What Is A Manufacturing KPI?
A manufacturing Key Performance Indicator (KPI) or metric is a well defined and quantifiable measure that the manufacturing industry uses to gauge its performance over time. Manufacturing companies specifically use KPIs to monitor, analyze, and optimize operations, often comparing their efficiencies to those of competitors in the same sector.
This post will take you through the 30 top manufacturing KPIs and metrics to use in your 2020 reporting, how they are calculated, and how you can streamline your reporting process using manufacturing specific reporting software.
Why Your Company Should Be Using Manufacturing Specific KPIs to Stay Competitive
The manufacturing industry represents more than 10 percent of the US economy, and more than 15 percent of the global GDP. The only way to stay ahead in this fiercely competitive industry is through the implementation of manufacturing KPIs and metrics.
Everyone strives to increase the top line of a business, trying to gain more market share in an attempt to increase profits. While this is important, what if you could grow your bottom line without having to take on expansion risks? This is where KPIs for the manufacturing industry come into play.
The Fundamental Manufacturing KPIs and Metrics That You Should Be Using in 2020
When your company is just starting to implement KPIs, the whole concept can seem fairly daunting. Rest assured, it isn’t as bad as you think. Everything can be broken down into smaller, more digestible morsels of information. In this section, we will go over 10 of the basic examples of KPIs in manufacturing that your company should consider using:
- Throughput – This is probably one of the most fundamental KPIs for the manufacturing industry while also arguably one of the most important. The Throughput KPI measures the production capabilities of a machine, line, or plant; also known as how much they can produce over a specified time period. Throughput = # of Units Produced / Time (hour or day)
- Cycle Time – The cycle time KPI is very simple in nature, but that doesn’t mean it can’t be manipulated to be a very powerful tool. In the manufacturing industry, cycle time is the average amount of time it takes to produce a product. Simple, right? Maybe not as simple as you think. The cycle time metric can be used to measure the time it takes to manufacture a completed product, each individual component of the final product, or even go as far as to include delivery to the end user. Thus, cycle time can be used to analyse overall efficiency of a manufacturing process on the macro scale, as well as determine inefficiencies on a micro scale. Cycle time = Process End Time – Process Start Time
- Demand Forecasting – This manufacturing metric is used by companies to estimate the amount of raw materials they will require to meet future customer demand. This metric can be a little bit trickier for companies to fully utilize, as it is highly dependent on uncontrollable external factors. The basic formula is as follows: Projected Customer Demand = Raw Materials * Production Rate
- Inventory Turns – This is a measure of how many times inventory is sold over a specific time period and helps indicate resource effectiveness. Low ratio numbers indicate poor sales and excessive inventory, while high ratio numbers represent strong sales or insufficient inventory. Inventory Turns = Cost of Goods Sold / Avg. Inventory
- Production Attainment – This production performance metric measures production levels over a specific time period and calculates what percentage of the time a target production level is achieved. Production Attainment = # of Periods Production Target Met / Total Time Periods
- Cash to Cash Cycle Time – This is a time-based manufacturing KPI metric. It measures the amount of time it takes from an initial cash outlay for raw materials, inventory, or a manufacturing plant until the company receives cash from its customers for its products. This KPI is typically measured in days. Cash to Cash Cycle Time = Inventory Sale Date – Inventory Purchase Date
- Avoided Cost – This doesn’t mean you can just avoid paying bills and keep all the profits. The avoided cost manufacturing metric is an estimate of how much money you saved by spending money. Seems strange, right? The most common example is how much money is spent on machine maintenance vs. repair cost if a machine were to break down, plus the lost production value associated with the repair downtime. Avoided Cost = Assumed Repair Cost + Production Losses – Preventative Maintenance Cost
- Changeover Time – At the most basic level, changeover time represents the amount of time required to switch from one task to another. Typically, in manufacturing, it represents the amount of time lost from switching a production line from one product to another. However, it can also represent the amount of time lost during a shift change. Changeover Time = Net Available Time – Production Time
- Takt Time – This is a very useful manufacturing KPI when scheduling production orders or deciding whether to take an order from a client. Takt time is the maximum permissible amount of time that can be spent manufacturing a product while still meeting a client’s deadline. For those who are curious, Takt stands for “taktzeit,” a German word meaning “cycle time.” While very similar in nature, this is not to be confused with the cycle time KPI. Takt Time = Net Available Time / Customer’s Daily Demand
- Return on Assets (ROA) – You might be thinking, this seems like it has less to do with manufacturing and more to do with finance. That is because it does. However, financial metrics are just as important as manufacturing metrics. You can’t have a business if you aren’t making money. This metric evaluates how well your business is making use of its assets (money). It is the annual net income divided by total assets (fixed assets + working capital). ROA = Net Income / Avg. Total Assets
It is key to note that these are just the basic KPIs used in the manufacturing industry. A company should look beyond these for more insight into their production practices.
