Improving Efficiency

  • Capacity Utilization: Actual Output / Potential Output x 100
    This measures how much of your available capacity you are actually using on your production line. The higher the better. Buildings and equipment are expensive assets and you want to maximize their use. It also helps to manage what you sell by production centre, so you do not over or undersell a particular manufacturing line, thereby balancing the workload.

  • On Standard Operating Efficiency – If you have a piece rate or incentive system in place, you want to measure how employees are performing against the labor standards you used to cost the product. If these numbers are low, it is beneficial to examine methods and do post-production analysis. It is very common for companies to underestimate labor costs, and this KPI can help you identify this.
    • Overall Operating Efficiency (OOE)– Availability * Performance * Quality
      This is one of my favorites because it includes on standard time as well as off standard time. You are trying to maximize this percentage so that employees are adding value most of the time they are clocked in and present.
    • Overall Equipment Effectiveness (OEE)– This metric measures the overall effectiveness of a piece of production equipment or the entire line. Availability x Performance x Quality. This is a great KPI to maximize to ensure you are running the plant effectively.
    • Throughput
      Units Produced / Time
      This manufacturing KPI is the rate of how many units on average a machine, cell or line is producing over time, i.e. 1000 units/minute. While cycle time is the measure of the time it takes between two points, throughput should be monitored in real-time since when throughput decreases it is usually indicative of an issue on the line. Throughput can be increased by eliminating downtime, calibrating machines to run at an ideal cycle time, reducing the number of touches or steps in cycle to reduce shortstops, changing the raw materials or tooling required to produce the good, improving machine maintenance.
    • Availability
      Uptime / Uptime + Downtime
      At the core of most manufacturing reporting is the availability KPI – the measure of machine uptime/downtime. Downtime is by far and away the biggest loss facing most manufacturers today. No matter what industry you are in downtime costs money. Ideally availability should consider all downtime, making no distinction between whether it is planned or unplanned. In addition, in order to address the issues causing downtime and reduce it, manufacturers need to start tracking downtime reasons so when viewed on a pareto chart, downtime can be analyzed within the context of the machine affected, by operator and shift, and by any other factor on the plant floor.
    • Labor Efficiency Variance:
      (Actual hours – Standard hours) x Standard rate = Labor efficiency variance
      The labor efficiency variance measures the ability to utilize labor in accordance with expectations. The variance is useful for spotlighting those areas in the production process that are using more labor hours than anticipated. This variance is calculated as the difference between the actual labor hours used to produce an item and the standard amount that should have been used, multiplied by the standard labor rate. If the variance outcome is unfavorable, there will likely to be a review by industrial engineers to see if the underlying process can be improved to reduce the number of production hours required, using such means as:
    • A simplified product design to reduce assembly time
    • A reduction in the amount of scrap produced by the process
    • Increasing the amount of automation
    • Altering the workflow
    • If this cannot be done, then the standard number of hours required to produce an item is increased to more closely reflect the actual level of efficiency
    • Material Variances:
      The difference between the actual cost incurred for direct materials and the expected (or standard) cost of those materials. It is useful for determining the ability of a business to incur materials costs close to the levels at which it had planned to incur them. However, the expected (or standard) cost of materials can be a negotiated figure or only based on a certain purchase volume, which renders this variance less usable. The variance can be further subdivided into the purchase price variance and the material yield variance. They are:
    • Purchase price variance. This is concerned solely with the price at which direct materials were acquired. The calculation is: (Actual price – Standard price) x Actual quantity
    • Material yield variance. This is concerned solely with the number of units of the materials used in the production process. The calculation is: (Actual unit usage – Standard unit usage) x Standard cost per unit

    Increasing Flexibility & Innovation

    • Changeover Time
      Changeover Time is the time it takes to unload/load, retool, calibrate, and program a new job. Changeover is most relevant when there’s a switch between one type of part to another before a production run. When taken as an average this KPI can help determine which job types and parts might require some reduction in setup time if possible. By tracking changeover time, manufacturer’s can define total cycle times by part, fine tune their estimates, and recognize the need for more operator training, better planning, proactive prep of required materials.

    Reducing Maintenance

    • Machine Downtime – This KPI and the two below are components of OEE above, but worth measuring on their own. This includes scheduled downtime for maintenance, setups and unscheduled downtime and can include machine changeover.
    • Unscheduled Down Time – This one can be a killer and one to minimize because it affects other processes in the production chain. Scheduled and predictive maintenance can help minimize unscheduled downtime. There are wireless sensors you can use which can help support predictive maintenance to reduce unscheduled downtime.
    • Machine Set Up Time – A lot of production time can be lost to set up and changeovers. Implementing SMED (single minute exchange of dies or similar techniques) can really help keep this lost time to a minimum. Look for ways to incorporate parts of the set up so that they are internal to the process to avoid taking machines offline for any longer than you need to. Quick changeover setups also reduce this time.
    • Planned maintenance percentage (PMP)
      Planned Maintenance Time / Total Maintenance Time
      By calculating the percentage of scheduled maintenance vs. planned maintenance plus all the emergency maintenance required to address breakdowns. This metric is essential for manufacturers to appropriately allocate resources towards preventative maintenance. One rule of thumb established by advocates of preventative maintenance is 85% PMP, in which an organization is targeting less than 15% maintenance time be dedicated to emergency work orders. Since emergency fixes can cost on average 3-9 times more than planned maintenance due to overtime, rushed parts, service call outs, scrapped production, this metric should be stable for manufacturing seeking uptime and trying to lower operational costs.

