Managing Company Performance: Key Performance Indicators for Manufacturing Companies
Every company has key transactions that are critical to the efficient, profitable performance of the company. This is particularly true of manufacturing entities, which may be characterized by frequent, repetitive processes to deliver products that conform to company and customer specifications.
Sound financial reporting is, of course, important to any company that wishes to maintain good control of asset utilization and to report results of operations in a consistent manner in conformance with accounting and financial standards. Quarterly or monthly financial reports, however, are not enough to enable a manufacturing operation to maintain efficiency and productivity. Developing a set of key performance metrics is an effective way to deliver timely information on critical control processes, enabling the management team to respond quickly to indicators of performance that are out of control parameters.
When developing a set of key performance indicators (KPIs), the following variables should be considered:
Number. Even small manufacturing entities may have hundreds or perhaps thousands of discrete processes that contribute to the overall product. Tracking large numbers of metrics may be a necessary aspect of operational control on the production floor, however, there usually are a few key indicators that, when measured consistently and accurately, provide a sense of the overall “health” of the company and its operations.
Production output versus expectation is a ready example of such an indicator. If production is falling short of expectation, a timely KPI will lead to quick focus on possible factors for the shortfall.
- Is raw material performing meeting company quality specifications, or are there deficiencies in the raw material that are impacting production output?
- Are there a larger than usual number of new production staff on the line, and have they been trained in good manufacturing processes (GMPs) before being placed on the line? Poorly trained or less experienced production workers will certainly have an impact of manufacturing performance.
- Have production processes been changed, or has the floor layout been changed with commensurate differences in workflows?
- Are new products being introduced to the manufacturing line, with associated learning curves for worker learning?
Selection. KPIs may not point directly to the root cause of a manufacturing problem, however, well-selected KPIs will indicate production variances that may be the result of a variety of factors. Timely follow up and review will then identify the operational fault that is causing the variance.
Direct labor costs are another example where the indicator may have a variety of causal contributing factors. If direct labors hours and overtime are trending higher than expectation, consider reasons:
- Are there new employees on the line?
- Has the production staff been pushed to higher levels of output, with large amounts of overtime due to production volume requirements?
- Has new equipment been installed that is not performing to specification, leading to extended hours of operation to meet production goals?
- Has the workforce been operating in a “burst” mode for a long period, with extended amounts of overtime required and perhaps extra weekend shifts?
- Is reduced output due to collective fatigue and deteriorating morale?
Balance. When selecting KPIs, it is important to ensure the wrong behaviors are not being reinforced. For example, if production output is measured only in terms of units coming off the line, it may lead to less focus on waste and rework being generated by the line. The consequence may be higher levels of output with higher levels of waste, rework and potentially returned product and dissatisfied customers. Metrics are needed to balance the quality of the output in addition to the quantity.
Scope. It is common to focus on the production area when developing KPIs for manufacturing entities. Other functions should be included also, as they may indicate areas of operational concern.
Employee turnover is an example. If turnover rates are increasing as measured by the Human Resources team, what is the root cause? Is the onboarding process deficient, and employees are being frustrated and leaving as a result? Are the wage levels comparable with the industry and the region where operations are being carried out? Are fringe benefit levels at least comparable with companies of similar size and in the same industry? Has there been a change in the management team, perhaps a new supervisor, that is causing dissatisfaction with leadership? If there is a new supervisor, have they been given training in trained in management techniques? All too often, a high-performing worker is promoted to a lead or supervisory position without proper training in their new role. The inevitable result is that an excellent worker becomes a poor supervisor, and frustration and turnover are the unintended consequences. Are there perceptions that certain employees or groups are being “favored” and are therefore not held accountable for their actions? In such a case, an HR team with a strong relationship with the workforce is essential to determining the root cause of workforce turnover.
Participation. Developing a set of effective KPIs should be a team effort, including all key functions within the company. A set of KPIs developed by a small group and then “imposed” on the team will be met with dissatisfaction. Impacted groups should have a say in what is being measured, not only so they understand the key drivers of performance, but also because they may have better insight into some of the areas that need focus and improvement. Not everyone will agree with all the metrics. However, it is important that impacted groups at least feel that they have had into the process.
Continuous improvement. A set of KPI metrics is a not static document. As the company grows and expands, it may very well be necessary to add or change the KPIs to adapt to changed operational dynamics. Measurement should be consistent over time r to assess improvement in the areas being measured. It also is important to review the KPIs on a regular basis (perhaps annually) to address changes in operational characteristics, workforce changes, new product introductions or organizational changes.
A well-conceived set of KPIs, reported and reviewed regularly, is a critical differentiator in driving increased performance throughout the manufacturing operations and support functions. The beneficial results will be evident in the KPI metrics themselves, and in the overall profitability of the organization.
For guidance in KPI design and development, we are happy to assist.
Dale brings a broad and diversified portfolio of skills in financial and operational management to the Food and Beverage sector. Clients count on his depth and breadth to help them address the full scope of improving business performance. Dale is an excellent team builder, able to build consensus across departments to achieve company objectives. He understands the need to have timely, reliable information across multiple functions to have informed, objective discussions to understand issues and develop strategies to drive results.