Being a manufacturing company in the digital age is no small feat, but the rise of technology gives manufacturers access to a critical tool: Data.
Keeping track of your manufacturing company’s numbers and applying them to ensure continuous improvement is a challenge. Read on for an in-depth guide featuring 33 manufacturing key performance indicators that will help your business use its data to its greatest advantage.
Average Unit Contribution Margin
The average unit contribution margin is how much profit, on average, is generated per unit produced. This KPI will help you understand how many units need to sell in order to break even as well as give you an idea of the profitability of a given product.
To calculate average unit contribution margin, divide variable costs by total units sold and subtract that number from total revenue. When you calculate this metric, make sure you only include variable costs, and not fixed costs like overhead.
Avoided cost is the amount of money saved by doing routine preventative maintenance as opposed to emergency maintenance, as discussed in the previous metric. For example, getting regular oil changes for your car ends up being less expensive than having to replace the entire engine, even if the oil changes are a minor inconvenience.
Capacity utilization is the measurement of the degree to which output capacity is being used. This KPI is a reflection of efficient use of assets like equipment and space, so it’s important to keep this metric close to 100 percent.
Capacity utilization also affects other metrics like cycle times, so tracking it will give you a way to connect trends between those metrics and capacity utilization.
To calculate capacity utilization, divide actual output by maximum possible output.
Cash-to-Cash Cycle Time
Cash-to-cash cycle time is the measure of the time between the purchase of materials and the collection of payments for products created using those materials. This KPI is typically measured in days and is an important metric to help management understand the overall cash flow created by a manufacturing process based on speed and efficiency.
Defect density is a measure of how frequently a unit is produced with defects. Defective products should be examined as soon as possible to prevent further issues and avoid using materials on defective items, which is an unnecessary waste of money.
To calculate defect density, divide the number of defective units by the total amount of units produced in the same time period. Aim for a defect density that is as close to zero as possible.
Demand forecasting helps determine a plan for manufacturing activities, such as how much supply to order and when. This minimizes expenses by optimizing the timing of steps in the manufacturing process.
Demand forecasting doesn’t have a cut-and-dry formula; instead, manufacturers must monitor competitor activities, historical sales data, seasonal fluctuations and work closely with sales and marketing teams to stay abreast of promotions that may increase demand.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. This metric is a big-picture indicator of profitability, even more straightforward than net operating profit. EBITDA is often used by investors to determine the financial health of industries and companies.
To calculate EBITDA, simply add earnings before interest and taxes to depreciation and amortization.
Engineering Change Order Cycle Time
Engineering change order cycle time refers to how quickly design changes or changes to existing inventory can be implemented. Flexibility is key to make these changeovers smooth. Engineering order cycle time impacts overall volumes and cycle time, so your processes should be prepared to implement change orders quickly.
First Pass Yield
First pass yield is similar to yield except it adds the requirement that the products pass quality standards without needing any modifications or rework. That is, the products must meet the quality standards on the “first pass” through production.
Higher is better for first pass yield. Drops in this metric can signify a need to evaluate materials and processes so that issues causing defects can be addressed quickly.
To calculate first pass yield, divide the number of products that meet quality standards after their first run by the total number of products made in the same time frame.
Manufacturing Cost as a Percentage of Revenue
Manufacturing cost as a percentage of revenue is the ratio of total manufacturing costs to the overall revenue generated by production. This metric is a measure of cost effectiveness. Make sure you understand what your manufacturing costs are made up of (materials, overhead, etc.) so that changes can be made to improve this ratio.
To measure manufacturing cost as a percentage of revenue, divide total manufacturing costs by total revenue. The lower the percentage, the more revenue is being generated.
Manufacturing Cycle Time
Manufacturing cycle time is the measurement of the amount of time between order placement to the shipment of the order to the customer. In other words, manufacturing cycle time is the time it takes to convert raw materials into a finished product.
It’s important to measure manufacturing cycle time, because it is an indicator of efficiency and the plant’s capacity to meet customer demands in a timely fashion. Aim to lower your manufacturing cycle time to maintain flexibility in your manufacturing process and achieve a high level of customer satisfaction.
Material Yield Variance
Material yield variance is the difference between how much material is actually used in a product versus the standard amount of materials expected to be used.