What Makes the Best Manufacturing KPI Metrics?
There is a plethora of manufacturing KPIs considered to be standard practice throughout the industry. However, that doesn’t mean that they should all be applied to any company that produces a product. While many of them are applicable, some are not. There might even be the possibility that a standard manufacturing metric doesn’t even exist for what you want to measure. If you are going to create your own production metric, there are the things you should take into consideration.
- Every KPI needs a clearly defined goal. What are you trying to achieve? Is it even something that can be achieved? What is the time period that you wish to achieve this goal? Be specific and set up parameters that clearly define your goal. This goal needs to be something that can be numerically defined (quantitative not qualitative).
- It is very important that you are able to objectively measure your progress toward the goal. This means collecting and interpreting data. Which bring us to the next criteria.
- Data, data, data. There must be a clearly defined data source with a strict procedure of how the data are measured or collected. There should be nothing left to interpretation here.
- Reporting your data is just as important as collecting it. Different manufacturing KPIs will have different reporting frequencies. Typically, reporting should happen on a weekly or monthly basis, and will often make use of a manufacturing reporting software solution.
Now that we have gone over some of the basic KPIs for the manufacturing industry and have a grasp of what makes a good KPI, we can dig a bit deeper into the world of manufacturing KPIs and explore lean manufacturing KPIs.
Lean Manufacturing KPIs
Lean manufacturing is a practice of Japanese origin (name drop: Toyota) whereby companies attempt to minimize the amount of “waste” without sacrificing productivity. “Waste” in this situation doesn’t mean garbage or refuge from the production process. It actually represents any activity that does not add value from a customer’s perspective. Listed below are 10 examples of lean manufacturing KPIs:
- Machine Downtime Rate – While this is commonly used as a manufacturing metric to give a general snapshot of how operation is going, it doesn’t paint a full picture. Machine downtime is a combination of both scheduled downtime and unscheduled downtime. Machine Downtime Rate = Downtime Hours / (Downtime Hours + Operational Hours)
- Percentage Planned Maintenance – This production metric is used to analyze the ratio of scheduled maintenance against the unscheduled maintenance. This KPI is useful in identifying when more preventative maintenance is required for certain assets. PPM = (# Planned Maintenance Hours * 100) / # Total Maintenance Hours
- Downtime to Operating Time – This manufacturing metric can be used to measure the effectiveness of machinery maintenance and the machine itself. With effective preventative maintenance, the amount of downtime can be reduced, creating a more optimal manufacturing process. Companies aspire to reduce this ratio as much as possible. Downtime to Operating Time = Downtime / Operating Time
- Capacity Utilization – This production KPI measures the amount of capacity being utilized as a function of total capacity available. Ideally, companies want this number to be as high as possible, as it indicates they are making better use of their production capabilities and maximizing return on their assets. This metric can also be used by management when deciding whether to take on new orders or quoting lead time, as it gives a snapshot of available resources. Capacity Utilization = Actual Factory Utilization / Total Productive Capacity
- First Pass Yield – This is one of the most fundamental production KPIs. It calculates the percentage of products manufactured to specification the first time through the process. This means that they do not require any rework or become scrap. A higher FPY rate is very desirable for any company. First Pass Yield Rate = Quality Units / Total Units Produced
- Overall Equipment Effectiveness (OEE) – This key performance indicator is considered the gold standard for measuring manufacturing productivity. The higher your OEE, the more effective your equipment is. A score of 100 percent means that you are manufacturing 100 percent of the time, at 100 percent capacity, at a 100 percent yield (no defective parts). OEE = Availability * Performance * Quality
