Manufacturing Key Performance Indicators (KPI’s) focuses on what factory managers should track for optimal performance, such as the 8 Manufacturing KPI’s Your Factory Managers Should Measure in 2021. These KPIs represent tasks and outcomes that a factory can control and change.
However, a significant part of manufacturing is beyond the factory manager’s control, such as your suppliers. Regardless of how seamless the processes are within the factory, the end product cannot be delivered on time, to quality specifications, and at a competitive price if the incoming material from suppliers is late or of poor quality.
To determine how effective your suppliers are, we recommend tracking the following 4 KPIs:
1. Delivery Performance
Receiving products and materials on time is critical to manufacturing timetables and implementation schedules. If you can’t count on your suppliers, you need to hold more inventory, impacting your costs. Furthermore, you might have to ‘expedite’ some work orders at the expense of overall efficiency. Before holding your supplier accountable for on-time delivery, understand what that means for your organization.
How does your organization define on-time delivery? It’s highly dependent on your manufacturing process. Some factories use just-in-time delivery of critical supplies meaning that if a supplier is even an hour late, then the production plan is thrown off. Other materials may not be as essential, and you keep a couple of days for safety in your schedule. Understand this so you can accurately hold your suppliers accountable.
2. Quality Performance
Like on-time delivery, quality is a simple metric. Is the supplier sending your factory the pieces to your specifications, or does it happen that some parts are unusable for whatever reason? The percentage of usable to unusable pieces, with the most frequent issues ranked in a Pareto chart, allows you and your supplier to engage in root cause analysis and develop effective countermeasures.
Several factors could impact quality performance:
- Manufacturing errors at the supplier or from their suppliers
- Incorrect packaging
- Damage during shipping
The factors that impact quality performance could be a once-off ‘bad batch’ or a systematic issue. Keeping track of your supplier’s quality performance with a simple measurement such as ‘yes’ (usable) or ‘no’ (unusable) can help determine the course of action for how to handle quality shortfalls.
3. Reliability Performance
On-time and high-quality parts do not matter if it is the wrong number of components or the incorrect parts altogether. Suppliers often sell their products to multiple customers, so mix-ups can happen. Failing to provide the right pieces at the right time routinely could point to a failure of the supplier’s ERP and planning system and insufficient mistake proofing to prevent errors.
4. Lead Time Performance
The amount of lead time necessary to turn around an order can depend on the type of production, the order size, the complexity of the product, the distance to the supplier, etc. However, long lead times for routine products often show that a factory is not improving its operations and may not be able to deal with changing orders or order sizes.
For relatively routine items, lead times should decrease as the factory becomes more proficient. Your supplier should improve the lead time as your factory works to improve your forecasting. Longer lead times to get the parts you need will force you to carry more inventory and make decisions based on longer (and less accurate) forecasts.
Keep it Simple
KPIs are best when kept simple. Each of these performance areas is simple to track and can provide helpful, easy-to-read information for you and your supplier. You can go into more depth with each one and take a more granular approach if necessary. However, if a supplier has trouble wrapping their head around three KPIs and hasn’t started to take action, the next step is not to give them five more indicators.
Maintain Open Communication Channels
Open communication between buyers and suppliers is necessary to make these KPIs useful. Suppliers need to know and have input on what will measure them. Suppliers may have KPIs for you as well that can help them run their operations more effectively. Working together and developing a cooperative system will improve all major KPIs and lead to further innovations that neither of you considered.
If you would like to learn more about how to set up KPIs for your suppliers and business, please contact us.
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