Meticulous Enumeration of KPIs of the Manufacturing Industry

If it cannot be measured, it cannot be managed

Peter Drucker

In the competitive business world, maintaining and tracking records of performance in a business is crucial for managing the resources and sustaining in the corresponding industry. The collected data assists in creating effective business strategies and plans that further add up to the growth of the company.

However, businessmen often find themselves in the dilemma of choosing the correct metrics that can assist in tracking the accomplishment of the desired goals. The most appropriate approach in situations like these is to recognize the accurate key performance indicators and implement them in the business to measure the success and failure of business objectives.

Before heading ahead, it is crucial to understand what exactly key performance indicators are and how effectively they can be implemented in today’s contemporary competitive business world. Key performance indicators are the quantifiable metrics that can be utilized to effectively measure the performance of a company in a certain period of time.

Whenever we discuss any global economy or the progress of a country, the growth of the manufacturing industry plays an important role. Many factors such as globalization and technological advancements are enhancing the competitiveness of the industry day by day.

Keeping that in mind it is becoming crucial for manufacturers to effectively keep a track of their performance and accomplishment of their strategic goals in order to improve their weaknesses and boost their strengths which will further contribute to the growth of the company. In order to track the progress or regress of the business objectives, effective comprehension and implementation of the key performance indicators are necessary for manufacturers. However, first, an effective SWOT Analysis is essential to identify the key strengths and weaknesses of a company.

Hence, this article will categorize the key performance indicators of the manufacturing industry that can assist business owners or managers to get a clear picture of their performance as opposed to their business goals.

Detailed Listicle of KPIs of the manufacturing industry

1. Overall Equipment Effectiveness (OEE)

OEE or Overall Equipment Effectiveness is a crucial metric that reflects how the assets in the manufacturing unit perform in accordance with their performing capability. It can be used to measure the effectiveness of a single unit as well as for the whole production line. The major measurements that are included in the OEE are

• Availability - It refers to the time for which the equipment was available and was actually under operation. Time spent on activities like lunchtime, maintenance, etc is not included in the total planned time.
• Performance - This refers to the overall capability of the equipment in getting the desired output. Performance of the equipment can be affected by multiple factors such as workers not operating the pieces of equipment effectively or machines not working congruously.
• Quality - Quality refers to the number of products delivered by the equipment in the first run without any need for rectification. Quality runs on a very simple equation stating that low quality leads to low output and vice versa.

OEE as a KPI

Overall Equipment Effectiveness can be considered as an essential KPI in the manufacturing unit because it assists in calculating the overall productiveness of the equipment. Additionally once calculated, it can assist in filling the gaps that are affecting the efficiency of the equipment in order to get better performance. For top-class manufacturers around the globe, as per statistics, 85% is the ideal OEE percentage that can assist them in creating a long-term sustainable goal. Whereas below 40% is considered below average score and companies with a similar score need a lot of improvements in order to sustain in the market.

Formula to Calculate Overall Equipment Effectiveness

Example

Calculate Overall Equipment Effectiveness (OEE)

2. Overall Operations Effectiveness (OOE)

Overall Operations Effectiveness is another method of measuring the overall performance of the production line. OOP is quite similar to the Overall Equipment Effectiveness. However, the difference between the two can be positioned by the way of calculating the amount of availability. To elaborate, the time spent on activities such as maintenance, workers' break time will also be included in the total planned time of availability.

OOE as a KPI

OOE is an effective KPI because it includes all the aspects of a standard on and off time of the equipment that gives you a clear picture of the operation of manufacturing units which further assists in creating effective strategies for utilizing the full potential of the production line.

Formula to Calculate Overall Operations Effectiveness

Example

Calculate Overall Operations Effectiveness

3. Total Effective Equipment Performance (TEEP)

Total Effective Equipment performance is also formed in the basics of OEE and OOE but again the difference relies on the way we calculate the aspect of the availability. Under this, the total time of running includes the whole time the machines were available in the manufacturing units. It means TEEP is directly related to the availability of the machines in the manufacturing unit for 24*7 a week or 365 days/ year.

