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What KPIs Should Manufacturers Monitor?

August 15, 2023

Key Performance Indicators (KPIs) aren’t just designed to diagnose problems. They can also identify growth opportunities. Here is some advice for selecting the right KPIs for your business to monitor.

Key performance indicators (KPIs) are critical financial metrics that a company tracks to monitor its performance in real time. KPIs vary from company to company, based on its industry and management’s short- and long-term goals. Here’s guidance to help manufacturers create daily or weekly flash reports with the KPIs that are most relevant to your business operations.

Customizing the Report

KPIs allow management to identify opportunities and problems, allowing timely response. Proactive CFOs publish KPIs in a concise “flash report” that’s distributed to the entire management team. Graphics and tables can help managers digest the information quickly and avoid data overload. It also may be helpful to provide metrics that show where you stood last week (or the same time last year) or compare your performance to industry leaders. Industry benchmarks may be available from trade associations or your financial advisors.

KPIs should be specific and measurable. Those that fall outside of acceptable ranges — or are trending toward pre-determined danger zones — may be indicated with yellow or red coloring.

For example, a manufacturing business might want to highlight its defect rate (rejected units as a percentage of the total units produced). This metric could also be broken down by machine, machine operator, shift and product line. This information might be presented in a graphical format, and when the defect rate exceeds an acceptable level (say, 2%), the bar on the graph would be yellow, indicating a negative trend. If the defect rate exceeds 5%, the bar would be red, indicating a need for immediate attention. This coding helps management quickly recognize that a problem exists, then pinpoint the root cause(s) and fix it.

Another KPI that’s on many manufacturers’ radars is overtime pay. Given increasing hourly wage rates, many companies want to minimize weekly overtime — and waiting until month end can be too late. Overtime costs can be reported on the flash report in aggregate, as well as by department and shift. When overtime exceeds a prescribed level for a given week, management can use the overtime breakdown from the flash report to brainstorm ways to reduce overtime hours, including shuffling workers between shifts, cross-training operators on multiple machines or using temporary contract labor during peak production periods.

Choosing the Right Metrics

Many companies publish flash reports. But few use them to their full potential. It’s common for managers to use a generic industry template month after month, year after year. Those templates may include important metrics that matter to every business. Examples include daily cash receipts, weekly shipments, and monthly earnings before interest, taxes and depreciation (EBITDA). But managing an efficient manufacturing operation requires more attention to detail.

In addition to monitoring your defect rate and overtime costs, other KPIs for manufacturers to consider include:

  • Units of production,
  • Materials cost per unit,
  • Inventory levels,
  • Scrap and waste,
  • Workorder backlog,
  • Ontime delivery,
  • Labor hours,
  • Average hourly wage rates,
  • Unplanned call outs,
  • Gross margins,
  • Workplace safety incidents,
  • Shipping costs,
  • Utilities consumption and costs, and
  • Machine utilization rates and breakdowns.

Some manufacturers install sensors in equipment to collect real-time data, such as electricity usage, hours of operation, temperature and output. Tracking these data points can allow you to perform “predictive maintenance” rather than react to breakdowns after they occur.

KPIs can vary over time. For example, if your customer service representatives start receiving calls from unhappy customers about damaged or defective parts, you might want to monitor quality-related metrics more closely.

Also think beyond the shop floor when selecting KPIs. For instance, you may decide to keep close tabs on receivables aging if you’re experiencing collections issues. Or you could track the closing rate on sales leads if you recently hired new sales team members, or you want to gauge the effectiveness of a new marketing campaign. Individual managers can help CFOs identify the most important performance indicators for their respective departments.

Balancing Negatives and Positives

Remember that KPIs aren’t just designed to diagnose problems. They can also identify growth opportunities. For instance, a specialized machine that’s only at 40% utilization could be moved to a different factory where a similar machine is currently operating at maximum capacity. Or your sales manager could devise an incentive program to increase sales of items that are produced on the machine to increase its utilization.

KPIs can even be used to celebrate successes. For example, you might post a sign in the breakroom that displays the number of days without a workplace safety incident or throw a pizza party for the shift with the lowest defect rate for the quarter.

We Can Help

Contact us for help selecting the right KPIs for your business to monitor — or fine-tuning your existing flash report to better align with what matters most based on your current situation.

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