How Manufacturers use KPIs to Improve Manufacturing Execution & Profitability
After reading this article, you will learn the crucial role of Key Performance Indicators (KPIs) in manufacturing. I feel manufacturers should embrace a balanced approach between tracking too few vs too many metrics. KPIs represent critical inputs as business decision-making tools, performance benchmarks, and drivers of continuous improvement. You will learn the two types of KPIs, including leading and lagging indicators and specific operational/tactical metrics for a manufacturing business.
In this article, I’ll share strategies for successful KPI implementation, including the establishment of clear objectives, alignment with business goals, and the selection of appropriate SMART goals. I will also address challenges in implementation, such as resistance to change and setting realistic targets, emphasizing the need for support in interpreting and responding to KPI results.
I will dive into cultural dynamics influenced by KPI implementation, highlighting its impact on accountability, proactivity, employee engagement, trust, and continuous improvement. I’ll also share a success story illustrating the positive outcomes of implementing KPIs in a manufacturing business, including improved on-time delivery and reduced changeover times.
In conclusion, you’ll learn that KPIs are imperative for maximizing potential, understanding drivers, and systematically addressing challenges in the manufacturing sector. I feel that KPIs are essential for remaining competitive in the evolving manufacturing landscape.
Did You Know?
- Manufacturers not using KPIs may lack visibility into key aspects of their operations, making it challenging to identify performance bottlenecks or areas for improvement.
- Without KPIs, manufacturers’ decision-making tends to be more reactive, relying on subjective assessments rather than real-time insights.
- Manufacturers may find it challenging to measure progress toward goals without specific KPIs, making it harder to assess the success of operational strategies.
- With KPIs, manufacturers can detect issues early on and proactively address them, minimizing the impact on production and quality.
|KPIs as Business Tools
|KPIs in manufacturing act as decision-making tools, performance benchmarks, and drivers of continuous improvement.
|KPIs provide actionable insights for strategic decision-making, establish benchmarks for evaluation, and highlight areas for enhancement.
|Types of KPIs
|There are two types of KPIs: Leading indicators (predictive metrics guiding actions to improve current performance) and lagging indicators (reactive metrics guiding actions to improve future performance).
|Operational KPI Categories
|Operational/tactical KPIs should be categorized into Safety, Quality, Delivery, and Cost.
|Strategies for successful KPI implementation include establishing clear objectives, aligning KPIs with business goals, selecting appropriate and SMART goals, implementing performance measurement systems, and ensuring data accuracy and consistency.
|The implementation of KPIs influences cultural dynamics by fostering accountability, proactivity, employee engagement, trust, and a continuous improvement mindset.
In the manufacturing world, I find two types of practices when it comes to key performance indicators (KPIs) and their measurement: The first involves only a handful of metrics that are tracked and often done without any systematic approach; surprisingly, they are reviewed infrequently. The other approach is a measure-everything approach that becomes overwhelming and creates unnecessary work for those producing reports.
Both situations are a nightmare for those trying to make informed decisions. In one situation, you don’t have enough information; in the other, you can become a victim of paralysis by analysis.
With this in mind, I wanted to help manufacturing executives strike a balance between measuring too little and measuring too much and having a structured approach to establishing and tracking metrics.
I’ll start by saying there are some mainstays for measuring performance; things like safety, quality, and efficiency are crucial in a manufacturing setting.
In this post, I’ll provide insights into the strategies, principles, and challenges to implementing a strong measurement system for a manufacturing business and how to use it to make informed decisions.
1. The Importance of KPIs in Manufacturing
1.1 Understanding Key Performance Indicators
Key Performance Indicators, or KPIs, are quantifiable metrics used to measure the results of a manufacturer against its targets and evaluate its success in achieving its strategic objectives.
1.2 The Role of KPIs in Manufacturing
KPIs in manufacturing play several key roles, including:
- Decision-Making Tools: They provide actionable insights that guide strategic decision-making at various levels of the organization.
- Performance Benchmarks: KPIs establish benchmarks for evaluating and improving performance against predefined goals and industry standards.
- Continuous Improvement Drivers: By highlighting areas for improvement, KPIs foster a culture of continuous improvement, driving efficiency and innovation.
1.3 The Types of KPIs in Manufacturing
There are two types of KPIs in manufacturing:
- Leading indicators: These are preventive metrics that can help us predict future performance. These metrics provide feedback that can guide our actions to improve current performance.
- Lagging indicators: These are reactive metrics that indicate past performance. These metrics provide feedback that can guide our actions to improve future performance.
Lagging indicators are necessary to report results.
“I recommend you also develop leading indicators so that you can proactively influence your results;”
understanding your leading performance trends will enable you to respond when you notice a negative trend and attain better results.
Read this Infographic to learn more about recommended KPIs for manufacturing businesses.
2. Identifying KPIs in Manufacturing
2.1 Operational/Tactical Metrics.
When establishing these types of metrics, think about how you’d want your team to fulfill a customer order. You will expect your team to:
- Start by working safely so they don’t injure themselves or others or cause property damage.
