One of the prevailing shortfalls we see in consulting work is poor manufacturing KPIs (Key Performance Indicators). Setting the right KPI establishes how we can improve manufacturing performance and output.Improvement doesn’t happen independently; by identifying the gaps in performance, managers and engineers can observe, understand, and implement necessary changes to their systems and processes.
Before we get started, we need to understand KPI management and KPI tracking - what makes a good KPI and how are they used to make manufacturing improvements.
Many companies set 30-40 KPI’s for the business. These are too many to measure. The term ‘key’ in ‘key performance indicators’ is there for a reason. Manufacturing facilities need to focus on what performance indicators are the most important and can be discussed in short daily meetings.
As we mentioned in a previous post, the useful KPIs are:
- Quantitative: Presented in the form of numbers.
- Practical: Integrates with current company processes.
- Directional: Helps to determine if a company is getting better.
- Actionable: Can be put to practice to see desired change.
For example, measuring units of output alone is not an effective KPI. Yes, it is quantitative, practical, and actionable, but it is not directional. A high production output does not mean your factory is producing high-quality products. Employees who are paid-by-piece have low incentive to improve their work quality – they are rewarded by their production speed. Hopefully, with wages and price levels in China rising, pay-per-piece will become less common.
Setting appropriate metrics to track in real-time and building a culture of sustainable manufacturing excellence are two key elements to KPI tracking. By establishing the KPIs below, you can empower your managers to make decisions that align with your growth plan:
1. Work-In-Process (WIP)Your WIP KPI should indicate how much material is still in production and how long it will take to move through the production process. If your company has MRP (Material Requirements Planning) or ERP (Enterprise Resource Planning) system, you should be aware of the number of raw materials given to each line and the output. Generally, when the WIP is lower than the prepared products, it reflects positive changes in your layout & processes. But you can determine the impact according to your factory and products.
2. Scrap and Reworks
Measuring scrap and reworks determines the total cost of material that is added into production but is not part of a finished product. It is presented as a percentage of sales. For factory managers, knowing how much scrap your factory produces in comparison to quality products is a key metric you’ll need to track.
The more waste generated, the higher the rework costs for raw materials, disposal costs, extra time and effort.
Let’s say, your machine produces goods with a 20% scrap rate. If you set a benchmark of scrap reduction by 12%, you can increase output by 8% at the same operating cost.
3. First Pass Yield (FPY)
Similar to scrap and rework rates, First Pass Yield gauges the quality of output based on the number of good versus defective units produced. FPY enables factory managers to track your company's progress in the reduction of inefficiencies and waste.
4. Direct to Indirect Employees
It is important to measure the productivity impact of the indirect workforce, like head office employees ratio on to the direct labor force.
The recommended ratio of direct labor to indirect is about 3:1. This means a direct employee spends about 70% of their time actually working on making the product and the rest of the time is spent on activities that do not create value, like meetings, downtime, waiting for parts, paid breaks, among others.
This KPI can help factory managers measure the impact of process changes on the workforce. If direct labor’s actual productive time increases from 70% to 80%, the ratio is improving.
5. Unplanned Downtime
Failure of machines to perform can cause unplanned downtime and unforeseen delays. The entire production can stop to fix the engine, and a lot of time is wasted in completing the production manually. Identifying how much unplanned downtime occurs will allow you to plan for changes that minimize bottlenecks in the production line.
While proper equipment maintenance is vital for efficient production, and scheduled downtime is mandatory to maintain your factory’s equipment, it should not be included in this KPI as it is planned.
6. On-Time Deliveries
Tracking how many work orders were delivered at the original schedule date versus its due date is important in understanding your factory. By understanding this KPI, you can improve customer satisfaction and improve morale by recognizing high-performing employees.
For example, you can set the goal for 100% on-time weekly delivery, and reward your employees for achieving it.
7. Inventory Dollar Value
Factory managers need to measure how much output is still in the factory. Holding inventory can be expensive. It is estimated that on-hold inventory costs about 20% of its value. Keeping inventories to a minimum can really help to increase the cash-on-hand. It can also help you respond efficiently to changing trends and improve delivery times.
8. Capacity Utilization
Capacity utilization is the percentage of potential output capacity to actual capacity being utilized. It is an indicator of how the company is utilizing its resources.
If this rate is low or is decreasing over a period of time while the plant is in full operation, it indicates the plant could be lacking efficiency. As a factory manager, aim for a higher capacity rate to lower the cost per unit.
The Bottom Line
These are just a few of the potential KPIs you may want to consider. The best KPIs are the ones that are directly tied to your business needs.
The best way to implement this is to start by choosing 2 or 3 KPIs. Then, allocate up to 3 KPIs per function and involve your entire leadership team to track them and drive improvement.
Having too many KPIs can become unmanageable, and they may even overlap or contradict each other; a few KPIs can easily be shown on a reporting dashboard. Dashboards with a simple, readable user interface can give every member of the team a snapshot of the current state of manufacturing, how it compares to previous performance and an indication of what could alleviate the problem or continue the current improvement.
What Chinese factory managers need to know about factory management.