Key Performance Indicators (KPIs) are crucial to the success of any company, and are also used in the manufacturing industry. KPIs are essential for measuring performance, encouraging advancements, and guaranteeing operational effectiveness. These measurements shed light on a number of production-related topics, including sustainability, health and safety, and quality as well as efficiency. Here, we examine a few of the most important KPIs that business executives utilise to assess and improve their manufacturing processes.
Table of Contents
- What are Manufacturing Key Performance Indicators?
- How To Write SMART KPIs
- Top 15 Manufacturing Key Performance Indicators
- 1. Overall Equipment Effectiveness (OEE)
- 2. Work-in-Process
- 3. Production Downtime
- 4. Quality Yield
- 5. Cycle Time
- 6. Scrap Rate
- 7. Inventory Turnover
- 8. Cost of Goods Manufactured (COGM)
- 9. Return on Assets (ROA)
- 10. Capacity Utilisation
- 11. Energy Consumption
- 12. Maintenance Costs
- 13. On-Time Delivery
- 14. Safety Incident Rate
- 15. Sustainability Metrics
- Conclusion
What are Manufacturing Key Performance Indicators?
KPIs are a popular form of measurement that provide executives with the data they need to make strategic business decisions. World-class businesses use KPIs to create a clear picture of their operations, and to identify areas for improvement. It is the same in the manufacturing and production industry. Manufacturers use KPIs to measure and evaluate the performance, efficiency and effectiveness of the manufacturing process.
“If you can’t measure it, you can’t improve it.”
Lord Kelvin, Scottish-Irish physicist
Therefore, if you want to be an industry leader in manufacturing, you need to implement key performance indicators into your business model. These indicators are crucial for manufacturers as they offer perceptions into several facets of production, assisting companies in streamlining processes, raising standards, cutting expenses, and accomplishing strategic objectives.
How To Write SMART KPIs
Defining specific and successful goals might not be the easiest thing to do. Therefore, it is helpful to follow the SMART technique to ensure your key performance indicators are effective.
- Specific: clearly define goals aligning to your business strategy and objectives.
- Measurable: set specific milestones to measure your progress.
- Achievable: make sure your goals are achievable within the timeframe and budget.
- Realistic (and relevant): come up with goals that are relevant to your company, industry, and market.
- Time-bound: in order to stay on track, you need to set deadlines for each KPI.
Top 15 Manufacturing Key Performance Indicators
Have a look at the most common KPIs for manufacturing and production:
1. Overall Equipment Effectiveness (OEE)
OEE is a comprehensive indicator used to evaluate the productivity of manufacturing machinery. Three aspects are considered: quality (percentage of items free from defects), performance (speed and output compared to the ideal), and availability (uptime percentage). Manufacturers can find bottlenecks, cut down on downtime, and boost overall production by keeping an eye on OEE.
How to calculate OEE: OEE = Availability x performance x quality
2. Work-in-Process
Work-in-process (WIP) goods are those that are either in the middle of production or are waiting to be finished and sold. Costs associated with personnel, raw materials, and other unfinished commodities are all included in work-in-process. You can assess how successfully you’re using materials and the value of partially produced things with the aid of this KPI.
How to calculate WIP: WIP = (Beginning WIP + manufacturing costs) – cost of goods manufactured
3. Production Downtime
Production downtime describes the times when manufacturing is put on hold because of maintenance, equipment replacements, or malfunctions. Tracking downtime aids in locating the source of problems, putting preventative maintenance plans into action, and reducing lost production. Minimising downtime maximises equipment utilisation and improves operational efficiency.
How to calculate production downtime: Production downtime = Sum of all downtime during a specified time frame
4. Quality Yield
The percentage of defect-free products produced within a given time frame is known as the quality yield. This KPI is crucial for evaluating the quality of the product, cutting waste, and guaranteeing client happiness. Manufacturers are better able to maintain high production standards and execute remedial actions when quality yield is continuously monitored.
How to calculate quality yield: Quality yield = Number of non-defective products excluding rework and scrap / total number of products manufactured
5. Cycle Time
Cycle time is a measure of the overall amount of time needed to finish an operation or order. It is an essential KPI for locating production blockage and enhancing throughput and workflow optimisation. Manufacturers can increase productivity and better satisfy consumer demands by cutting cycle times.
How to calculate cycle time: Cycle time = (Time customer received order – time customer placed order) / number of total shipped orders
6. Scrap Rate
This manufacturing KPI calculates the amount of production materials that are wasted in relation to the total amount of materials used. Monitoring this parameter is crucial if you want to reduce waste and improve the profitability and efficiency of your production process.
How to calculate scrap rate: Scrap rate = Total amount of scrap / Total amount of product
7. Inventory Turnover
Inventory turnover measures how quickly inventory is sold or used within a given period. It reflects the efficiency of inventory management and production planning. High inventory turnover indicates effective demand forecasting and efficient use of resources, while low turnover may signal overstocking or production inefficiencies.
