While establishing and measuring key performance indicators—KPIs—is well-accepted as good management, it’s easier said than done for many small and mid-sized manufacturers. These firms typically understand that determining performance against KPIs is vital in reaching strategic and tactical goals in the short- and long-term. They allow for issues to be identified so that improvements can be made.
The Manufacturing Enterprise Solutions Association researched 28 manufacturing performance indicators as most important by decision makers, but the reality is that most companies have trouble tracking more than two or three performance indicators, let alone 28.
Additionally, KPIs can change as the company matures and evolves. With this in mind, and knowing that all companies are different, my colleagues and I at ERP solutions firm MRPeasy have identified what we believe are the Top 10 metrics:
Manufacturing Cost per Unit, as calculated by dividing the total number of units produced by their production cost, excluding material spending. The number shows how effectively the current resources—people and equipment—are utilized and on track.
Productivity in Revenue per Employee, as calculated by dividing all generated revenue by the number of all employees. This can be examined on several levels: on a company level, on a department level and even production-line level. Revenue per employee shows areas with the lowest and biggest ROI.
Downtime in Proportion to Operating Time, as calculated as the ratio between the time production lines are stopped and time they operate. This ratio is a direct indicator of asset availability for production. The lower the number, the more efficiently manufacturing equipment is used. A ratio of 0.5 indicates production lines were stopped half of the time.
Incoming Material Quality can be calculated by the amount of time or money spent repairing product because of the quality of materials used in the end product. If the quality of materials supplied is low, repairs increase, creating an extra cost to the manufacturer. This can be examined in different ways: by supplier; by product category; as a percentage of faulty materials vs. good materials.
On-Time Supply, as calculated as the difference between orders delivered on time vs. delivered late, then divided by the number of total orders. Tracking this KPI helps to understand whether the supplier is reliable or not.
On-Time Delivery as calculated by the manufacturer’s ability to deliver shipments on time vs. late. Even if a manufacturer isn’t tracking their suppliers’ ability to deliver materials on time, this KPI may indicate a need to do so. It may also identify possible issues in customer logistics.
For many, this is the most important KPI because it speaks to customer satisfaction and can directly affect the bottom line.
Yield, as calculated by the number of good units vs. units that need to be reworked or scrapped coming off the production line. It’s a basic measure of product quality. High yield means all elements of the manufacturing process are working fine and there is no issue with material quality, workers qualification or equipment. Low yield might mean that there are problems somewhere during the manufacturing process. This is one of the key metrics that signal that something is wrong and a closer investigation into the process is needed.
Capacity Utilization, a calculation between actual output – units produced – vs. potential maximum output. It’s a vital number for manufacturers in industries where large orders can come in unexpectedly, and provides a sense of how long it will take to complete this sort of unexpected order. The higher the rate, the more efficiently equipment is used.
Schedule or Production Attainment, as calculated as the difference between planned output and real output, divided by planned output. This measures the ability of the production department to execute a plan, and is more difficult to achieve when manufacturing processes are complex.
Inventory Turnover Control, as calculated by the number of days materials haven’t moved from warehouse storage to production. Extra inventory ties up valuable financial and real estate resources as manufacturers want to use their space for production, not for storing extra materials and components. The higher inventory turnover rate is, the more efficiently supply chain is built. The number of days varies by industry and manufacturer-specific needs, but as the general rule, turnover should be 30 days or less.
Many outside factors can influence a manufacturer’s efficiency, some outside the company’s control. Still, tracking the performance of an operation with KPIs can be the difference between success and failure. Keep in mind, that manufacturing metrics by themselves can’t solve ongoing issues; they act more like a roadmap and a compass, showing whether the operation is developing in the right direction. Identifying the problem and its cause is just the first step.
Karl Lauri is the managing team member at MRPeasy, developer of ERP software for small and mid-sized manufacturers.
