As you likely know, manufacturing is one of the biggest industries around the globe. And although the industrial revolution ended long ago, manufacturing remains an essential industry that’s constantly shifting to adhere to customer demands and new products. While there are many sectors included in the broader manufacturing industry, there’s still enormous competition and pressure overall to produce goods quickly and cheaply. This is why an effective manufacturing software solution tracks manufacturing KPIs specifically.
So what exactly is a KPI? KPIs, or key performance indicators, are points of measurement that determine an organization’s success. These are typically measured through sophisticated analysis and reporting functionalities that employ business intelligence (BI) tools such as charts, dashboards, displays, graphs and reports. Manufacturers use KPIs to measure and evaluate success according to critical business objectives. Making sound business decisions based upon relevant, real-time data is invaluable in today’s hyper-competitive market.
The KPIs that your business tracks should be based on your unique requirements and needs. For example, a process manufacturing company might need more visual and up-to-date geographic information related to the status of ordered materials due to the sensitivity of the in-transit ingredients. On the other hand, a B2C manufacturer might be especially concerned with on-time delivery status, as it can improve rates of customer retention and generate positive word-of-mouth.
In the following section, we’ll go over some of the basic manufacturing KPIs that many manufacturers track, but keep in mind that the best KPI visualizations for your business are dependent on your company’s unique workflows.
11 Manufacturing KPIs Your Software Should Track
Whether you’re shopping for a new manufacturing program or just trying to configure your current system, it’s important to track production planning KPIs to measure factors such as success and efficiency. Here is a list of several important and common manufacturing KPI examples your software should track:
1. Cycle Time
One important manufacturing KPI to keep track of is the cycle time of your production from the beginning to the end of product creation and from finished production to actual shipment. This is called supply chain cycle time. Manufacturing tools can conveniently and automatically track this information, helping your business discover ways to improve speed while also maintaining quality. Your manufacturing program can show you which processes eat up time and point you in the right direction toward measures that can make them more efficient. Manufacturing KPIs can show you if you need to find a better way to move raw materials quickly, if suppliers aren’t meeting your goals or if setup times are too long.
You can also track the cycle time of individual processes. For instance, you might want to analyze cash-to-cycle time. This is the time between paying for raw material to make your product and eventual payment from a customer for the finished manufactured product. You may also wish to track customer order actual cycle time if you’re concerned with the distribution side of your operations. This measures the time between when a customer places an order and when they finally receive it.
2. Inventory Turns
Knowing how often your company completely sells and replaces its entire inventory over a certain amount of time is indispensable information for manufacturers. Because many companies typically have a significant amount of money tied up in inventory, it’s beneficial to know which inventory practices are inefficient and which are productive. Slow-moving items in your stock can use up valuable space and makes the warehouse less efficient.
Using manufacturing data, you can quickly see which goods have the highest carrying costs. From there, you can develop strategies backed by data to figure out a way to either move that product faster or to reduce its stock in your inventory.
3. Inventory Deviation
As a manufacturer and someone who deals with inventory lists regularly, you’re probably well aware of how much actual inventory levels can vary from the levels that are manually marked in your records. While you might do your absolute best to track all materials entering and leaving your warehouses and plants, deviation is still likely to happen.
However, with a manufacturing solution, you can drastically lower your deviation rate. All inventory transactions are performed in the software in real time using a warehouse management system. These systems include advanced tools such as RFID technology or established capabilities such as barcoding. Manufacturing systems ensure that you have a more accurate number recorded and improves how you track any deviation that may still occur.
Tracking the costs of every activity and every ingredient that goes into your product is a challenge, especially for process manufacturers. However, with a manufacturing or ERP system, you can track every cost incurred during the production process. This includes the cost of labor, equipment, raw materials/ingredients, handling, landed costs, distribution and more. This is an important manufacturing KPI for production planning to consider, as prices and revenue are the beating heart of a business.
Along with tracking your costs, ERP systems may also come equipped with a BI module that can show cost trends. Many systems offer cost forecasts to visualize where you’ll likely spend money in the future. These tools can be used to understand exactly how many outgoing costs you’re incurring. They can also assist in deciding what financial strategy you should use going forward. By leveraging financial data, you may choose to procure cheaper materials or to raise the cost of your product, for example.
When production is at a standstill, your business isn’t working as efficiently as it could be and isn’t reaching its maximum potential. To help minimize downtime, you need to understand why it occurs and record this reasoning in your software solution. By doing this, the system allows you to uncover patterns that lead to downtime through data analysis.
For example, are you continually stopping production due to equipment failure? Maybe you need to change the way you perform asset management. Are the errors occuring due to operator error? You might need to offer more training for your employees. Maybe you continually see batch contamination and need to seek out the root cause of the issue. Whatever the main reason for downtime is, an ERP or manufacturing program can consolidate and evaluate production KPIs to help you make better business decisions.