TEEP as a KP

Total Effective Equipment Performance assists in stating a clear idea about the untapped potential of the equipment and can effectively assist manufacturers in reevaluating the production plan. Utilizing the untapped potential of the equipment efficiently will assist in earning more profits for the company.

Formula to Calculate Total Effective Equipment Performance

Example

Calculate Total Effective Equipment Performance

4. Capacity Utilization Rate (CUR)

Capacity Utilization Rate assists in efficiently quantifying the percentage of the amount of potential capacity that is utilized by the whole production line. The low Capacity Utilization Rate reflects the lack of productivity and affects the overall profits and efficiency of businesses.

CUR as a KPI

Different organizations can utilize the CUR as a KPI because it precisely points out the areas where the production line can perform better but is lacking due to some external factors like electricity defects or faults in the machines. Moreover, it helps in creating a long-term strategy of utilizing the production unit rationally and efficiently.

Formula to Calculate Capacity Utilization Rate (CUR)

Example

Calculate Capacity Utilization Rate (CUR)

5. First Time Through Rate (FTT)

First Time Through (FTT) or First Pass Yield (FPY) refers to the ability and skill of a production unit in producing the number of units in the first run without defects or need for reworking. Units that require rectification or do not match the quality standards of the product fall under the category of defective items.

FTT as a KPI

First Time Through can be used as an effective key performance indicator for the reason that it effectively identifies the percentage of the potential of the equipment. Moreover, it reflects the areas that can be improvised to improve the efficiency of the machines to deliver satisfactory products to the customer without the need for any rectifications.

Formula to Calculate First Time Through Rate (FTT)

Example

Calculate First Time Through Rate (FTT)

6. Production Downtime

Production Downtime refers to the period in which the manufacturing of the product is on hold or no products are being produced. It can happen due to indulgence of external factors like shortage of human resources, broken or under maintenance equipment.

Production Downtime as a KPI

It is one of the crucial KPIs that can be applied by the manufacturing units to analyze the idle time because if the downtime is higher, it can cause loss to the company and affect the overall revenue. Efficiently reducing the downtime assists in increasing the production volume of the manufacturing line which can further lead to increased revenue generation.

Formula to Calculate Production Downtime

Example

Calculate Production Downtime

7. Production Volume Variance (PVV)

Production Volume Variance calls attention to the cost of profit or loss a manufacturing unit can process in accordance with the expected outcome within the assigned period of time. In addition, a rate of overhead is also a critical factor in calculating the Production Volume Variance because the cost of overhead decides the profit margin of the product.

Production Volume Variance as a KPI

Production Volume Variance can assist manufacturing units in calculating and tracking the manufacturing outcome efficiency of the production line. Comparison of Production Volume Variance with the previous years can assist in getting a clear picture of growth, profit, and loss that a company can improve by implementing effective strategies.

Formula to Calculate Production Volume Variance (PVV)

Example

Calculate Production Volume Variance (PVV)

8. Production Cost (PC)

Production cost refers to the overall cost a company pays during the manufacturing of the products. All sorts of fixed and variable costs are included in the production cost of a unit. To elaborate, fixed costs include salaries of the human capital and rents of locations or equipment whereas variable costs can include the cost of labor or raw materials that can vary based on the requirement.

Production cost as a KPI

Multiple manufacturing units can use Production Cost as a key performance indicator because it can assist in understanding the essential and non-essential investments included in manufacturing a product. This can further help in eliminating the non-essential investments lowering the cost of production per overhead.

Formula to Calculate Production Cost (PC)

Example

Calculate Production Cost (PC)

9. Defect Density

Defect Density assists in measuring the defective units against the total number of units produced in a manufacturing unit in a given period of time. Measuring the defect density helps in identifying the key cause of defect occurrence and assists in eliminating the same.

Defect Density as a KPI

Defect Density can be an effective KPI that can be utilized by the manufacturing industry because it can assist in understanding and eliminating the cause of defects which can further also save manufacturing costs and can prevent losses.

