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.

obvious connect the dots

KPIs for manufacturing let you see connections and take action

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 objectives. There is no right or wrong way to approach building a KPI dashboard. Start by looking at your objectives and your end-to-end production cycle, then determine where you will get the most value from proactive measurement.

Researching KPIs can quickly become overwhelming, because there are so many options. Here we’ve identified some common manufacturing KPIs you should consider and why.

Production volume / Throughput

What is it? Production volume helps you understand the quantity of goods your operation can produce in a given period of time (e.g., per shift/day/week/month/quarter).

Why measure it? You can compare production to similar time periods (e.g., month-over-month, year-over-year) to gauge productivity and assess how other factors may have influenced it. If you notice a declining trend, you can investigate whether downtime is increasing or a process has changed.

How to measure it? total volume / time = production volume

Downtime

What is it? When production stops due to equipment malfunction or maintenance, we label it downtime. If you have multiple possible sources of production downtime (e.g., multiple machines) your dashboard should indicate the source or reason.

Why measure it? Among other things, tracking downtime can help you better plan and schedule maintenance to minimize interruptions to your production lines.

How to measure it? Downtime / total production time = downtime % OR ratio of downtime to uptime

Capacity utilization

What is it? If a machine in your production line is sitting idle, it’s a sign that you have unused capacity. Machines and other assets are costly and you need to make optimal use of them.

Why measure it? Understanding your capacity utilization allows you to make adjustments that reduce machine idle time, improve overall cycle time and boost efficiency.

How to measure it? Actual output / potential output * 100 = capacity utilization %

Rate of return

What is it? Your rate of return is the percentage of goods produced that are returned to you because they are faulty, mispackaged or damaged during shipping or similar reasons.

Why measure it? It’s important to know if there is a gap in your quality assurance process that you need to address or an issue with a logistics partner. Returned goods are costly to your business, because of the unnecessary rework they require and the brand trust and loyalty they erode.

How to measure it? returned items / total items produced * 100 = rate of return %

On-time delivery

What is it? Every business should strive to deliver orders on time 100% of the time. But there are many factors that can lead to products shipping late, including machine downtime, employee absences, inventory issues, quality issues and more.

Why measure it? On-time delivery is a major driver of high customer satisfaction and net promoter scores. If you notice a negative trend in on-time delivery, it’s a sign that one or more upstream issues need to be addressed.

How to measure it? Orders delivered on time / total work orders * 100 = on-time delivery %

Cost per unit

What is it? Cost per unit is a measure that captures all the fixed and variable drivers of cost in your production process. You can get quite granular with this KPI by measuring individual factors, including the cost of material, labour, equipment, energy usage, facilities costs and more. Manufacturers often chart unit costs over time so they can investigate unexpected spikes and negative trends.

Why measure it? Unit cost is a major determinant of profitability, so you need to know when you’re missing your target unit cost and why.

How to measure it? Total units produced / total production cost * 100 = cost per unit

Maintenance cost

What is it? Quite simply, this the cost of planned upkeep and unplanned repairs to the machinery, equipment and facilities you use. Whether it’s recalibration, parts replacement, HVAC servicing or something else, every manufacturer incurs maintenance costs and needs to plan to avoid unscheduled downtime, cash flow issues and other challenges.

Why measure it? Tracking maintenance costs helps you assess when the cost of servicing machinery exceeds the cost of replacing it, among other things.

How to measure it? Add up all planned and unplanned servicing and repair costs for a given period.

Schedule attainment

What is it? Schedule attainment is all about completing production work orders on schedule. Expressed as a percentage, it allows you to gauge how consistently and efficiently your processes are running. It’s a major (though not the only) variable for another important KPI: on-time delivery.

Why measure it? By tracking this KPI, businesses are more likely to evaluate their production processes critically, and they’re also more likely to accurately estimate order delivery dates and times.

How to measure it? work orders completed on schedule / planned work orders * 100 = schedule attainment %.

Total cycle time

What is it? The total time required to produce your product, from the time you receive the order until the product is ready to ship, is its total cycle time. You can also measure the total cycle time for one stage in a long manufacturing process. If you manufacture multiple products, you can track total cycle time for each product or create an average for all product types. Businesses often take an average of all cycle times over a given period (e.g., monthly) and track changes over time.

Why measure it? Monitoring total cycle time allows you to measure gains and losses in efficiency, which is a key cost driver. You can monitor the effectiveness of process improvements using total cycle time, and a negative trend can spark an investigation of where inefficiencies have been introduced.

How to measure it? Calculate the difference between the order completion time and the order start time.

Yield

What is it? Yield is fundamentally a quality measure, since it tells you what percentage of the products you create pass inspection and can be sold to your customers. An ideal yield would be 100%, and you will have to establish a benchmark yield rate for your business.

Why measure it? If your yield falls below the benchmark you set, it means you have one or more problems along your production line that you need to address. Low yield has a negative impact on other KPIs, such as cost of goods sold, throughput and total cycle time. High yield is a sign that you are running a well-oiled machine, literally and figuratively speaking.

How to measure it? Total units that passed quality inspections / total units produced * 100 = yield %

Inventory turnover ratio

What is it? Inventory turnover is the number of times in a given period that a business sells and replaces, or “turns over”, its stock of goods. So if your annual cost of your goods sold is $1,000,000 and the average cost of your inventory over the year is $50,000, your inventory turnover is 20 — you are replacing your inventory 20 times per year.

Why measure it? It’s important to know how often your stock turns over because it’s a key indicator of business health. No business wants to have low sales or bear the cost of having too much inventory at hand. You can also gauge the market demand for your product based on how high your inventory turnover ratio is.

How to measure it? Cost of goods sold / average inventory cost = inventory ratio

Customer churn

What is it? Customer churn is a measure of the number of customers that leave you during a given period. Businesses with a subscription model are particularly interested in churn. If your business has subscribers, learn how to predict customer churn so you can take action to prevent it.

Why measure it? Calculating churn allows you to forecast future revenues more accurately. It’s also a key metric for the health of your business — a leading indicator of the perceived value of your brand and your promised customer experience.

How to measure it? (customers at beginning of month - customers at end of month) ÷ customers at beginning of month = customer churn

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Put manufacturing KPIs to work in your business

The KPIs listed above are highly selective and only intended to give you a sense of what is possible. The most important next step is to clarify your objective(s) so you can identify the KPIs that will help you get there. Speak with an expert in reporting and analytics to get you started on your journey toward actionable insight.

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