What Is A Manufacturing

Key Performance Indicators?

KPI
Compiled by: Esubalew Gebrie

December 2013 E.C

 What is KPI?
 KPI or metric is a well defined and quantifiable measure that the
manufacturing industry uses to gauge its performance over time.
 Manufacturing companies specifically use KPIs to:
 Monitor
 Analyze, and
 Optimize operations, often comparing their efficiencies to those of
competitors in the same sector.
Why Your Company Should Be Using Manufacturing
Specific Kpis To Stay Competitive?

 The manufacturing industry represents more than 10

percent of the US economy, and more than 15 percent of
the global GDP.

 The only way to stay ahead in this fiercely (heavy)

competitive industry is through the implementation of
manufacturing KPIs and metrics.
 Cont.….

 Everyone strives to increase the top line of a business,

trying to gain more market share in an attempt to
increase profits.
 The Fundamental Manufacturing KPIs and
Metrics That You Should Be Using in 2020

 When your company is just starting to implement KPIs,

the whole concept can seem fairly daunting(ተስፋ
አስቆራጭ).
 Rest assured, it isn’t as bad as you think.
 Everything can be broken down into smaller, more
digestible morsels(ጉርሻ) of information.
 In this section, we will go over basic examples of KPIs in
manufacturing that your company should consider using:
 1. Throughput

 Is probably one of the most fundamental KPIs for the

manufacturing industry while also arguably one of the most
important.
 Throughput KPI measures the production capabilities of a
machine, line, or plant; also known as how much they can
produce over a specified time period.
Throughput = # of Units Produced / Time (hour or day)
 2. Cycle Time
 The cycle time KPI is very simple in nature, but that doesn’t
mean it can’t be manipulated to be a very powerful tool.
 In the manufacturing industry, cycle time is the average
amount of time it takes to produce a product.
 The cycle time metric can be used to measure the time it
takes to manufacture a completed product, each individual
component of the final product, or even go as far as to
include delivery to the end user.
 Cont.….

 Thus, cycle time can be used to analyze overall efficiency of

a manufacturing process on the macro scale, as well as
determine inefficiencies on a micro scale.
Cycle time = Process End Time – Process Start Time
 3. Demand Forecasting

 This manufacturing metric is used by companies to

estimate the amount of raw materials they will require to
meet future customer demand.
 This metric can be a little bit trickier for companies to fully
utilize, as it is highly dependent on uncontrollable external
factors.

Projected Customer Demand = Raw Materials * Production

Rate
 4. Inventory Turns

 This is a measure of how many times inventory is sold over

a specific time period and helps indicate resource
effectiveness.
 Low ratio numbers indicate poor sales and excessive
inventory, while high ratio numbers represent strong sales
or insufficient inventory.
Inventory Turns = Cost of Goods Sold / Avg. Inventory
 5. Production Attainment

 This production performance metric measures production

levels over a specific time period and calculates what
percentage of the time a target production level is achieved.

Production Attainment = # of Periods Production Target Met / Total

Time Periods
 6. Cash to Cash Cycle Time

 This is a time-based manufacturing KPI metric.

 It measures the amount of time it takes from an initial cash

outlay for raw materials, inventory, or a manufacturing plant
until the company receives cash from its customers for its
products.
 This KPI is typically measured in days.

Cash to Cash Cycle Time = Inventory Sale Date – Inventory

Purchase Date
 7. Avoided Cost
 This doesn’t mean you can just avoid paying bills and keep
all the profits.
 The avoided cost manufacturing metric is an estimate of
how much money you saved by spending money.
 The most common example is how much money is spent on
machine maintenance vs. repair cost if a machine were to
break down, plus the lost production value associated with
the repair downtime.
Avoided Cost = Assumed Repair Cost + Production Losses –
Preventative Maintenance Cost
 8. Changeover Time
 At the most basic level, changeover time represents the
amount of time required to switch from one task to another.
 Typically, in manufacturing, it represents the amount of time
lost from switching a production line from one product to
another.
 However, it can also represent the amount of time lost
during a shift change.
Changeover Time = Net Available Time – Production Time
 9.Takt Time
 This is a very useful manufacturing KPI when scheduling
production orders or deciding whether to take an order from
a client.
 Takt time is the maximum permissible amount of time that
can be spent manufacturing a product while still meeting a
client’s deadline.
 For those who are curious, Takt stands for “taktzeit,” a
German word meaning “cycle time.” While very similar in
nature, this is not to be confused with the cycle time KPI.