- Manufacturing Cost Per Unit – It is very important that you know the total cost associated with manufacturing a product on a per unit basis. Without it, you wouldn’t be able to price a product properly. This KPI takes into account all costs associated with production and divides the cost by the number of units manufactured. Typical costs include materials, overhead, depreciation, labor, etc. Manufacturing Cost Per Unit = Total Manufacturing Cost / # of Units Produced
- Material Yield Variance – This lean manufacturing KPI takes the estimated amount of material required for a product and compares it against the amount of material actually used. Material Yield Variance = Actual Material Use / Expected Material Use
- Maintenance Cost Per Unit – This production metric is often overlooked as people tend to consider maintenance cost to be an overhead item. However, it is an important lean manufacturing KPI to take into consideration when trying to optimize efficiency. This calculation takes the total cost of maintenance (both preventative and emergency) and divides it by the number of units produced for a specified time period. Maintenance Cost Per Unit = Total Maintenance Cost / # of Units Produced
- Overtime Rate – This metric compares the amount of overtime worked by employees to the amount of standard hours. It helps to identify inefficiencies in scheduling and/or staffing. Overtime Rate (Percentage) = (Overtime Hours * 100) / Regular Hours
We have covered 20 different manufacturing KPI examples at this point, as well as what it takes to make your own. Now it is time to look at some data management best practices.
How to Keep Track of Your KPI Data
Quality control and process management are not the most exciting things going on at a manufacturing company, but they are the backbone of the operation. After companies start to implement their newly created KPIs and metrics, they often keep track of the collected data using Excel (hopefully no one is still compiling data using a ledger book). However, there are a couple of things to take into consideration when managing your data:
- Data protection and security are essential. Hackers stealing your KPI data is probably not a huge concern. However, it is critical that your data are backed up and can’t be deleted by accident.
- Reduce the amount of duplicate data. Don’t keep multiple working copies of the same data. Have one working copy, and one unaltered backup.
- Ensure your KPI data are easily accessible to your team. There is nothing worse than not being able to do your work because you don’t have access to information that you need.
All of these concerns can actually be remedied through the use of a reporting solution. Here at insightsoftware, we build industry leading reporting software solutions. Come and see how our KPI dashboards can help your company get ahead of the curve.
Streamline Your Reporting with Manufacturing Reporting Software
Regardless of whether your manufacturing company is large or small, using a manufacturing dashboard can help with the following reporting processes:
- Managing large data dumps manually is an inefficient process. A manufacturing dashboard is able to automatically process collected data and turn the data into analytics and insights.
- Consolidating the data into a central location can take a long time. Manufacturing reporting software allows companies to input all of their information into a single centralized location.
- Interface with other services. Manufacturing reporting solutions have developed over time to become powerful tools. Any good business intelligence software will be able to interface with your favorite ERP software.
- Instant updates at your fingertips. Gone are the days of asking someone to bring you weekly data updates from different segments of the company. Everything you need is just one click away. With a centralized database, manufacturing dashboards can immediately generate reports on performance, as well as send you alerts when a KPI starts to underperform.
Having a manufacturing reporting solution is a crucial aspect of operating a company in the industry. Centralized data with real time reporting will give any company the potential edge required to stay ahead of their competitors. However, it is important to remember that KPIs aren’t a one-time set-and-forget. They will require updating as your business grows and expands. Sometimes there are metrics that you don’t think of when someone says manufacturing.