Formula to Calculate Defect Density

Example

Calculate Defect Density

10. Asset Turnover Ratio (ATR)

Asset Turnover Ratio assists in identifying the relationship between companies' revenue and the value of their assets. The relation between the two simply states that the higher the turnover ratio the higher efficiency of the company. On the contrary, the lower the turnover ratio reflects the lack of productivity of assets in a company.

Asset Turnover Ratio as a KPI

Utilizing the Asset Turnover Ratio as a KPI can assist production units in identifying the potential a company's assets have in generating revenue. Comparing the ATR of a company with other companies or with historic years can assist in determining the growth and progress of the company.

Formula to Calculate Asset Turnover Ratio

Example

Calculate Asset Turnover Ratio

11. Return on Assets

Asset Turnover Ratio assists in identifying the relationship between companies' revenue and the value of their assets. The relation between the two simply states that the higher the turnover ratio the higher efficiency of the company. On the contrary, the lower the turnover ratio reflects the lack of productivity of assets in a company.

Return on Assets as a KPI

Return on Assets is an essential KPI for manufacturing because it gives critical insights to the owners on the performance efficiency of the assets. Furthermore, essential insights can assist in the decision-making process of future investments in different assets.

Formula to Calculate Return on Assets

Example

Calculate Return on Assets

12. Inventory Turnover Ratio

The Inventory Turnover Ratio measures the amount of stock a company has been able to sell, use or replace in a given period of time. It can be calculated on a monthly, yearly, or quarterly basis. After calculating the ratio, the number of days in which the inventory was restocked is calculated and is called Days Inventory.

Inventory Turnover Ratio as a KPI

It is one of the essential KPIs that can be utilized by the manufacturing units to measure profitability and the position of generated revenue in a given period of time. The higher turnover ratio implies higher sales and profitability of the company, whereas, lower turnover rates mean frail sales.

Formula to Calculate Inventory Turnover Ratio

Example

Calculate Inventory Turnover Ratio

13. Avoided Cost

Avoided cost refers to the amount saved by the organization by taking preventive measures. To simplify, it means how much money an organization is saving by spending some extra money on taking preventive measures or spending on maintenance.

Avoided Cost as a KPI

This metric can be an effective KPI that can assist manufacturing units in identifying the key areas where efficiency can be improved by spending some extra money. In addition to this, it can also assist in preventing major potential losses that can occur in a manufacturing unit.

Formula to Calculate Avoided Cost

Example

Calculate Avoided Cost

14. Revenue Per Employee

Revenue per employee refers to the amount of business that is derived from a single person working for the company. This metric can be calculated on a yearly, monthly, or quarterly basis depending upon the company. External factors such as the availability of the resources to generate the revenue, skills, and capabilities of employees affect the Ratio of Revenue per employee.

Revenue Per Employee as a KPI

Revenue per employee will be an effective KPI for the manufacturing industry because it will assist in tracking the efficiency and productivity of the human capital of different companies. To elaborate, higher revenue per employee indicates higher productivity and efficiency of employees. On the other hand, lower revenue per employee reflects poor fecundity of employees. In addition to that, Revenue Per Employee when compared to the company’s own historical data or with the competitors of the same industry can assist in providing solid insights on predicting future strategies and business objectives.

Formula to Calculate Revenue Per Employee

Example

Calculate Revenue Per Employee

15. On-Time Delivery Rate

One of the most crucial pillars on which the future of companies relies is its customers. Hence, it is really crucial to deliver a product matching the quality requirement of the consumers and should be delivered on the committed date and time. On-time delivery ensures customer satisfaction and happiness. Internal process in inventory management and supply chain has a major role in ensuring on-time delivery because inefficiency in the internal processes can cause a delay in the delivery of goods.

On-Time Delivery as a KPI

On-time delivery can be an effective KPI for manufacturers as it will assist in tracking whether the delivery of products to the customers is done on time or not. Meeting customers' delivery expectations can assist in earning customer loyalty and increase brand loyalty as well.