    Improving Quality

    • Yield
      Good Parts Produced / Total Units Produced
      The Yield KPI is a measure of quality and performance and is the heart of production efficiency and profitability. Measuring First Pass Yield (FPY) will identify which processes require substantive re-work which will affect throughput and influence total cycle times and provide a target of a 100% yield in which no defective parts were produced at all.
    • Quality – This is a no-brainer and table stakes today, but still necessary to measure. There are many ways to measure quality, and I am listing a few below for consideration. Percent defective is one of many ways you can measure quality. Establishing clear and consistent standards goes a long way to reaching your quality goals.  The only way to continuously improve is to learn from your mistakes, so don’t just measure the quality – determine the root cause and fix it.
    • First Pass Yield – The percentage of products manufactured correctly and to spec the first time through the process. Getting this number up reduces the next two listed.
    • Rework – There is no bigger waste of time and raw materials than rework. Implementing quality at the source and effectively training people can go a long way to minimizing this waste.

    Improving Customer Experience & Responsiveness

    • On-Time Delivery –Work Orders Delivered by the Original Schedule Date ÷ Original Schedule Work Orders Due
      This is a KPI that really keeps customers happy but is also motivating to your production employees. Set the goal for 100% on-time weekly and consider rewarding your employees if they achieve it. Many of the other leading indicators mentioned help drive this one
    • Customer Returns – Rejected Goods / Total Number of Goods Delivered
      There is nothing worse than getting a defective product back from customers. Not only is it embarrassing, it ruins customer confidence. Even though this is a result indicator, it can help you determine problems in the production chain when you evaluate returned products. A good goal is to strive for zero returns.

    Reducing Inventory

    • Inventory Turns – In today’s Lean environment and pull approach, keeping inventories to a minimum can really help free up cash and give you the ability to respond to changing customer needs much more efficiently and with better delivery times. It also keeps your on-hand inventory fresh and relevant to avoid obsolescence and mask quality problems.
    • Inventory Accuracy – There is nothing worse than putting a work order into production only to find your raw goods inventory was inaccurate. This either delays the start of production or causes delays in the line if the order happened to make it into process. I had a rule to never let an order begin production unless everything was available in-house for the order. This helps you manage and maintain your supply chain to keep the right amount of inventory on hand to keep things running.
    • Scrap – Total Scrap / Total Product Run
      Raw material costs are expensive so minimizing scrap is important. The more robust your processes and training programs are, the less scrap you are likely to produce. When you do produce scrap, do your best to recycle it if possible.

    Employee Retention and Motivation

    • Training Hours – This is a great leading indicator that can drive a lot of the other KPIs on this list. Training doesn’t solve every problem, but there is no substitute for a good training and onboarding program. Too many companies still use the sink or swim method which creates a lot of problems.
    • Employee Turnover – Happy employees make happy customers. If your turnover is high, it is time to do some root cause analysis to determine why. Quality and efficiency problems often stem from high turnover due to training new inexperienced employees.

    Ensuring Compliance

    • Reportable Health & Safety Incidents – Here’s another KPI to strive for zero on. Many companies have embedded this in their culture. I grew up in a big railroad town, and I remember driving past the billboard of a locomotive where they would list how many days achieved with zero accidents. Very motivating for employees and something they were proud of. Accidents drive up workers’ compensation rates and are hard on employee morale.
    • Failed Audits – There is nothing worse than having a shipment ready to go out the door that fails a final quality control audit. Better here than on the customer’s doorstep, but this still leads to rework, scrap and delays. The goal for this KPI should be 0 failed audits, and if it’s not, a root cause analysis is in order.

    Reducing Cost & Increasing Profitability

    • Revenue per Employee– This is a basic indicator but can be a quick helpful way to see how the operation is doing overall; improving, standing still or becoming less efficient. It is also a good metric to use to compare your company against others in a similar industry.
    • Profit per Employee – I like this KPI even more than the one above. Even though it’s lagging, it takes into consideration how well you are doing on many of the leading indicators above. Revenue per employee may look good, but you may see you have opportunities to improve profitability.
    • Total Manufacturing Cost per Unit Excluding Materials – This is a measure of all potentially controllable manufacturing costs that go into the production of a given manufactured unit, item or volume.
    • Manufacturing Cost as a Percentage of Revenue – A ratio of total manufacturing costs to the overall revenues produced by a manufacturing plant or business unit.
    • Net Operating Profit – Measures the financial profitability for all investors/shareholders/debt holders, either before or after taxes, for a manufacturing plant or business unit.
    • Average Unit Contribution Margin – This metric is calculated as a ratio of the profit margin that is generated by a manufacturing plant or business unit, divided into a given unit or volume of production.
    • Return on Assets/Return on Net Assets – A measure of financial performance calculated by dividing the net income from a manufacturing plant or business unit by the value of fixed assets and working capital deployed.
    • Energy Cost per Unit – A measure of the cost of energy (electricity, steam, oil, gas, etc.) required to produce a specific unit or volume of production.
    • EBITDA – This metric acronym stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a calculation of business unit or company’s earnings, prior to having any interest payments, tax, depreciation, and amortization subtracted for any final accounting of income and expenses. EBITDA is typically used as top-level indication of the current operational profitability of a business.
    • Customer Fill Rate/On-Time delivery/Perfect Order Percentage – This metric is the percentage of times that customers receive the entirety of their ordered manufactured goods, to the correct specifications, and delivered at the expected time
      At we can help you set-up all the above KPI’s for your company. If you can measure it, you can improve it. Without the above KPI’s you are flying blind and may be leaving loads of money on the table. According to an estimate a company is losing 5% to 10% of their Revenue without proper KPI’s.
      Please call the professionals at Wealth Cloud Accounting Professional Corporation at
      647-615-1000 to come and assist you become a world class company with increased bottom line, happy employees and happier customers.