In business, Key Performance Indicators (KPIs) get thrown around a lot, and for good reason. They provide organizations with unimaginable benefits. However, to gain these benefits you need to track the right KPIs using the right data. That’s why we thought it would be useful to create a 3-part blog series focusing on this topic. In part 1 of this series, we’re breaking down the importance of KPIs, and what ones you should prioritize for your manufacturing ERP implementation. There are 100s of different KPIs out there, but there are only 7-8 main ones that you want to look at as a manufacturer. Before we dive into these specific manufacturing KPIs, let’s first look into why they are important.
Why are KPIs and Metrics Important?
Manufacturing companies use KPIs to analyze, monitor, and optimize production operations. If an organization doesn’t have a set of KPIs, they won’t have baseline numbers. When they don’t have a baseline, there will be no way to determine if a company’s activities are working as intended, making things worse, or are having no difference at all. This can be detrimental to a manufacturing company that relies on operational efficiency to be successful. Without KPIs, organizations are making best guesses based on anecdotal evidence instead of informed decisions that are based on accurate data.
That’s why it’s surprising to hear that a lot of companies don’t have a good set of KPIs or operational metrics to use on an ongoing basis. Rich Harbin, Founder and President of IntelRise, talks about a recent interesting experience with one of his clients, “They are a large commercial and industrial water treatment system company, but surprisingly, they had no actual metrics. When our client went live with their manufacturing ERP implementation, they only tracked the 3 basic building blocks of an organization: take orders, manufacture product, ship & invoice.”
In a simple world, this might be satisfactory because even with just these three basic building blocks, you have the entire business process flow mapped out. Except we don’t live in a simple world. When comparing the data available post-ERP implementation, this client realized what they had been missing out on for so long. Rich continued, “Now, post-implementation, our client has a ton more data points and information at their fingertips in real-time to help them make smart quick critical business decisions.” This includes data like promise date, requested date, on time delivery, inventory status, actual vs forecast, etc. With all this new information, they can now see how they’re actually doing anywhere and at any time. Equally important, they can see where they can make improvements.
What KPIs To Prioritize
There are specific manufacturing KPIs that companies should prioritize to streamline the business-decision making process. Post-implementation, you want to be able to prioritize the following KPIs:
- Plan vs Actual Hours and Cost
- Resource Utilization
- Scheduled Production
- Sales and Profitability by Item Class and Item
For example, thinking of that same client we mentioned before, pre-implementation they had a significant back log of orders. They were also having a hard time getting orders in the system. As Rich put it, “That meant they couldn’t build anything – all these orders were jammed up. So the question came up of ‘Do we have a bottleneck in our ordering process?’ and it turns out they did. Those kinds of things can now be easily called out in their post-implementation KPIs.”
The data will paint you a clearer picture that can be easily analyzed and understood. That gives you a better chance of rectifying the inefficient or defective process and then optimizing for enhanced future performance. In addition, after implementation, hidden bottlenecks now become visible. Now not only do you have the data to prove it, you also have a better understanding of how to fix it. With bottlenecks in manufacturing creating $10 trillion in waste, that is a sizeable increase in profits.
Why Those Manufacturing KPIs?
The KPIs that matter the most to a manufacturing company are those that have the biggest influence on business success, as well as those that accurately measure business objectives. Analyze the processes that generate the highest yield value and track that data. More specifically, the processes listed above, or any combination of them. Other examples may include production volume, downtime, costs, operations and equipment effectiveness, utilization and capacity, scheduled production, etc. Keep in mind, that when your business matures and objectives evolve, so too should your KPIs. They should adjust to accurately reflect your business’s current situation.
It’s also worth mentioning that KPIs help increase employee morale and engagement. When staff witness the effect their work performance has on the bottom line and business operations, job satisfaction increases. Naturally staff become more aligned and cohesive with the company’s mission and long-term goals.
In short, it’s hard for a manufacturing company to gain deep insights and high business visibility without an effective ERP facilitating them. Organizations should care about and prioritize manufacturing KPIs so their business can identify their achievements and areas of improvement. In our next blog post of this series, we’ll discuss how to leverage your business data so you can be proactive, instead of reactive. If you’re wondering how a ERP solution can help your organization discover KPIs so you get the best ROI, we’d be happy to assist.