Learn to understand some of the most commonly-used KPIs in manufacturing today and how companies are measuring them to drive performance improvement.

Keep reading for a research-based framework for your own KPIs, from identifying the metrics that matter most for any middle market manufacturing business, to finding advice on setting up systems and processes to track and improve your key performance indicators/KPIs. 

How Should You Define Your Manufacturing KPIs?

The answer depends upon the specific needs of your company and industry, but having the right KPIs and using them to make course corrections along the way is exactly what KPIs are for. Using the wrong KPIs is like having a car and only looking at the speedometer. If and when some part of the car breaks down, the speedometer tells you nothing about factors related to maintenance and all the "under the hood" stuff. If you’re not measuring and monitoring KPIs, you can’t fix problems when they occur. Having visibility “under the hood” of your business, into your manufacturing and warehouse functions, can keep your middle market company running smoothly. 

Defining the “right” KPIs starts with your overall business and your strategic objectives. Begin by asking "which KPIs are relevant to my particular business and my industry?” Work backwards from your strategic goals to find and map out the actions that move the needle on those strategic goals. Defining KPIs requires you to have visibility into the key steps to success in your business and its internal functions (manufacturing, distribution, etc.). Your defined KPIs are the steps that matter most for your specific operations, the ones that drive strategic outcomes.

Tracking Your KPIs

Measuring your KPIs means collecting data and using that data to make course corrections when necessary. KPIs are useless if you don’t have visibility into them as well as the ability to act upon collected data. You might, for example, use your ERP system, or other internal systems that collect data, to track your KPIs in real time. Set up systems to capture relevant data on each KPI and then share it with relevant people, maybe via a shared KPI dashboard. You can compare your KPI tracking system to a cockpit on a plane: you have visibility in to what’s happening with your operations in real time, and can then make necessary adjustments if you’re off course. Tracking KPIs provides your functional teams with data upon to develop actionable insights in support of better decision making.

Production KPIs

For middle market manufacturing, production is the engine that drives your business. The following are some commonly used KPIs for the production function:

Rate of Productivity. The more productive you are, and the less downtime you have, the better. Base your production goals on a precise and realistic evaluation of your capabilities (machines and workers) and needs (your orders). You should be measuring and setting realistic rates, utilization and efficiencies based on your production capacities and the demands upon it.

When problems arise that impact productivity, your KPI tracking system can alert you and help uncover the causes, enabling you to quickly develop an action plan. You’ll clearly need to monitor machine performance/breakdowns, capacity bottlenecks, manufacturing defects, bad material from your vendors and the efficiency of your workers. All of these factors will affect productivity and can slow or stop the line. 

Manufacturing Capacity Utilization (MCU). How can manufacturers plan their production in an optimal way? Advanced planning and scheduling (APS) software can help, giving you graphic visibility into key resources, including materials, machine capacity, personnel capacity and availability, potential bottlenecks, sales orders, purchase orders, material availability, and more. You’ll see all the potential points in your processes that could cause delays or inefficiencies.

Advanced planning and scheduling software also allows you to build in contingency planning for when unanticipated events occur, such as when a key vendor isn’t able to provide parts on time or a machine breaks down. APS can provide a revised plan to remedy or minimize disruption and production downtime.

Inventory KPIs

You’ll want to run your operations as lean as possible, eliminating as much cost as possible related to carrying unused materials or having too much work-in-process and inventory sitting around. Inventory management and quality control are deeply intertwined, of course. Inadequate quality controls take a costly toll on your working capital, from the moment you receive materials from suppliers, to your production process, and until your customers receive the goods. 

Percentage of Finished Goods Versus Cost of Goods Sold/COGS. This particular KPI helps ensure you’re not ignoring hidden costs (e.g., due to inventory returns). It provides valuable information on how well your purchasing, sales and planning functions are operating. You should not look at it as just a number. Use it for deeper analysis, asking key questions such as “Am we over promising our sales? Are my forecasts wrong? Is our purchasing department buying too much?" You want just-in-time inventory, not "just-in-case" inventory, which hurts your bottom line.

Too Much Inventory = Cost Inefficiencies. Whether it’s raw materials, work in process, or finished goods in a warehouse, all these tie up capital that you could be using elsewhere in your business. “Just-in-case” inventory sits around creating hidden costs, often counted as expenses, additional material handling costs, damage to material stored, material redundancy, and material expiration.

High Rate of Customer Returns. This KPI has a clear impact on your financial bottom line but also points to operational and quality control problems within your production area. Ask your customers why they’re returning items. Identify trends. Use your analysis capabilities with your tracking software so you can isolate and identify the causes of the problems, and then remedy them to reduce costly customer returns.

Democratize KPIs to Drive Performance

KPIs tend to be the focus of the leadership team, which is a problem. Savvy middle market manufacturers get their employees involved with their own assigned KPIs, giving these employees both visibility into data and responsibility for meeting their goals. Displaying KPIs through accessible dashboards or big screen displays on the shop floor is extremely valuable for keeping everyone informed.

If made accessible across your company and utilized as tools to improve performance, KPIs can trigger employee engagement and motivation around the company’s strategic indicators. As management guru Peter Drucker once said, “that which gets measured, gets managed.” Use the tools you have to communicate to everybody how the company’s doing. Share the good news if your sales are increasing, your production is on time, and you’re becoming more efficient in the warehouse. Leverage KPIs to help your people keep your business running smoothly.