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. Companies typically 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 costs 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.
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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 product quickly and reliably helps companies make better promises their customers.
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.
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