- Have a high level of attention to detail so the quality of the work is high and consistent.
- Deliver the work product on time to customer commitments.
- Complete the work in an efficient manner without sacrificing quality.
The above-listed expectations fall under Safety, Quality, Delivery, and Cost. Operational/tactical KPIs should fall into those categories and should be established in that order.
“The reason for the specific order is that your priorities should start with keeping employees safe, delivering high quality, fulfilling your company’s purpose, and working efficiently to make a profit.”
Watch this video to learn more about some of the most important KPIs in manufacturing and the potential improvement ranges we find:
2.1.1 Safety Metrics
OSHA Total Recordable Incidents Rate (TRIR)
This metric will measure the rate of safety incidents that qualify as recordable injuries under OSHA guidelines. This enables OSHA to compare the incident rate between similar businesses. This metric considers the count of recordable incidents per 100 full-time employees annually.
TRIR = Number of Incidents in the reporting period x 200,000 / total hours worked in the reporting period Lost Time Incident Rate
Lost Time Incident Rate (LTIR)
This metric will indicate how safe the company’s practices are. A higher LTIR means more employees have had to take time off due to work-related injuries.
LTIR = Number of Lost Time Incidents in the reporting period x 200,000 / total hours worked in the reporting period
The reporting period is typically 12 months, as 200,000 hours represents the total hours worked per 100 full-time employees annually. I recommend tracking these for the most recent 12 months.
These metrics measure the effectiveness of management’s efforts to create a healthy and safe environment for employees.
2.1.2 Quality Metrics
First Pass Yield
Also known as throughput yield, measures the percentage of parts produced right the first time, meaning defect or rework-free, through a process or series of processes (i.e., a production line).
First pass yield = (total units completed with no rework) / (total units of product entering the process)
This metric measures the percentage of parts or materials that became unusable due to mistakes or other defects.
Scrap Rate = (total units of product scrapped) / (total units of product entering the process)
These metrics will indicate your manufacturing processes and employees’ ability to meet process/product standards.
Watch this video to see an explanation of how to use KPIs on a SQDC/Visual Management Board:
2.1.3 Delivery Metrics
This metric measures the percentage of work completed vs the total work scheduled per period (hours, shifts, days, etc.)
Schedule Attainment % = Completed Planned Work / Total Planned Work x 100
This metric measures the percentage of orders that were shipped or delivered (depending on customer agreements) to the customer on or before the due date.
On-time delivery % = Total orders shipped on-time / Total orders shipped
These metrics measure our ability to fulfill customer orders on time.
2.1.4. Cost Metrics
Labor Productivity (Hrs/Unit)
Labor productivity measures the efficiency of your workers in performing their work. This metric should be adapted to your specific business as there are many nuances to consider from industry to industry.
Productivity = Total hours worked in the reporting period / Total units produced in the reporting period
Overall Equipment Effectiveness (OEE)
OEE is a comprehensive metric that assesses the performance, availability, and quality of equipment. It provides insights into how well manufacturing assets are utilized to produce quality products efficiently.
OEE = Equipment Speed x Equipment Availability x Equipment Quality
Equipment Performance = (Ideal Cycle Time per unit x Total units produced) / Run Time
Equipment Availability = Actual Run Time / Planned Production Time
Equipment Quality = Good units produced in the reporting period / Total units entering the process in the reporting period
These metrics measure how efficiently we are using our resources.
Watch this video to learn the four stages of Improvement for a Manufacturing Business:
3: Strategies for Implementing KPIs in Manufacturing
3.1 Establish Clear Objectives
This is the first step towards successful implementation.
“Everyone must understand that metrics are not only for management but also for the workers.”
A common misconception is that employees think that managers are micromanaging when implementing metrics. I recommend you quickly tackle that by assigning responsibilities to the area owners and their respective teams for their performance. Make sure you empower them to practice Lean Daily management.
Read this article to learn more about implementing Lean Daily Management in Manufacturing.
3.2 Align KPIs with Business Goals
A mistake I have observed is that leaders arbitrarily implement KPIs in their manufacturing areas. KPIs should align closely with your business metrics and strategic initiatives. Ensuring this will prevent teams from having conflicting priorities and, therefore, dysfunctional dynamics.
3.3 Select Appropriate KPIs
The criteria I recommend you use here are what we call SMART goals. SMART is an acronym for specific, measurable, attainable, relevant, and time-bound. This framework ensures that your KPIs drive accountability and motivation in your teams, are impactful to the business, and are executed within a reasonable time frame.
3.4 Considerations when Implementing Manufacturing KPIs
3.4.1 Performance Measurement Systems
Measuring these metrics will inevitably necessitate a system to gather this information for you. Depending on your organization and resources, this can range from a form or spreadsheet to data visualization software that can be connected to your equipment interface, ERP, and accounting systems to provide real-time customized reporting.
