These 9 Manufacturing Key Performance Indicators Can Help You Increase Productivity — and Profits
Whether you are looking at a spectacular or less than stellar year, it’s rarely a bad time to consider your company’s goals for the future. Those can range from the lofty to the minute, but one principle stands across the board: if it can’t be tracked, it can’t be measured. And if it can’t be measured, how do you know if it works?
To increase your productivity - and profits - it’s important to hone in on a few Key Performance Indicators (KPIs). This allows you to focus your efforts and achieve more value.
But measurement for the sake of measurement is a waste of time. Tracking processes that don’t affect your company’s performance can generate a lot of busy work creating and monitoring meaningless dashboards. It’s important to ensure you are measuring the right success indicators in the most critical areas of your business.
Selecting your top KPIs and creating corresponding dashboards across each of your divisions provides the insights, accountability, and focus needed to move the needle on your business. Once established, these indicators are not a “set and forget” proposition. You can improve both accountability and decision-making with scheduled, on-going conversations tracking progress around your biggest priorities.
To help you implement the best KPI’s for your company, we outlined some of the most meaningful KPIs for manufacturing. These indicators will help provide the framework to measure your progress and stay on track.
Supply Chain Management is among the most critical factors to a company’s success. KPI’s around supply chain management should provide important information about the products you have, the products you need, and the products you can do without.
1. Inventory Turnover Ratio
Inventory Turnover Ratio is a value that represents how many times the entire inventory for a company has been sold and replaced over a given time period. This value will help you decide if the inventory you have is being sold and replaced at an efficient rate - the higher the inventory turnover ratio, the better. To calculate inventory turnover, divide total sales by the average inventory value for the determined time period.
Inventory Turnover Ratio = (Sales) / ((Inventory Value Beginning of Time Period + Inventory Value End of Time Period)/2)
2. Stockout Ratio
A stockout occurs when a customer wishes to order more of a product than a company has available. Thus, the Stockout Ratio is a value that provides information about inventory availability and highlights products a company needs. To calculate the stockout ratio, divide lost revenue due to stockouts by the total potential revenue (revenue + lost revenue due to stockouts) for a time period. The lower the stockout ratio, the better.
Stockout Ratio = (Lost Sales)/( Revenue + Lost Sales)
3. Obsolete Inventory Value
When inventory becomes obsolete, it is near the end of the product lifecycle and will significantly decrease in value. At this point, the inventory may even be worth less than the original cost of purchase. Monitoring this value will help companies understand how much inventory they could do without, and strategically plan ways to sell or write off the obsolete inventory. Calculating the current obsolete inventory value can be difficult when considering additional costs, like overhead and inventory depreciation. For this reason, the most straightforward way to monitor obsolete inventory value is to calculate the purchasing cost for all dead inventory currently on hand. The lower the value, the better for your supply chain.
In manufacturing, quality refers to a company’s ability to manufacture products free from defects that work for the customer as expected. KPIs around quality are critical to help companies create and retain positive customer experiences.
4. Rate of Return
Rate of return evaluates the percentage of products that are sent back after being sold, typically as a result of an unsatisfied customer. Monitoring the rate of return can help companies better understand the quality of their products and can serve as an indicator for customer satisfaction and assembly line performance. As the rate of return fluctuates, it is important to complete a further analysis on root causes of returns. If your rate of return is consistently higher than expected, consider adding new quality control checks into your processes.
Rate of Return = (Total Number of Returns/Total Number of Units Sold) * 100
5. First Pass Yield
First pass yield describes the percentage of finished products that meet completion requirements without the need for re-work. Products that qualify for re-work include units that do not meet compliance or quality standards. First pass yield can be a useful measure to monitor while implementing continuous improvement activities to your production line. This measure can tell you which activities are useful to eliminate waste and increase unit output.
First Pass Yield = (Units completed successfully with no re-work required)/ (total number of units entering production process) * 100
Warehouse Management KPIs measure your warehouse efficiency. A smooth transition of items in and out of your warehouse can reduce waste and increase delivery speed.
6. Inventory Accuracy
Keeping an accurate inventory count is crucial to any business. Without accurate inventory counts, a company may order parts it already has in stock or lose orders without knowing which products are on hand. An inaccurate inventory count can also cost a company man hours while employees look for parts that are showing in inventory, but are not actually on hand. Monitoring inventory accuracy can help reduce waste and lost opportunities.
Inventory Accuracy Rate = (Number of counted products that match company stock record)/ (Total number of products counted)
7. Perfect Order Rate
Perfect Order Rate provides insight into how accurately products are picked from inventory, packed for shipping, and shipped to the customer. Perfect orders are both accurate throughout the fulfillment process and delivered on time.
Perfect Order Rate = ((Total Perfect Orders Delivered)/(Total Orders Delivered) )*100
Operations metrics can provide a high-level assessment on how a company is performing within a given timeframe. These KPIs measure how well all business processes are coming together to provide the end customer with goods and services.
8. Average Order Fulfillment Cycle Time
Order fulfillment cycle time tracks the amount of time it takes for a customer to receive their product or service in full after an order is placed. Tracking this KPI gives management a better understanding of their internal efficiency. A long order fulfillment cycle time could be an indicator that a company has long supplier lead times, long production lead times, inaccurate inventory, understaffing issues, or other problems within the organization causing delayed order fulfillment. In contrast, a quick order fulfillment cycle time can indicate a healthy supply chain and smooth interactions between company departments.
Average Order Fulfillment Cycle Time = (sum of all fulfillment cycle times for orders within the given timeframe)/(Number of all fulfilled orders within the given timeframe)
9. Average Manufacturing Cycle Time
Manufacturing Cycle Time measures the amount of time it takes to manufacture one unit from the time an order is released to the time of completion. This measure may also be known as “throughput time”. A long manufacturing cycle time can be attributed to lead times on raw materials, inefficiencies in the manufacturing process, or machine downtime. Monitoring this value can help a company stay ahead of potential production line problems.
Average Manufacturing Cycle Time = (sum of all manufactured unit cycle times within the given timeframe)/(Number of all manufactured units within timeframe)
KPIs Drive Continuous Improvement
Manufacturing is full of complexities with little room for error. Small mistakes can prove costly and may impact brand reputation and reliability. Tracking key performance indicators can simplify the manufacturing process by monitoring and highlighting potentially problematic areas before they impact your organization’s operations.