Takt Time = Net Available Time / Customer’s Daily Demand

 10. Return on Assets (ROA)
 You might be thinking, this seems like it has less to do with
manufacturing and more to do with finance.
 That is because it does. However, financial metrics are just
as important as manufacturing metrics.
 You can’t have a business if you aren’t making money.
 This metric evaluates how well your business is making use
of its assets (money).
 It is the annual net income divided by total assets (fixed
assets + working capital).
ROA = Net Income / Avg. Total Assets
 11. On-Time Delivery
 This is less of a production performance metric, but a very
important KPI in the manufacturing sector nonetheless.
 You can have the most efficient production line in the world,
but if you can’t deliver on time, clients are not going to want
to work with you.
 This metric measures the percentage of products delivered
on time to clients.
On-Time Delivery = (# Units Delivered On-Time * 100) / # Units Delivered
 12. Health and Safety Incidence
Rate
 In an ideal world, this manufacturing metric would not even
exist because it would be zero.
 Unfortunately, the reality of the matter is that workplace
accidents and near misses do occur.
 This metric monitors the number of incidents or near misses
over a given period of time (normally per annum).

Health and Safety Incidence Rate = (Number of Incidences *

200,000) / # hours worked by all employees
 13. Employee Turnover

 While this metric isn’t manufacturing specific, it is as equally

important as the other KPIs in this list.
 While employee turnover typically has a negative
connotation associated with it, not all turnover is bad.
 Some turnover may be required to remove underperformers
and replace them with higher performers.
 However, having too high of a turnover can lead to lower
moral.
Employee Turnover Rate (%) = (Employees who left * 100) /
Avg. # of Employees
 14. Non-Compliance Events / Year
 Every country has regulatory compliance rules that
manufacturers must follow when producing their products,
whether it be safety, emissions, or something else.
 Not only is it important to record the number of times a non-
compliance event occurred, it is also good practice to
document the reason why it occurred, and what the
resolution was.

Non-Compliance Events = # of Non-Compliance Events /

Specified Period of Time (Annually)
 15. Customer Returns (Rejects)
 This is a classic example of a KPI used in manufacturing,
and it is still used to this day for a reason.
 Keeping track of returns is imperative.
 This metric calculates the percentage of products that
customers return because they have received a bad
product.
 Needless to say, a company should strive for the lowest
percent possible.
Customer Return Rate = (# of Products Returned * 100) / Total
# of Products Shipped
 16. Total Manufacturing Cost Per Unit
Excluding Materials

 This is a performance metric that attempts to pin down the

fixed costs associated with operating a factory or
production line.
 These are arguably the costs that companies are able to
control.

TMC Per Unit Ex Materials = TMC Per Unit – Material Cost

Per Unit
 17. Manufacturing Cost as a
Percentage of Revenue

 This manufacturing KPI will help bring insight into how

much your company is spending on manufacturing with
respect to total revenue.
 This is very useful data to compare against competitors in
the same sector.

Manufacturing Cost as a Percentage of Revenue = Total

Manufacturing Cost / Total Revenue
 18. Energy Cost Per Unit

 This is a fairly nitty gritty manufacturing KPI that a lot of

companies tend to overlook.
 It only really comes into play when companies are fine-
tuning their operations and trying to become leaner.
 This KPI takes to total cost of energy spent over a period of
time and divides it by the number of units produced in that
time frame.

Energy Cost Per Unit = Total Energy Cost / # of Units

Produced
 19. Work-in-Process

 This manufacturing KPI metric measures the value of

partially completed products.
 It helps manufacturing companies understand how much of
their working capital is tied up in incomplete products, and
can help identify supply chain management issues.

Ending Work-in-Process = Beginning WIP + Manufacturing

Costs – Cost of Goods Manufactured
 20. Scrap Rate

 This is a fairly straightforward manufacturing KPI.

 It keeps track of the number of products that are deemed

scrap due to manufacturing defects that can’t be reworked.
 It gives companies insight into the ratio of products deemed
scrap in a production run, helping identify an inefficient
process.
Scrap Rate = # of Scrap Units / Total # of Units
 21. Machine Downtime Rate

 While this is commonly used as a manufacturing metric to

give a general snapshot of how operation is going, it doesn’t
paint a full picture.
 Machine downtime is a combination of both scheduled
downtime and unscheduled downtime.
Machine Downtime Rate = Downtime Hours / (Downtime Hours
+ Operational Hours)
 22. Percentage Planned Maintenance

 This production metric is used to analyze the ratio of

scheduled maintenance against the unscheduled
maintenance.
 This KPI is useful in identifying when more preventative
maintenance is required for certain assets.

