Key Performance Indicators (KPIs) are used in all industries and services. Every business needs to know if it's performing optimally or if it needs to do better in certain areas. That's what KPIs do - they give business owners and executives the data that shows how their business is performing.
Admittedly, KPIs can become overwhelming if you try to track data for a multitude of different scenarios. Below is a list of some important KPIs that are beneficial for your manufacturing business.
The key here is consistency. First, you need to understand how to calculate the KPIs you want to track. If you calculate a KPI incorrectly, you will be basing decisions on false data which can lead to problems.
Next, a process must be set up to monitor these KPIs and assess collected data regularly. You may not always like the numbers you see from your KPIs, but you’ll be able to take that information and determine what should be improved.
Most KPIs can be monitored monthly and, over time, they will provide historical data to identify trends and help you make smart business decisions to ensure optimal performance.
Many of these KPIs are straightforward but even obvious things can be forgotten. Harness the valuable data available to you and let it help with your business decision-making.
Below are 7 KPIs manufacturing companies should create and track to ensure continued growth.
Note: For manufacturers with multiple product lines, it is important to set these KPIs for each product line.
The most important metric to track is your production volume. Almost every other KPI on this list is determined in some way by the number of products you produce.
One of the biggest challenges here is balancing between producing a large enough amount of product to meet demand but not too much where you are left with a large amount of inventory. Tracking this KPI consistently over time will help you determine your optimal production levels.
Amount of Production Downtime
In many cases, when a manufacturer’s equipment is down, money is not being made or it's even lost. Tracking your production downtime can provide insight into possible equipment problems or inadequate employee levels.
When these downtimes occur, it is important to document the reason for the downtime. Knowing why can help identify patterns (such as a certain piece of equipment that breaks down regularly) so you can start thinking about solutions.
Whether it is equipment or employees, identifying and documenting the causes can help you minimize unnecessary downtimes and keep production levels high.
This KPI is another important one for manufacturers because you need to know how much it costs to make a product in order to set a selling price.
The easy way to do this is to add all your costs together, determine what you want your profit margin to be, and then determine a price. While this is the simple way, it only gives you a broad look at the costs associated with making your products.
In order to get a better feel for where your costs are coming from, break them down into the different types of expenses involved with production: materials, labor, assembly, etc. This more granular view will help you look at each expense and see if they can be improved upon. If material costs seem high, are other vendors available with better pricing? Are there ways to improve the assembly process? Monitoring this KPI over time will help you determine if a change in selling price is needed to keep your profits where you want them.
Manufacturing Cost Per Unit = Manufacturing Costs / Total Number of Units Produced During a Given Period
Defective products are part of manufacturing. If you’re producing thousands of products a day, some of these are bound to be defective in some way.
Do you track how many defects you have per day/shift? If not, now is the time to start. Along with looking at the total number of defects, document what the defects are. Do many of them have the same problem? If you see a consistent problem in your defects, identify where in your production process this may happen and find out the cause. It could be mechanical or human in nature.
This is another KPI to track over time. Even if you have a small number of defects, you will be able to identify problem areas and see if the problems increase during certain periods. As you know, defects cost you labor and material costs.
You can spend lots of time and money creating great products with optimal costs and profit margins, but if you can’t get these products delivered to customers in a timely manner, it will all be for naught. It is imperative that you track your deliveries to customers. This important KPI will show you when your products are being delivered on time and when they are not.
Immediately investigate late deliveries to determine the cause. If you are using shipping carriers to deliver your products, work with them to be able to track shipments and create a way to monitor carrier notifications so you are aware of any issues.
Whether the causes are out of your control (i.e., weather, traffic accident, etc.) or something you can fix (i.e., more delivery vehicles, adding more shipping carriers, etc.), it is important to notify the customer of any delays in them receiving your product. While they will be disappointed, they will appreciate the notice. Customer satisfaction is paramount so do your best to ensure on-time delivery and notify customers when there are delays.
On-time Delivery = On-time Units / Total Units
Cost of Equipment Maintenance
Maintaining equipment is very important in manufacturing. Keeping maintenance costs low is always the goal but, depending on the age of your equipment, that may not be possible. Try to balance costs by being proactive in your maintenance to possibly prevent major equipment breakdowns. Also, take a look at the age of your equipment and perform a cost analysis to determine if replacing older equipment would be a smart financial choice.
Maintenance Cost Per Unit = Total Maintenance Cost / Number of Produced Units in Measurement Period
Revenue Per Employee
How do you know if your staffing levels are adequate? Efficiency and productivity are key elements to any manufacturing operation. One way to measure these parameters is determining Revenue Per Employee.
If this KPI is low, it usually indicates a lack of growth. Evaluate your processes and look for ways to optimize them. While the goal is to have this KPI be high, make sure to not ignore your employees while trying to achieve this goal. Depending on less employees to do more will take its toll over time.
Revenue Per Employee = Total Revenue / Current Number of Employees
In order for businesses to succeed, they need to know how they are performing now in order to make a plan for where they want to be in the future. Tracking KPIs will help manufacturers find strengths and weaknesses in their production process and ensure accurate data for making pricing and personnel decisions.
If you find that your manufacturing business is not currently tracking KPIs, or is only tracking a few generic ones, reach out to one of SVA’s industry experts to find out how to get your business back on track.