Material yield variance shows how efficiently materials are being used in finished units, so a low variance that is close to standard usage is ideal. High variances can be caused by low-quality materials or changes in the production process that do not use material as efficiently.
To calculate material yield variance, use this formula:
(Actual unit usage - Standard unit usage) x Standard cost per unit
Net Operating Profit
Net operating profit is the measurement of profitability for all stakeholders for a manufacturing plant. This metric is another measure of cost effectiveness and also gives stakeholders an idea of the profitability of the plant.
By reducing the cost of goods sold and operating expenses with lean methods, net operating profit can be an actionable KPI for your business to work on.
To find net operating profit, subtract cost of goods sold and operating expenses from total revenue. This can be calculated before or after taxes.
Number of Non-Compliance Events Per Year
The number of non-compliance events per year is how many times a plant or facility operated outside guidelines of regulatory compliance rules over a given year. Like health incidents, these events can cost time and money, sometimes in the form of fines. Companies must document violations in detail with the reason for the event and how the issue was resolved. If similar non-compliance events occur regularly, evaluate operating procedures and make changes so that these incidents can be avoided.
On-Time Delivery to Commit
On-time delivery to commit is the rate at which finished products are delivered in the timeline promised to customers. Focusing on this metric will help you build trust with your customers as well as motivate employees because it’s a concrete, visible metric. It’s best to keep this KPI as close to 100 percent as possible; otherwise, you may need to evaluate the speed of production processes and reconsider the timeline your company presents to its customers.
To calculate on-time delivery to commit, divide the number of orders delivered on time by the total number of completed orders.
Overall Equipment Effectiveness (OEE)
Overall equipment effectiveness, or OEE, measures the efficiency of a machine or production line. This metric is based on the time the machines are scheduled to run, unlike overall operational effectiveness, which will be discussed next.
OEE is an important KPI because it factors in availability, performance and quality into one clear metric. Aim to keep OEE close to 100 percent by using lean manufacturing methods that optimize each factor.
To calculate OEE, multiply availability, performance and quality all together. Note that availability refers to actual production time divided by scheduled time, performance refers to the percentage of time the machines are running at full capacity, and quality refers to the percentage of quality product that is produced.
Overall Operational Effectiveness (OOE)
Overall operational effectiveness, or OOE, is similar to OEE except that it is based on plant operating time. This means it includes changeover times, maintenance and downtime, giving a holistic view of the efficiency of a manufacturing plant.
Reducing downtime is a great way to improve OOE, and lean manufacturing strategies emphasize making the most of would-be downtime by quickly shifting to other tasks.
The formula for OOE is the same as OEE except that availability instead refers to actual production time divided by total plant operating time.
Overtime rate is how often workers are required to work overtime to meet production needs. Overtime pay is expensive for your company, and while workers may like the extra money, it’s often at the expense of their physical and mental well-being.
Additionally, a high overtime rate could be a sign of deeper issues like inefficient processes and insufficient staffing on the shop floor. If your overtime rate is spiking, evaluate your processes and apply lean manufacturing methods to improve efficiency.
Percentage Planned vs. Emergency Maintenance Work Orders
The percentage planned vs. emergency maintenance work orders is the ratio of how often maintenance is planned versus how often unscheduled maintenance has to be performed. With machinery, upkeep and repairs are inevitable, but unplanned maintenance is disruptive, reduces efficiency and incurs higher costs than planned maintenance.
Perfect Order Percentage
Perfect order percentage is similar to on-time delivery to commit, but also includes the requirement that no products may be returned or replaced. So not only must the order be delivered on time, it must also meet all of the customer’s expectations as well. Like on-time delivery to commit, perfect order percentage is an indicator of customer satisfaction and builds loyalty with your customer base.
To calculate perfect order percentage, divide the number of perfect orders (on time with no errors) by the total number of orders completed.
Production attainment is how often a plant meets scheduled production volumes in a set period of time. This number should be close to 100 percent. If this metric is consistently low for your business, check for issues with machinery and apply lean manufacturing methods that will help your staff work more efficiently.
To find production attainment, divide the actual production volume by the scheduled production volume.
Production volume is the number of products that can be produced over a set period of time. This KPI is a measure of total output and is a way to get an overview of your business’s production trends.
