You shall use manufacturing KPI’s for your different teams to track their progress towards their targets and goals.
KPI’s are performance indicators that help your executives and teams to do the right things.
In this blog post I describe:
- Why you need manufacturing KPI’s.
- What is the difference between goals, targets and KPI’s.
- How to design manufacturing KPI’s.
- How to use manufacturing KPI’s.
- Examples of manufacturing KPI’s for sales, purchasing, operations and finance.
At the end of this blog post you find practical and proven manufacturing KPI’s for each part of your organization.
So, let me quickly take you through what you need to know to implement useful and practical KPI’s in your organization:
Why you need manufacturing KPI’s?
Consider why you need manufacturing KPI’s before you decide which KPI to use. A common mistake is to ask your finance manager for KPI’s and not the organization.
Most companies have budgets, some have business plans. These are necessary to drive a business but to many employees, budgets and business plans are abstract management plans.
“KPI’s are Key Performance Indicators. They are directional progress reports towards your targets.”
You will give your different teams operational tools when you design useful manufacturing KPI’s for them. These KPI’s shall be reported on a weekly or monthly basis depending on the teams type of task.
2 – 3 KPI’s per team, or executives, help you and them to evaluate their own progress towards their team-target.
What is the difference between goals, targets and KPIs’
Many people have difficulties to see the difference between goals, targets and KPI’s.
Here are the differences between goals, targets and KPI’s:
- Goals are your overall ambitions. This can be market share in 3 or 5 years.
- Targets are your measurable milestone target or financial target for a certain period.
- KPI’s are the periodic indicators that help you track progress towards a certain target.
It’s important that your KPI’s are aligned with the target you have set for yourself. The KPI is your tool to track your performance towards a specific target.
Targets shall be achievable but have the nature of being a stretch-target. Delivery on your targets shall lead to the eventual fulfilment of your goals.
How to design manufacturing KPI’s
When you design manufacturing KPI’s you shall focus on making your teams as efficient as possible.
5 ways to design manufacturing KPI’s:
- Decide exactly what drives your performance. No. of calls to prioritized prospects?
- Scale down to max 2-3 KPI per team to get focus on what’s really important.
- Follow up on your KPI’s. Your KPI’s indicate if your team is on the right track.
- Acknowledge that KPI’s are directional indicators, not monthly or yearly targets.
- Reevaluate and re-design your KPI’s if they do not support right behavior.
KPI’s shall be measured frequently so that you know that you make progress towards your monthly or yearly targets.
Targets shall be periodic, for example quarterly or yearly targets.
How to use manufacturing KPI’s
KPI’s are repetitive indicators that help your team to understand if they have made any progress during a certain period. Such periods can be weeks or months.
Typically, you’re expected to use the KPI’s as the basis for your periodic follow up.
As a tool, KPI’s can be extremely powerful to help the organization to align activities that result in the company to deliver on its targets.
Examples of manufacturing KPI’s
KPI’s for sales executives:
- No. of active prospects (for the last period). An active prospect can be defined as prospects with who at least 4 discussions has been held in the last two periods.
- Total sales volume (for the last period).
- Average gross margin in sales (for the last period).
Manufacturing KPI’s for purchasing and sourcing teams:
- Top-10 supplier relationship, measured as no of defined top-10 supplier with whom two dialogues has been held in the last month.
- Cost reduction per unit compared to last year’s actual cost per unit.
- Supplier delivery quality, measured in parts per million faults vis-a-ví agreed delivery quality, including timing.
Manufacturing KPI’s for the operations team:
- Lead time from order and material planning to ready for delivery via each production step. Reducing lead times means not only happy customers but also less working capital requirements.
- Stock turnover, or inventory turnover, defined as Cost of Gods Sold divided with the sum of start and end inventory divided with 2.
- Delivery quality, measured in parts per million faults vis-a-ví agreed delivery quality, including timing.
KPI’s for the finance team:
- Day of reporting track how fast decision makes receive monthly financial reports to base decisions upon. This is the number of calendar days after end of month when the final financial, or management, report is distributed.
- Day of closing track how fast accounts are closed, including balance sheet and cashflow statement. Typically, this is used at quarterly and yearly closing. The faster closing, the more efficient and automated process, the faster focus can be on other things.
- No of supplier payment days shall be as high as possible, within the supplier agreement, to minimize necessary working capital.
Use KPI’s to get to your targets so that you achieve your goals. Scary? Maybe, but just do it and I promise you that you will start to see positive results.
Read more why operating cashflow is important.