6. Reject Ratio
Reducing the amount of scrap created during the production process can help increase your organization’s profitability. With manufacturing software, you can measure reject ratio as a KPI and monitor scrap factor for different products, along with tracking yield percentages in the BOM (bill of materials). You can further leverage this data to measure the differences between the amount of scrap that you projected and the amount actually created.
Monitoring your financials is necessary if you want to understand how your company is performing and if you can reach your set goals. Reports for accounts payable and receivable, cash flow, income statement, balance sheet and more can be generated from your ERP solution to give you an accurate picture of the company’s financial health.
ERP KPIs can also help you determine your operating cash flow, quick ratio, current ratio and other metrics to influence your short-term and long-term goals. Using these points of data, you’re positioned to make a more knowledgeable judgment call when it comes to deciding where to allocate your financial resources.
Sales are tracked in many different ways within a manufacturing solution. At the core of the system are typical metrics such as lead response time, rate of contact and follow-up. These data points are likely very important to your sales team in understanding what they could do to improve the number of deals they close.
A beneficial option to manufacturers looking for heightened sales functionality in their program is by implementing a CRM that has ERP integration. With this type of solution, you can quickly analyze, manage and synchronize sales to see if you’re meeting your sales initiatives. A CRM integrated with an ERP can also help you track information such as customer data and information regarding previous calls to further assist your sales team.
9. Quality Control (QC) and Quality Assurance (QA)
It’s essential to know the condition of the raw materials provided by your vendors and to be sure that your products are safe and up to the expectations of your customers. ERP systems offer a level of visibility not available from many other software systems. For instance, ERP systems provide traceability tools like serial numbers that allow you to track finished products by lot and date. This is extremely useful, especially if you were to find out your product was tainted or otherwise damaged.
With traceability, you’re able to recall only the product affected by a recall or quality issue. This enables you to maintain your quality while also minimizing costs. ERP solutions also supply auditing tools so you can retrace your steps in case issues surrounding your product arise. In addition to helping you perform QC and QA testing, ERP sends issue reports to the FDA and other regulatory entities in minutes instead of hours.
10. Order Management
The better you understand your order management activities, the more consistently you’re able to fulfill orders of the highest quality and efficiency. Tracking your order management KPIs also reduces the number of returns you’ll have to process. The number of sales order returns your company experiences due to improper shipments, mistakes and defects can damage your brand reputation and lead to unhappy customers. With a powerful ERP or manufacturing software solution in place, you’ll have more insight into what causes these types of issues, and you can rectify the situations that cause errors.
Additionally, with ERP software, you can track average order value, average time dedicated to client orders, return percentage, warranty activity, refund rate and more. All of these ERP metric examples give you valuable insight into how you can improve your processes and raise customer satisfaction.
11. Other Trends
Your ERP software can assist you in assessing consumer trends and predicting future behavior patterns. It might also contain information related to calendar dates, weather conditions, growth in e-commerce and the price of oil, which could affect your operations depending on the products that you manufacture and your industry.
Manufacturing software enables you to access historical and real-time data, along with external data resources. With the power of a business intelligence suite within your ERP, you can easily manipulate your manufacturing metrics dashboard and share critical trend data across your organization.
What Is a Leading Indicator and a Lagging Indicator?
Before you finalize the list of KPIs that you want to have prominently represented in your manufacturing software, you should consider adding both leading indicator KPIs and lagging indicator KPIs. What exactly do these terms mean? A leading indicator KPI is a method of measuring the inputs that are needed to meet your company goals. For example, if you want to add 50 more customers in the next six months, you might measure KPIs such as percent of leads closed, amount of money spent on different types of advertising, etc. By grouping and analyzing these metrics, you can find trends that affect how rapidly you gain customers.
A lagging indicator measures the results of your efforts. In the example above, the lagging indicator would be the addition of 50 customers in six months. Basically, the lagging indicator is the result of your actions (as measured through your leading indicators). The lagging indicators are easy to measure — did you get 50 more customers or not? — but it can be difficult to drill down if improvement is needed or if you’re trying to discover the methodology that led to success.
Overall, it’s important to include both lagging indicators and leading indicators when developing your KPI strategy, as it’s a way of actively trying to improve your business by measuring quantifiable results. To start the process, you need to develop an end goal or lagging indicator (which you may already have firmly in your mind, especially if you’re considering new or updated manufacturing software) so that you can improve operations and potentially generate more revenue.
To Wrap It Up
KPIs are important for assessing accountability and measuring the success of your manufacturing operations. With the assistance of a manufacturing system, you can define and track your company’s performance through KPIs. This allows you to make critical decisions backed by data to impact quality, profitability and the overall future of your business. It’s essential that when analyzing the different KPIs to include in a solution, you consider your company’s unique requirements and needs. After all, implementing a software solution with a BI dashboard of KPIs is most effective when the insights presented are extremely applicable to your organization’s needs.
What other production planning metrics do you track using manufacturing software? Let us know in the comments below!