What is a KPI?
A KPI (key performance indicator) is a measurement of value that manufacturing companies typically identify and track to determine how they are performing in a particular area of operations. KPIs are ideally presented in a dashboard format, giving the user the ability to quickly answer questions like, “How are we are doing?” and “What is causing performance issues”? Think of KPIs as a company or department’s scoreboard showing how well the team is playing in the game.
Every company is different and, in my experience, so are its KPIs. KPIs are limited by the software system the company uses, though. Companies typically manage performance based on what they can track—if a company does not have sophisticated software systems, the default KPI becomes “dollars” (e.g. 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 for manufacturing metrics.
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, 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 the 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 in their manufacturing metrics—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 an important one. It is basically a measure of a company’s ability to keep its promises. You have to give an answer when a customer calls and asks, “When can you ship this?” 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 a 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.
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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 products quickly and reliably helps companies make better promises to their customers.
Not to be confused with lead time (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 (VISUAL and CloudSuite Industrial) have tools to help companies better understand where these differences exist, so they can more easily analyze performance issues.
Scheduled vs. unscheduled maintenance
This KPI is fairly straightforward—it is used to understand how well your preventative maintenance programs are performing. Companies schedule routine maintenance on equipment, which then makes that equipment (and thus capacity) unavailable. It is planned and can be forecasted and accounted for in the overall picture of capacity, whereas unplanned maintenance is the opposite. Understanding the impact of unscheduled maintenance can help you improve your preventative programs, or help you understand if new equipment would be beneficial.
This is a high-level quality measurement that companies use to measure their product value and order accuracy. It calculates how many returns you receive versus how many orders are shipped, along with reasons for return. This can help identify if you have a product problem or an order accuracy problem.
Putting solid manufacturing KPIs in place is the first step to improving a company. You cannot manage performance unless you measure it. KPIs are important “scoreboards” to have, but perhaps more important is the system tracking and managing the KPIs. If you have an ERP in place, then you have the platform to drive the KPIs in this article 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.