery of the product or service, while indirect costs are those that are not easily traced to the specific product or service but are still incurred in the process of providing it.

Now onto why understanding your cost to serve is important.

By understanding how much it costs to serve each customer, companies can segment their customers and identify potential areas for cost savings. It can also be used to evaluate different pricing strategies and understand how changes in price may impact overall costs ultimately helping organizations to transform unprofitable customers into profitable ones.

But what is the best way to determine cost to serve, and what are the different elements that make up this metric?

There are several elements and categories that need to be captured to be able to analyse cost to serve and have some meaningful data to work with:

1- Customer: Customer services overheads, order management, customer specific services, presales costs etc

2- Sourcing and manufacturing: Sourcing and procurement, cost of goods, production costs, manufacturing costs etc.

3- Warehousing: Picking packing and storage cost.

4- Delivery/Transportation: Transport, last mile delivery, returns and reverse logistics etc.

Finally, how do we put everything together and calculate cost to serve?

This is the easiest part, providing you have managed to do the hardest part which is to identify all the different costs impacting your operations. Once this information is ready, it´s just a question of subtracting from the customer sale price all these different elements, leaving you with a data point that can be compared across all customers in your organization.

The importance of cost to serve in Supply Chain

In this post, we are going to shed some light on one of the most critical concepts in Supply Chain that most times is not being given the importance it deserves; cost to serve.

Cost to serve is a process that will allow you to identify the total cost of servicing your customers at a customer and product level in order for your business to provide the appropriate levels of service to achieve its business goals.

Cost to serve is critical as it shows that each product and customer demands different approaches and has a different cost profile. Many businesses today still adopt a one size fits all service policy.

Different customers drive different supply chain and logistics costs; large customers, small customers; large orders, small orders, frequent orders, less frequent orders, strict delivery time windows, detailed invoices required in triplicate, constant account management needs etc

The same is true of your products; large products that take up more warehouse space, products that have to be kitted or bundled, products that need temperature controlled storage and many more.

If you can identify the characteristics of your customers and products or services that drive your cost to serve, you will be able to identify low margin customers, low margin products and services and high cost processes so that you can make sure all of your customers are more profitable by providing the right service levels to the right customers.

Overall, understanding Cost to serve will enables your business to focus on both long-term decisions and the prioritisation of short-term actions and will make you able to reposition customers and services, and how they are served to improve overall margin.

The video below explains in a very graphical form the importance of cost to serve and how airlines have been able to make the most out of it!