Production volume is a good KPI to apply when doing demand forecasting because it reflects trends and your business can prepare for anticipated spikes without worrying about running low on resources.
Rate of Return
The rate of return is how frequently purchased items are sent back over a given period of time. Rate of return is an important KPI to measure to get a sense of the production quality of an item. Additionally, returns are an unnecessary expense that require shipping costs, additional processing, and potentially wasted materials.
Make sure you’re not only tracking the rate of return, but also monitoring the reasons for returns so you can address the root causes for returns and prevent further costs. Further, quickly amending issues with your products will build trust with your customers.
To calculate rate of return, divide the number of returned items by the total number of items sold.
Reportable Health and Safety Incidents
Reportable health and safety incidents is a measure of incidents or “near misses” over a given period of time. Incidents consume resources like time, staffing and cash, so it’s important to keep this metric low and to document the details of each incident so further events can be prevented.
Return on Assets
Return on assets is the measure of how well a manufacturer’s assets are being used to generate revenue. This can be thought of as a form of ROI, or return on investment, since assets like equipment are expensive. Return on assets is a measure of financial performance and profitability relative to a company’s assets.
To find return on assets, divide net revenue by total assets in dollars. Ideally, this number will be close to 100 percent.
Revenue Per Employee
Revenue per employee is how much revenue is generated by a company divided by the total number of its employees. Revenue per employee is an indicator of efficiency, productivity and the overall profitability of a company’s workforce.
To improve revenue per employee, use lean methods to optimize workers’ time and consider automation for parts of your production processes.
Scrap rate refers to the percentage of raw materials used in production that do not become part of finished products. Scrap rate is a measure of efficient use of materials and waste generation. A high scrap rate results in unnecessary costs and means that it’s time to evaluate how materials are used during your production processes.
To calculate scrap rate, divide the total amount of scrap by the number of units produced. Ideally, your scrap rate should be low. Check industry benchmarks to set a goal for your processes.
Supplier Quality Incoming
Supplier quality incoming is a measurement of the quality of materials being received from your supply chain. Mistakes and damage in supplier materials happen, whether in their production processes or during shipment.
Tracking this metric is important so your company understands if and how a supplier’s materials are impacting your production quality. If the supplier repeatedly sends defective materials, it may be time to restructure your supply chain. Knowing your supplier quality incoming trends can smooth this potentially costly and time-consuming transition.
To calculate supplier quality incoming, divide the units of quality materials received by the total number of units received from that supplier.
Takt time is the rate at which a product must be completed to meet customer demand. That is, if an order is received for a given product every three hours, it should take three hours to make that product. Takt is the German word for “pulse,” so takt time can be thought of as the heartbeat of the manufacturing process: orders come in, products go out.
To calculate takt time, divide the available time for production of a product by the number of units required for production in that given time period.
Throughput is the number of units produced by a given process, machine or plant over a given period of time. It’s important to measure different time frames to observe trends so that causes can be attributed to any drops in this metric.
Throughput is measured in units per time period, such as per day or per hour. Since it is an indicator of speed and efficiency, throughput can be improved with automated processes and applying lean manufacturing strategies.
Time to Make Changeovers
Time to make changeovers refers to how long it takes to convert a machine, production line or even an entire plant from being prepared to make one product to a different product. This time should be as quick as possible without risking mistakes, because delays in production can impact revenue. The goal for this metric will be different between products and between machinery, so track time to make changeovers based on different factors instead of as a one-size-fits-all metric.
WIP Inventory/Turns refers to the ratio of inventory of work-in-process that is completed and turned over in a period of time. This metric shows how well your products move through the manufacturing process efficiently and without creating waste.
Lean manufacturing methods, like a pull system, are a great way to optimize WIP inventory/turns metrics because it emphasizes controlling inventory at each stage of the manufacturing process.
To calculate WIP inventory/turns, divide the cost of goods sold by the average cost of inventory used to produce those goods.
Yield is the percentage of products that pass quality standards in a given period of time. In other words, yield refers to how many items produced are ready for sale. Yield is a simple but impactful manufacturing KPI that is an indicator of both speed and quality.
To calculate yield, divide the number of items that pass quality standards by the total number of items produced in that same time frame.