More Examples of KPIs Used in Manufacturing
Here are 10 more manufacturing KPI metrics that might take you by surprise:
- On-Time Delivery – This is less of a production performance metric, but a very important KPI in the manufacturing sector nonetheless. You can have the most efficient production line in the world, but if you can’t deliver on time, clients are not going to want to work with you. This metric measures the percentage of products delivered on time to clients. On-Time Delivery = (# Units Delivered On-Time * 100) / # Units Delivered
- Health and Safety Incidence Rate – In an ideal world, this manufacturing metric would not even exist because it would be zero. Unfortunately, the reality of the matter is that workplace accidents and near misses do occur. This metric monitors the number of incidents or near misses over a given period of time (normally per annum). Health and Safety Incidence Rate = (Number of Incidences * 200,000) / # hours worked by all employees
- Employee Turnover – While this metric isn’t manufacturing specific, it is as equally important as the other KPIs in this list. While employee turnover typically has a negative connotation associated with it, not all turnover is bad. Some turnover may be required to remove underperformers and replace them with higher performers. However, having too high of a turnover can lead to lower moral. Employee Turnover Rate (%) = (Employees who left * 100) / Avg. # of Employees
- Non-Compliance Events / Year – Every country has regulatory compliance rules that manufacturers must follow when producing their products, whether it be safety, emissions, or something else. Not only is it important to record the number of times a non-compliance event occurred, it is also good practice to document the reason why it occurred, and what the resolution was. Non-Compliance Events = # of Non-Compliance Events / Specified Period of Time (Annually)
- Customer Returns (Rejects) – This is a classic example of a KPI used in manufacturing, and it is still used to this day for a reason. Keeping track of returns is imperative. This metric calculates the percentage of products that customers return because they have received a bad product. Needless to say, a company should strive for the lowest percent possible. Customer Return Rate = (# of Products Returned * 100) / Total # of Products Shipped
- Total Manufacturing Cost Per Unit Excluding Materials – This is a performance metric that attempts to pin down the fixed costs associated with operating a factory or production line. These are arguably the costs that companies are able to control. TMC Per Unit Ex Materials = TMC Per Unit – Material Cost Per Unit
- Manufacturing Cost as a Percentage of Revenue – This manufacturing KPI will help bring insight into how much your company is spending on manufacturing with respect to total revenue. This is very useful data to compare against competitors in the same sector. Manufacturing Cost as a Percentage of Revenue = Total Manufacturing Cost / Total Revenue
- Energy Cost Per Unit – This is a fairly nitty gritty manufacturing KPI that a lot of companies tend to overlook. It only really comes into play when companies are fine-tuning their operations and trying to become leaner. This KPI takes to total cost of energy spent over a period of time and divides it by the number of units produced in that time frame. Energy Cost Per Unit = Total Energy Cost / # of Units Produced
- Work-in-Process – This manufacturing KPI metric measures the value of partially completed products. It helps manufacturing companies understand how much of their working capital is tied up in incomplete products, and can help identify supply chain management issues. Ending Work-in-Process = Beginning WIP + Manufacturing Costs – Cost of Goods Manufactured
- Scrap Rate – This is a fairly straightforward manufacturing KPI. It keeps track of the number of products that are deemed scrap due to manufacturing defects that can’t be reworked. It gives companies insight into the ratio of products deemed scrap in a production run, helping identify an inefficient process. Scrap Rate = # of Scrap Units / Total # of Units
Congratulations! You have now learned the top 30 manufacturing KPIs to use in your 2020 reporting, how to create your own KPIs, the basics of KPI database management, and how you can streamline your reporting processes with a manufacturing reporting solution like the solutions we offer at insightsoftware. This might seem like a lot of information to digest all at once. If you have any questions or are interested in speaking with a reporting & KPI expert, contact us here.