Why you need to track KPIs for manufacturing

High-level financial KPIs won’t cut it if you’re serious about growing your business

· 3AG blog,CHFA,data coach

Image credit: Tom Fishburne

Key performance indicators (KPIs) are specific measures of the success and health of a business, and if you don't have these crucial gauges or ignore them, you’re essentially flying blind. And that story never ends well.

KPIs are always tied to particular objectives or desired outcomes. For example, to gauge your ability to cover all your financial obligations, track your current ratio of assets to liabilities. Or if you want to know how quickly you’re spending cash, monitor your burn rate. The equations to calculate KPIs are generally quite simple.

When a KPI falls below a threshold or benchmark you’ve identified or is otherwise trending in the wrong direction, it’s a clear signal that you need to investigate the cause and take appropriate action.

As a startup or a growing manufacturer, you may be so consumed by day-to-day operations that reporting and analytics have taken a back seat. Making sure that your supplies and materials have arrived, your production line is running smoothly and your orders have shipped on time can feel much more urgent than running your business numbers.

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Financial KPIs are basically table stakes

No business can operate without basic reporting, and no doubt you’re creating financial statements for tax filings, audits, bank loans and other common requirements; however, these are basically historical records by the time you sit down to review them — measures of what happened instead of indicators of what could happen. So, while they have their uses, they can’t tell you how your business is doing today or what action you need to take to hit your production target.

To answer these questions, you need real-time (or near-real-time) KPIs presented clearly on a dashboard that updates automatically, so you can see at a glance how you’re performing and take action quickly when needed. For example, if your revenue KPI is well off the target, you can promptly investigate whether you have an inventory issue, a customer retention issue or another problem.

KPIs for manufacturing let you see connections and take action

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If you’re only monitoring financial KPIs, they won’t help you determine why the results are what they are. Staying with the revenue example for a moment, a low monthly number doesn’t provide any clues as to whether you need to investigate your inventory levels or your customer orders. For this, you need operational KPIs tied to the processes in your manufacturing operations.

If you already consider yourself a data-driven business and are capturing insights through automation, good for you! You might want to read on, or check out this post about overall equipment effectiveness (OEE) and why it’s so important for manufacturers.

If you’re like many other growing manufacturers, however, and not using technology effectively to measure production performance, you need to start today. You can’t change the past, but you can respond to present conditions and shape the future.

Establishing smart KPIs that measure your manufacturing processes helps you pinpoint the cause(s) of an issue. For example, they can help your figure out that your decline in revenues is tied to a decline in the output of your most popular product. Or that your net income shortfall is due to an increase in machine maintenance. When you use KPIs to measure automated, data-generating manufacturing processes, it takes a lot of the guesswork out of operations management.

Driving business decisions with KPI data is only viable when systems are integrated and automated; your KPI dashboards need to update automatically or they won’t be useful. As was mentioned earlier, reporting is usually the first thing you postpose when you’re strapped for time and putting out fires. Add too much manual work and it doesn’t happen.

Where to start with KPIs for manufacturing

Since KPIs are tied to particular objectives and outcomes, the ones you choose depend on what you want to achieve; there are KPIs associated with productivity, efficiency, timeliness, profitability, quality and other o