Watch this video to learn more about the difference between a traditional leader and a Lean leader:
3.4.2 Ensuring Data Accuracy and Consistency
Data accuracy is key. Consider that bad information can lead to bad decisions. Build trust in your measuring system by developing as little human dependency as possible, documenting procedures, clear ownership, checks and balances (i.e., secondary metrics to validate accuracy), and ensuring consistency in your measurement processes.
4: Challenges in Implementing KPIs in Manufacturing
4.1 Resistance to Change
“When it comes to KPIs, I find that people will fall into one of two categories: 1. High accountability, meaning they welcome being measured because they trust their work ethic and results. 2. Low accountability, these folks avoid being measured and will go out of their way to stay under the radar.”
When you introduce KPIs you’ll disrupt people’s day-to-day dynamics. Make sure you provide training, help employees understand the purpose, and also what’s in it for them.
“In some cases, we have modified the employee bonus structure to be based on meeting targets for operational KPIs. This structure will foster shared ownership and increase employee engagement and overall performance.”
Watch this video to learn ways to get buy-in from your team:
4.2 Setting Unrealistic Targets
“Remember what I said about SMART goals. When you fail to give your team a realistic or attainable target, you lose trust. Some may resent your leadership and will become disengaged.”
4.3 Lacking support
Employees will need your support in measuring, interpreting, and responding to KPI results. Make sure you provide the appropriate support so they can be successful. This will be your opportunity to shift the culture from reactive to proactive.
5: Cultural Dynamics of KPI Implementation
Establishing KPIs will undoubtedly begin creating a culture of accountability.
“Beyond the numbers, KPIs will help your people take ownership of their results, and if you support and empower them, they will start owning their results.”
Read this article to learn more about encouraging your team to make improvements.
Many manufacturers I visit have an environment where they make decisions based on opinions or speculation. Having KPIs will expose the real issues. Ideally, people will then begin anticipating them and work on preventing small issues from snowballing into full-blown crises.
5.3 Employee Engagement
Employees often become disengaged because they don’t enjoy their work, they don’t see opportunities to advance, and/or they don’t feel valued.
“Implementing KPIs will allow you to empower employees so they can use their creativity and solve their problems.”
Many employees will enjoy influencing their results, and if you combine KPIs with awards and recognition, those employees will feel valued and will continue to give their best effort.
Watch this video to learn about the five scenarios you’ll find in a manufacturing business when you take over:
When employees gain full visibility of their performance, they will no longer question management’s decisions. The transparency created by having KPIs help tell employees the story of the company. When things are going well and prosperous they should reap the benefits; and when things are not going well, they will understand when you have to make undesired changes (reduced hours, smaller bonuses, etc.).
5.5 Continuous Improvement
This will be a process of adaptation for your employees but once they realize the benefits of improving their results, they will constantly strive to improve their results.
“People want to be part of a winning team.”
6: Implementing KPIs in a Manufacturing Business Success Story.
6.1 Implementing KPIs in a Manufacturing Business.
We were hired to help this manufacturer improve their operational execution and increase profitability. We noticed early on that they didn’t track operational metrics and did not drive improvement activity.
We quickly started working on installing visual management boards and identifying what metrics we would track for each area. We landed on:
- Safety – Recordable incidents.
- Quality – Scrap rate.
- Delivery – On-time delivery.
- Cost – Hours/Unit.
Daily huddles followed shortly after and a team of engineers, mechanics, and production personnel started making improvements. The results were amazing:
- Improvement of on-time delivery by 14% (From 84% to 98%)
- Reduced changeover times by 75% (From 4 to 1 hr.)
We then moved to the warehouse area to implement KPIs. We noticed pickers did not have any metrics for order picking. There were no metrics for inventory, shipping, or purchasing. We proceeded to implement some key metrics:
- Orders picked complete.
- Shipping accuracy.
- Negative inventory.
- Supplier performance.
- Inventory turns.
- Cycle count compliance and accuracy.
Again, tracking these metrics enabled this team to recognize their gaps and begin tackling them. We assembled purchasers, warehouse managers, and shipping supervisors to work on improvements. Here are some of the results we saw:
- Increased inventory turns by 60% (From 5 to 8).
- Reduced excess and obsolete inventory by 30%.
- Increased shipping accuracy from 98% to 99%.
- Increased inventory accuracy from 94% to 98%.
7: Conclusion: KPIs are the Path to High Execution and Profitability.
As you can see, in our experience, having KPIs in manufacturing businesses should not be optional but imperative. Manufacturing businesses can maximize their potential by knowing their KPIs intimately, understanding the drivers, and being disciplined and systematic about tackling their challenges.
The effects of implementing KPIs go beyond operational performance; you’ll see a change in your company’s culture, and ultimately your bottom line. We have witnessed our clients’ clients notice the growth that comes from embracing KPIs. The response is very complementary, and this leads to stronger relationships because high execution leads to trust.
The manufacturing sector evolves, but one thing is certain: those who fail to embrace measuring and continuously improving their performance will be left behind by the competition.