How to calculate inventory turns: Inventory Turnover = Cost of goods sold (COGS) / average inventory during a specified time frame
8. Cost of Goods Manufactured (COGM)
The costs directly associated with the manufacture of goods, such as direct labour and material costs and manufacturing overhead, are measured by the cost of goods sold (COGS), or COGM. This is a crucial statistic not just for assessing the profitability of a production process but also for manufacturers, since they must account for this value as an expense in their income statements.
How to calculate COGM: COGM = (Beginning WIP inventory + Total Manufacturing Costs) – Ending WIP Inventory
9. Return on Assets (ROA)
With the aid of this manufacturing KPI, you may ascertain the revenue produced by the capital assets used in the production of your goods. It will assist you in determining whether or not your company has profited from the purchase of a specific piece of machinery or equipment.
How to calculate ROA: ROA = Net income / average value of assets
10. Capacity Utilisation
The capacity utilisation refers to the extent to which a manufacturing operation uses its installed production capacity. It helps in assessing operational efficiency and planning for future capacity needs.
How to calculate capacity utilisation: Capacity utilisation = (Actual production/Maximum potential output) x 100
11. Energy Consumption
Energy consumption measures the amount of energy utilised for each unit of output produced. Monitoring energy use facilitates the identification of areas where money can be saved on energy, maximises the use of equipment, and supports environmental projects. Energy conservation improves environmental sustainability while simultaneously cutting operating costs.
How to calculate energy consumption: Energy cost per unit = Sum of all energy costs / number of units manufactured
12. Maintenance Costs
It is possible to track a machine’s performance over time thanks to maintenance costs KPI. All of the costs associated with maintaining and repairing production equipment are included in maintenance costs, including preventive and corrective. Optimising equipment availability at the lowest possible cost is the aim.
How to calculate maintenance costs: Maintenance costs = Total maintenance costs of a piece of equipment / number of products produced
13. On-Time Delivery
On-time delivery is the proportion of orders or items that are delivered to clients according to the schedule. For client happiness and retention, it is an essential KPI. Tracking punctual delivery assists producers in locating stoppages in the supply chain, enhancing logistics scheme design, and reliably satisfying consumer demands.
How to calculate on-time delivery: On-time delivery rate = Number of products delivered on time / total number of products delivered
14. Safety Incident Rate
In manufacturing, ensuring a safe working environment is critical. The safety incidence rate calculates how many incidents or accidents occur at work each period, usually for every 100 employees. Tracking safety incident rates aids in danger identification, preventative measure implementation, and the advancement of a safety-conscious workplace culture.
How to calculate safety incident rate: Safety incidence rate = (Number of injuries and illnesses x 200,000) / Employee hours worked
15. Sustainability Metrics
A range of KPIs related to resource efficiency, social responsibility, and environmental effect are included in sustainability measures. These could include goals for reducing waste, recycling rates, water use efficiency, and carbon impact. Since manufacturing and production are heavily resource-intensive industries, these metrics are critical for companies that want to minimise their environmental impact. Tracking sustainability indicators helps businesses be more sustainable over the long run and promotes corporate social responsibility initiatives. Depending on what sustainability metrics are most relevant to your business, the formula might differ, the below is an example.
How to calculate sustainability metrics: Sustainability measures = Total waste generated / Total waste recycled) x 100
Conclusion
Reaching strategic objectives and promoting operational excellence depend on the efficient use of KPIs. Critical insights into many aspects of the production process are provided by the top production and manufacturing KPIs highlighted above. Manufacturers can improve production and profitability by identifying inefficiencies, improving quality, optimising resources, and ensuring safety through thorough monitoring and analysis of key indicators.
In addition, adopting these KPIs to support data-driven decision-making helps firms stay competitive, better respond to customer needs, and adjust to changes in the market. The significance and use of these KPIs will only increase as the industry develops due to technological improvements and a growing emphasis on sustainability. This will direct manufacturers towards more inventive, responsible, and efficient operations.
Depending on the industry and your company strategy, goals and objectives might differ. We’ve highlighted in this article examples of manufacturing KPIs; they are only for informational purposes and they should always be consulted with professional experts.
FAQs
Depending on the industry and the type of business, the main indicators may differ. However, generally businesses focus on revenue growth, customer satisfaction, cost reduction, productivity improvement, and employee retention.
In manufacturing, as we highlighted in this article, there are important indicators that can help you identify the areas of your business that need improvement. The top KPIs in the manufacturing industry include the following: lead time, overall equipment effectiveness, labour productivity rate, capacity utilisation and many others.
An effective KPI is created by establishing a precise, quantifiable goal, making it time-bound, realistic, and related to the company’s objectives. The SMART criteria can help with defining good KPIs. It could be, for instance, aiming to increase the number of customers from 10 to 30 by the end of the year.
There are different metrics and indicators that can be used to measure manufacturing productivity. One of them is setting up the right KPIs, which are the main indicators that help you identify the areas of your business that need improvement and measure the progress of the actions you have taken, in this case, whether your production is efficient and effective.
Prior to calculating a KPI, specify the goal and the metrics you want to track. For instance, a KPI that calculates revenue per employee, might look like this: total revenue divided into a total number of employees.
