3 Manufacturing Efficiency Metrics & KPIs

Production performance metrics

Visual South works with manufacturers who use work orders, so this article focuses on job shops and discreet manufacturers. In this type of environment, production’s job is to deliver a certain quantity of a certain product. There is a defined start and a defined finish. Maybe production has made it before, maybe they haven’t. They may make it again, they may not.

Over the years, I’ve seen many varieties of key performance metrics for manufacturing—usually developed in-house by the owner. I’ve seen profit per employee, sales per employee, overhead per employee, and many, many more. I have to say, I’m not a fan of most manufacturing efficiency metrices. It seems like they satisfy management’s need to measure something, but not the right thing.

Here’s another way to look at it. If I don’t want to get a speeding ticket, I need to know what my speed is at all times. I can also know the engine temperature, outside temperature, oil pressure, tire pressure, and such. All those other items are helpful in knowing the status of your car, but are they going to give you the data you need to avoid a speeding ticket? The answer is no; you just need to know your speed. The speedometer is the only key performance indicator (KPI) you need to avoid the speeding ticket.

Three must-have manufacturing performance metrics

In manufacturing, there are a lot of things you could measure, but the three fundamental KPIs to measure performance are:

1. How much labor did you use to produce what you produced, as compared to how much labor you thought you would use?
2. How much material was used to produce what you produced, as compared to how much material you thought you would use?
3. How much indirect labor was used, as compared to how much you thought you would use?

Let’s dive into each one.

How much labor did you use to produce what you produced ,as compared to how much labor you thought you would use? In order to measure this, there needs to be some structure in place:

• An accurate routing on the work order
• Labor standards for each routing step (e.g. How long will this step take?)
• Labor reporting to calculate how much time each step took

If you don’t have the three items above in place, you can stop reading this blog. Read this instead for a better understanding of why these items need to be in place to properly measure manufacturing efficiency metrics. Don’t worry, this blog will still be here when you are ready.

Think you may need an ERP system? Learn how to find one.

If you do have these items in place, here is how to use the data. Let’s say there’s a step that has a labor standard of 100 pcs/hr:

• If 200 are produced, the standard says it should have taken you two hours (200/100 = 2). This is called earned hours.
• Divide the actual hours it took into earned hours to establish an efficiency.
  • If it took less time, the efficiency will be over 100%, giving you a positive variance.
  • If it took more than two hours, the efficiency will be less than 100%, giving you a negative variance.

Track your labor efficiency in weekly buckets by employee or team, and have those roll up to a supervisor.

How much material was used to produce what you produced, as compared to how much material you thought you would use? The same type of rules applies here as in the labor section.

• The work order needs an accurate bill of materials, and materials need to be issued to the job.
• The cost of the material you expected to use is the estimated cost; the cost of the materials you did use is the actual cost.
• If the actual was lower than the estimated, you have a positive variance. The opposite is a negative variance.

Track materials by each job, then roll up your metrics to all jobs for a weekly time period.

How much indirect labor was used, as compared to how much you thought you would use? The previous two KPIs for manufacturing operations are related to work orders. This one isn’t, but it’s critical. Here’s why.

Let’s say I’m an employee who wants to game the system. I should be doing 100 pcs/hr, but I’m only doing 75. If I work eight hours on the job, but only report six, I have an efficiency of 100%. However, I now have two hours of indirect labor. If I’m budgeted for zero hours, that shows up as a negative variance.

Here’s how this KPI works. Each department creates an indirect budget for the week. Actual indirect time is collected and compared to the budged indirect time. The same positive and negative variance rules apply.

Three production performance metrics isn’t the limit

There may be other KPIs you need to track and that’s fine. Just remember two things:

• Too much information tends to become noise.
• The three KPIs I described can’t be replaced by another metric. Knowing your engine temperature is nice and it can alert you if the engine is overheating, but that information isn’t going to prevent you from getting a speeding ticket.

If you don’t think you have the right software in place to manage your production floor, we should talk.