PPM = (# Planned Maintenance Hours * 100) / # Total

Maintenance Hours
 23. Downtime to Operating Time
 This manufacturing metric can be used to measure the
effectiveness of machinery maintenance and the machine
itself.
 With effective preventative maintenance, the amount of
downtime can be reduced, creating a more optimal
manufacturing process.
 Companies aspire to reduce this ratio as much as possible.

Downtime to Operating Time = Downtime / Operating Time

 24. Capacity Utilization
 This production KPI measures the amount of capacity
being utilized as a function of total capacity available.
 Ideally, companies want this number to be as high as
possible, as it indicates they are making better use of their
production capabilities and maximizing return on their
assets.
 This metric can also be used by management when
deciding whether to take on new orders or quoting lead
time, as it gives a snapshot of available resources.
Capacity Utilization = Actual Factory Utilization / Total
Productive Capacity
 25. First Pass Yield

 This is one of the most fundamental production KPIs.

 It calculates the percentage of products manufactured to

specification the first time through the process.
 This means that they do not require any rework or become
scrap.
 A higher FPY rate is very desirable for any company.

First Pass Yield Rate = Quality Units / Total Units Produced

 26. Overall Equipment Effectiveness
(OEE)
 This key performance indicator is considered the gold
standard for measuring manufacturing productivity.
 The higher your OEE, the more effective your equipment is.

 A score of 100 percent means that you are manufacturing

100 percent of the time, at 100 percent capacity, at a 100
percent yield (no defective parts).

OEE = Availability * Performance * Quality

 27. Manufacturing Cost Per Unit
 It is very important that you know the total cost associated
with manufacturing a product on a per unit basis.
 Without it, you wouldn’t be able to price a product properly.
 This KPI takes into account all costs associated with
production and divides the cost by the number of units
manufactured.
 Typical costs include materials, overhead, depreciation,
labor, etc.
Manufacturing Cost Per Unit = Total Manufacturing Cost / # of
Units Produced
 28. Material Yield Variance

 This lean manufacturing KPI takes the estimated amount of

material required for a product and compares it against the
amount of material actually used.
Material Yield Variance = Actual Material Use / Expected
Material Use
 29. Maintenance Cost Per
Unit
 This production metric is often overlooked as people tend
to consider maintenance cost to be an overhead item.
 However, it is an important lean manufacturing KPI to take
into consideration when trying to optimize efficiency.
 This calculation takes the total cost of maintenance (both
preventative and emergency) and divides it by the number
of units produced for a specified time period.

Maintenance Cost Per Unit = Total Maintenance Cost / # of

Units Produced
 30. Overtime Rate

 This metric compares the amount of overtime worked by

employees to the amount of standard hours.
 It helps to identify inefficiencies in scheduling and/or
staffing.

Overtime Rate (Percentage) = (Overtime Hours * 100) /

Regular Hours
 What Makes the Best Manufacturing
KPI Metrics?

 There is a plethora(ke meten belay) of manufacturing KPIs

considered to be standard practice throughout the industry.
 However, that doesn’t mean that they should all be applied to
any company that produces a product.
 While many of them are applicable, some are not.
 Cont.….

 There might even be the possibility that a standard

manufacturing metric doesn’t even exist for what you want
to measure.
 If you are going to create your own production metric, there
are the things you should take into consideration.
 Cont.….

 Every KPI needs a clearly defined goal.

 What are you trying to achieve?
 Is it even something that can be achieved?
 What is the time period that you wish to achieve this goal?
 Be specific and set up parameters that clearly define your
goal. This goal needs to be something that can be
numerically defined (quantitative not qualitative).
 It is very important that you are able to objectively measure your progress toward the goal.
This means collecting and interpreting data. Which bring us to the next criteria.
 Cont.….

 Data, data, data. There must be a clearly defined data

source with a strict procedure of how the data are measured
or collected.
 There should be nothing left to interpretation here.
 Cont.….

 Reporting your data is just as important as collecting it.

 Different manufacturing KPIs will have different reporting
frequencies.
 Typically, reporting should happen on a weekly or monthly
basis, and will often make use of a manufacturing reporting
software solution.
 k Yo u ! !!
T han
KPI