A List of Manufacturing KPIs to Consider

    5/19/21 10:00 AM

    manufacturing-KPIs

    What is a KPI?

    A KPI (key performance indicator) is a measurement of value that manufacturing companies typically use and track to determine how they are performing in a particular area of operations. KPIs are ideally presented in dashboard format, giving the user the ability to quickly answer the questions of “How are we are doing?” and “What is causing performance issues”? Think of KPIs as a company or department’s scoreboard for how the team is playing in the game.

    Every company is different, and in my experience, so are its KPIs. The KPIs are limited by the software systems the company uses, though. What typically happens is companies manage based on what they can track—if a company does not have sophisticated software systems, the default KPI becomes “dollars.” For example, dollars shipped this day, week, month, etc. With more sophisticated software comes the ability to measure things at a more granular level.

    What manufacturing KPIs should I consider?

    Using the example of a manufacturing company, I’ll give some common KPIs below. The list is not exhaustive, but rather a starting point.

    Direct vs. indirect labor costs

    It is difficult for some companies to get a true picture of direct (e.g. when someone is creating a work order) versus indirect (e.g. being in meetings, on break, etc.) costs. Having the ability to clearly see the difference in these costs helps companies manage how efficiently their employees are working and spending their time.

    Estimated vs. actual costs

    If a company has a “to order” model—meaning it makes, engineers, or configures when a customer places an order—then costing is one of the most important manufacturing metrics. When a company can understand how much something costs, then it’s able to apply mark ups to make sure the work will be profitable. If there isn’t a way to compare what it actually cost to make the order with the estimate of what it would cost, then the profitability picture is murky. Conversely, if a company can estimate a job and then “close the loop” by understanding its actual costs, it can become better at estimating the next job, especially if that next job is similar to something that’s been manufactured before.

    Gross profit by sales order, work order, etc.

    Did we make money on this? It’s a common question that would seem easy to answer, but can be elusive. In many cases, companies know their overall profit margins by month or quarter, but cannot tell you on an order-by-order basis if they were profitable. Why is this important? If you understand your profitability down to the order level, you may learn there is business you’re taking that you shouldn’t be, and other business you should be trying to get more of. I frequently see companies confuse volume with profitability—you may have a customer that sends a lot of business your way, but it takes too much work to complete the order and you end up losing money or breaking even on the job.

    On-time delivery performance

    This is a very common manufacturing KPI, and a very important one. It is basically a measure of a company’s ability to keep its promises. When a customer calls and asks “When can you ship this?”, you have to give an answer. For companies that do not have a granular view of their capacity and materials, the answer is often a guess or a standard lead time. In essence, the on-time delivery performance metric is how accurately a company delivers product based on when it promises that delivery. It is usually represented as a percentage. Once a company has better tools in place, it can often decrease its lead times and increase on-time delivery performance, which then increases customer satisfaction and customer orders.

    If you’re searching for an ERP solution to help manage your delivery performance, I suggest downloading our eBook called “How to Select ERP and Not Regret It.” Or, if you’d prefer to have a common-sense conversation with someone who is not a salesperson, click here to schedule a free consultation with our president, Jack.

    Vendor performance

    Another of the more common manufacturing metrics is measuring how well your vendors perform in delivering product to you. It can be as simple as on-time delivery, but is often coupled with quality ratings as well, depending on the industry. You may have vendors that deliver fast and inexpensively, but perhaps the quality of the product could be better. Understanding which vendors supply high-quality product quickly and reliably helps companies make better promises their customers.

    Cycle time

    Not to be confused with lead time, which is the amount of time it takes from placing an order to when the order is actually delivered to the customer, cycle time is the actual amount of time it takes to manufacture the product. A lot of manufacturing companies will analyze the difference between cycle time and lead time to see where gains can be made in the process. Some Infor ERP products have tools to help companies better understand where these differences are so that they can more easily analyze the issue.

    Scheduled vs. unscheduled maintenance

    This one is fairly straightforward; it is used to understand how well your preventative maintenance programs are performing. Companies schedule routine maintenance on equipment that makes that equipment (and thus capacity) unavailable. It is planned, and can be forecast and accounted for in the overall picture of capacity, whereas unplanned maintenance is the opposite. Understanding the impact of unscheduled maintenance can help you analyze your preventative programs, or help you understand if new equipment would be beneficial.

    Returned product

    This is a quality measurement that companies use at a high level to measure their product quality and order accuracy. How many returns do you receive versus how many orders are shipped, along with reasons for return can help identify if you have a product problem, or an order accuracy problem.

    Throughput

    This is a measurement that tells you how well your production is performing by basically telling you the velocity at which product is being produced. Effectively, how much product can you get produced in a given amount of time. Many ERP solutions can tell you what your throughput is as well as identify what areas in your plant are causing bottlenecks that slow down your throughput.

    Setup changes

    In some manufacturing environments, there are significant setup times associate with preparing a machine to produce product. A simple example is a paint line. Paint color needs to be changed, and that triggers a new setup for when the paint color changes. Think of a wrought iron furniture manufacturer that paints furniture black, green, and white. Thought must be given in order to maximize throughput based on paint color so as to minimize set up times. A manufacturer like this cannot efficiently change paint colors on the fly, they optimize their painting so as to minimize setup changes in order to be as efficient as possible.

    Overtime rates

    This is obviously a measure of how much overtime you are paying employees versus their standard rate. Understanding how much you are paying in overtime can reveal why things may be taking longer to complete than originally planned. This gives insight in to training needs, capacity needs, or whether or not to hire more workers.

    In conclusion…

    Putting solid manufacturing KPIs in place is the first step to improving a company. You cannot manage unless you measure. KPIs are important “scoreboards” to have, but perhaps more important is the system providing this information to the KPIs. If you have an ERP in place, then you have the platform to drive these KPIs and many more. If you do not have an ERP, then the job is quite a bit more difficult.

    If you are looking for ERP and not sure where to start, how about talking to an expert who is not a sales person? Click here to learn more about Jack Shannon, and sign up for a free phone consultation to discuss your situation.

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    Bryan Foshee

    Written by Bryan Foshee

    Bryan is a Regional Manager at Visual South and has been working with the company since 2002. Prior to that, he was a consultant and implemented SAP in manufacturing, distribution, and service industries.