“What gets measured gets done”. While this is true in all businesses, it is especially important in the manufacturing industry. Product quality, product margin, and top line sales can be improved by simply identifying and subsequently measuring and managing the proper items that drive those parts of the business. Metrics can follow the ‘SMART’ criteria:
- Specific purpose
- Measurable
- Achievable
- Relevant
- Time phased
Step 1 – Identify the Proper Metrics for Your Manufacturing Business
The first step is to determine what is important to your business and to your manufacturing process. Time must be invested to select the metrics that truly drive the business; those that when impacted, can add value to the product or to the product’s bottom line. There are several areas to review to determine which metrics to choose:
- Which products are being produced out of specification
- Labor efficiency
- Machine utilization
- Scrap rates
- Total cost
- Total cycle time
- On time Delivery ratio
- Quality
- Safety
- AR Days
- AP Days
- Covenants
- Sales trends and graphs
- Backlog
- Inventory Days
- Turn and Earn
- Cost to produce vs. buy
- Break Even point
- Purchasing Managers Index (PMI)
Step 2 – Determine the Frequency of the Metric
Once you have determined what it is you want to measure, you then must determine how often to measure it. Some metrics lend themselves to daily or perhaps weekly monitoring. Others may be more financially oriented and therefore can be measured to coincide with the financial statements.
Regardless of the frequency, track the trend of each metric – how is the company doing this week compared to last week, this week compared to the same week last year, etc. The budget should also compare each metric to a budget established at the beginning of the year.
Step 3 – Distributing the Metrics
Who should receive the metrics? Some metrics should be posted in the plant, but others may be kept to a select few managers who have direct responsibility over the metric. Determine who the proper players are and review the metric with each participant. It is important that they a) understand how the metric is measured, and b) agree with both the calculation and the importance level.
Step 4 – Measure, Measure, Measure
Be consistent in the calculation and distribution of all metrics. Make sure to review each periodic posting with the proper players. The objective is not to embarrass or punish; the objective is to provide a tool to be used as a basis for performance improvement.
Review the proper metrics periodically to ensure that one has not become obsolete, or that another has not increased in importance. Maintain a buy-in from management and keep an open mind to measuring new items.
The process of analyzing and utilizing metrics is a very specialized one, and to ensure accuracy and effectiveness, it should be performed by a seasoned in-house or outsourced CFO.
