Measure what you want to improve
There are many opinions as to what key performance indicators (KPIs) should be monitored at a small to medium-sized manufacturing company, but the on-time delivery (OTD) KPI is on everyone’s list. It doesn’t matter if the company is build-to-stock, a job shop, or something in-between; there are many steps in coordinating the production of a product and OTD is a nice summation of manufacturing performance. Issues with production, supply, and quality can wreak havoc on a production schedule. Whether you ship on time or ship late, the on-time delivery metric reflects what’s going right and what’s not.
The wrong way to calculate the on-time delivery (OTD) KPI
Calculating the OTD rate can and should be simple math, but too often I see companies manipulate the on-time delivery performance measurement to show themselves in the best light.
One of the manipulations is to measure from the customer’s perspective. The customer cares about the delivery date, not your ship date. The ship date is calculated by taking the delivery date and subtracting the delivery time. For example, if a customer wants a 100-piece order on Friday the 10th and shipping is three days, the order needs to ship on Tuesday the 7th. What if it ships overnight on the 9th and the customer receives it on the 10th? Count it on time! We’ll just ignore that extra shipping expense.
Another manipulation of on-time delivery metrics is using quantities to make the numbers look better. In this case, customer feelings are ignored. Let’s say a customer orders a table and six chairs. The table and four of the chairs ship on time, but two of the chairs ship late. Five out of seven items shipped as scheduled, so we score 71.4% on time for that order! Meanwhile, the customer has two guests sitting on folding chairs.
These cases highlight what can happen when the focus is on improving a KPI, regardless of the cost, especially when there isn’t a good understanding of what that KPI is measuring. Measuring the on-time KPI for both examples described above would produce a combined score of 98.1% (105 pcs shipped on time/107 pcs ordered). We’re doing really good!
The right way to do an on-time delivery calculation
You must first understand what is actually being measured. It’s not pieces, and it’s not when the customer receives the product. You are measuring your ability to do what you say you are going to do.
If you put in an order to ship on the 7th and it ships the 9th, you didn’t do what you said you would do. The expedited shipping kept the customer happy (good move), but it still shipped late. If you take an order to ship a table and six chairs, and you ship two chairs late, you didn’t do what you said you would do. That order is late. “Shipped on-time” means the entire order was sent out on the date you committed to when taking the order. Using this calculation with our examples produces an on-time KPI score of 0.0% (0 orders shipped on time/2 orders total). Quite the difference from 98.1%, but it’s accurate. A score of 98.1% indicates there isn’t a serious problem; 0.0% indicates there is. Since there is clearly a problem, 98.1% doesn’t make sense.
What is on-time delivery?
On-time delivery (OTD) is a metric used to measure manufacturing performance across the entire organization. OTD shows the ability of the organization to do what you say you are going to do. When you take an order, you define a ship date. Did you ship it on or before that date?
What is the on-time delivery formula?
On-time delivery = (Orders shipped on time / total orders) * 100
Using the on-time delivery KPI the right way
The best way to use the OTD KPI is to remember the “I” in KPI stands for indicator. It is there to let you know if something needs your attention. The number is never the goal; improving the process is the goal. The KPI let’s you know what does—and doesn’t—need improvement. Look beyond the number and into what is creating the number. In the example above, the 0.0% rating may seem brutal, and your instinct may be to change the formula to make it look better, but then you are just kidding yourself. Invest your time and energy into fixing the process. As those process changes take effect, the KPI number takes care of itself.
Why do the numbers get skewed?
In my experience, the overwhelming majority of people want to do the right thing, they want to improve the organization they are in. So why do almost every company I’ve dealt with skew the OTD numbers to look favorable? I think there are two reasons:
- OTD delivery is viewed as a production KPI. The reality is, it’s an indication of how the entire organization is doing. Let’s say a product takes five days to produce. If an order is put in with a delivery date two days from now, is it production’s fault when it ships late? What if engineering releases the order two days before it’s scheduled to ship? Is it production’s fault it shipped late? I think it’s human nature to skew the numbers when you aren’t in control of all the inputs (I’m not going to let them make me look bad!).
- If senior management uses the KPI as a club (Your performance is awful! I have the numbers right here!), people are going to try avoiding getting hit with a club. They will skew the numbers. In this scenario, generating a “good” number – not fixing the process – is the goal. This is misguided.
How manufacturers can improve their on-time delivery KPI
Remember, the number is never the goal; improving the process is the goal. Here is how to improve the process:
- Create a production team to work on improving OTD. Even though the OTD KPI is a measurement of the entire organization, start with production. If production issues are not addressed first, the rest of the organization won’t be able to see how their actions (or inactions) are affecting production and the OTD KPI.
- Understand and accept there are problems. The culture of the organization needs to support leaders admitting weaknesses as the first step to overcome the weakness. This is not always as easy as it sounds. If your business culture won’t accept an OTD KPI that isn’t skewed, create your own realistic KPI following my advice. Use it to create a baseline and to measure improvements. Keep the information to yourself and the production team. It’s also critical that the problems that are defined are not just problems the team feels they know how to fix. Identify problems even if you think they are unsolvable. Just because the team doesn’t know how to solve a problem, it doesn’t mean it can’t be solved.
- Manage your capacity. If you have a problem with your OTD, I’m confident of two things:
- Your capacity isn’t being managed properly.
- The organization doesn’t know how to manage the capacity properly. If it did, it would. (This is an area where you may need help in both developing a strategy to fix the issue, and then executing that strategy.)
- Measure your production output. It could be argued this is a subset of #3. I broke it out because it’s an important concept. Part of managing the capacity properly is estimating how long each step in the work (job) order is going to take. To keep estimates as clean as possible, they need to be compared to actual rates on a regular basis.
- Provide Sales a tool to check the feasibility of customer demand. Once capacity is being managed properly, a methodology can be developed to see if production can do what the customer wants, based in part on all the other commitments that have already been made. Use this information to accept the order, reset the customer expectation, or find a way to open up capacity. This step is crucial. Your OTD KPI will never get better if unrealistic demands are put on production. The only way to know if the demand is unrealistic is to manage the capacity properly. That’s why I started with production.
For a manufacturer, there is no quick way to improve OTD KPI. However, not taking the steps I outlined above means you are as good as you’ll ever be. Maybe that’s good enough. If it is, that’s fine, although I’d offer this: If it’s fine, it’s fine for now. What if your competitors read this and are working on managing their capacity?
Improving your process as I described allows the organization to get better results with less overall effort. Yes, you need to climb a mountain to get there, but once you have climbed it, the view is great.