Formula to Calculate On-Time Delivery Rate

Example

Calculate On-Time Delivery Rate

16. Percentage Planned Maintenance

Function efficiency of equipment decides the overall productivity of the manufacturing unit. Hence, maintaining equipment and tracking the time of equipment are a few of the crucial tasks that need to be taken care by the production line of the company. Therefore, Percentage Planned Maintenance or PPM is a diagnostic tool that can be used to track the time of maintenance utilized by equipment in the production line.

Percentage Planned Maintenance as a KPI

PPM can be a potent KPI because tracking and maintaining it can assist in estimating the efficiency and functioning span of machines operating in manufacturing units. To elaborate, if the machines are taking regular maintenance checks or are taking more hours than planned in maintenance, it implies that either machine require improvisations or replacements of equipment are required in the unit.

Formula to Calculate Percentage Planned Maintenance

Example

Calculate Percentage Planned Maintenance

17. Scrap Rates

Scrap refers to the products or units manufactured that cannot be rectified or reworked and Scrap Rates measure the amount of scrap that is produced by the production unit in a given period of time. Moreover, Scrap Rates can assist in identifying the main cause of the wastage of resources. Key causes enhancing the Scrap Rate can include poor raw material or inefficiency of equipment. To continue, 15 - 20% of the Scarp Rate is considered to be completely normal in the manufacturing units. However, the Scrap Rate above this can affect the overall profitability of the manufacturing unit.

Scrap rate as a KPI

Utilizing Scrap Rate can be an effective KPI for the manufacturers because keeping track and eliminating the key causes can decrease the overall production cost of the manufactured units. Moreover, lowering the Scarp Rates can also increase the overall profitability and efficiency of a production line.

Formula to Calculate Scrap Rates

Example

Calculate Scrap Rates

18. Budgeted vs. Actual Cost Variance

Budgeted and Actual Variance assist in determining the difference between static or planned budget and the actually generated revenue of the company. Planed budget is usually decided at the beginning of the financial year, whereas, the actual budget is evaluated at the end of the year.

Budgeted vs. Actual Cost Variance as a KPI

Budgeted vs. Actual Cost Variance can be an effective KPI for the manufacturing units because it helps in estimating the achievements of business revenue projections. It can further assist in identifying the key factors using financial ratios calculators that are decreasing the generated revenue and based on the identified factors, manufacturing units can eliminate the factor for better efficiency and productivity.

Formula to Calculate Budgeted vs. Actual Cost Variance

Example

It implies that the company was not able to outperform its set target and requires some improvisations and a better efficiency plan.

Calculate Budgeted vs. Actual Cost Variance

19. Production Schedule Attainment

This term assists in measuring the percentage of the difference between the attainment of estimated production units and the actual units produced. This metric will assist in identifying the completion of the production target set by the unit on a yearly, quarterly, or weekly basis.

Production Schedule Attainment as a KPI

Production Schedule Attainment could be an effective KPI for the manufacturing units because it will assist in calculating the value of targets achieved. To elaborate, a lower percentage indicated the poor efficiency of the machines or human labor, whereas, the attainment of a target in the given period of time reflects the enhanced productivity of the human capital and machines. In addition, it can also assist in identifying the key areas of the problem and further assist manufacturers in eliminating it.

Formula to Calculate Production Schedule Attainment

Example

Calculate Production Schedule Attainment

20. Cost of Goods Sold (COGS)

Cost of Goods Sold also known as cost of sales refers to the cost required to manufacture the products. COGS only include the cost that is directly related to the production of the manufactured goods such as labor directly included in manufacturing and the costs of all the raw materials. Cost of indirect factors such as logistics, rent, and distribution are not included in the COGS.

COGS as a KPI

COGS can be one of the significant KPIs for the manufacturers because it assists in measuring the actual profit of the company which can further assist in estimating the accomplishment of the SMART Goals of the company.

Formula to Calculate Cost of Goods Sold(COGS)

Example

Calculate Cost of Goods Sold(COGS)

To encapsulate, the above give KPIs, when chosen correctly, can create a positive impact on the decision-making process and can effectively lead to better performance of the company. Hence, it is crucial for every organization to meticulously identify and implement the potential KPIs in order to successfully achieve business objectives.