In manufacturing businesses or call it Industry, achieving growth and ensuring sustainability are some of the hardest things to do. Ranging from the complex production processes, to manpower, product development and inventory management, the challenges are inexhaustible. With large capital investments required to set-up and operate, it is evident that industry players are always hopeful that they are playing a game whose future they have accurately predicted allowing them ample time to recoup their investment. With the growing disruptive business models, manufacturing entities woes keep rising as the future’s uncertainty increases.
It is evident that the manufacturing landscape like other sectors is experiencing an unprecedented technologically driven collective shift which is not expected to end. Ranging from consumer demands, the nature of products, and the economics of production and distribution are all evolving. The gap between manufacturing and technology on one hand and manufacturing and retail on the other is diminishing at a fast rate. While more value is being created, manufacturers are under increasing pressure. In this environment, capturing value requires fundamentally rethinking business models, remapping a company’s strategic positioning based on internal capabilities, external shifts, and any emerging influence points.
The question then is, “How does a manufacturing business guarantee its own future?” Like Peter Drucker wrote “What gets measured gets managed”. We would therefore be right to say, the answer lies in the numbers. We have taken a wide perspective on the industry and come up with seven (7) areas of focus with the key metrics for manufacturing businesses to always keep their tabs on, to ensure sustainable growth. They are;
Manufacturing compliance comprises the technical, legal and corporate requirements, regulations and practices manufacturers must comply with in order to produce and market products. Compliance in a manufacturing business deserves undivided attention. Failure to do so leads to may not only ruin the company’s reputation but also lead to financial stress that will adversely affect most stakeholders such as shareholders, employees, suppliers and many others. The risk of non-compliance has become an increasingly major concern in recent years due to the increasing role of governmental regulatory bodies in certain industry sectors, along with the emergence of global standards to address the increasingly global nature of manufacturing.
a. Reportable Health and Safety Incidents– A measure of the number of health and safety incidents that were either actual incidents or near misses that were recorded as occurring over a period of time.
b. Reportable Environmental Incidents– A measure of the number of health and safety incidents that were recorded as occurring over a period of time.
c. Number of Non-Compliance Events / Year– A measure of the number of times a plant or facility operated outside the guidelines of normal regulatory compliance rules over a one-year period. These non-compliances need to be fully documented as to the specific non-compliance time, reasons, and resolutions.
d. Full Compliance of Statutory obligation – ranging from Tax to Social security obligations, manufacturing businesses must ensure that they meet the statutory obligations within the stipulated timelines from the different government agencies. Keeping track of when these requirements are due and ticking off when complied with is key to smooth operations.
2. Market expectations
Customer expectations set the bar for customer satisfaction which also affects repurchase decisions and customer loyalty. If a customer feels like you did not deliver a service that was expected, they will not come back and buy from you again. On the flip-side, if you deliver a product that exceeds customer expectations, you can bet they will come back to buy again, and tell all their friends about the experience. When customers have high expectations and the reality falls short, they will be disappointed and will likely rate their experience as less than satisfying. For this reason, a luxury resort, for example, might receive a lower satisfaction rating than a budget motel—even though its facilities and service would be deemed superior in ‘absolute’ terms.” – Marketing Metrics. Key metrics to look at closely are;
a. On-Time Delivery to Commit– This metric is the percentage of time that manufacturing delivers a completed product on the schedule that was committed to customers.
b. Manufacturing Cycle Time– This measures the speed or time it takes for manufacturing to produce a given product from the time the order is released to production, to finished goods.
c. Time to Make Changeovers– Measures the speed or time it takes to switch a manufacturing line or plant from making one product over to making a different product.
3. Flexibility and innovation
Manufacturers of all types seek the same objective – Efficiency: the strategy that delivers the same products at the lowest possible total cost. Establishing the cheapest manufacturing unit becomes infinitely more elusive when basic assumptions change fast and furiously, as they have in the past couple of years. Very often, many managers choose the manufacturing unit by using only a single set of future cost and demand assumptions. We must understand that all manufacturing businesses are exposed to risks, such as changes in local and global demand, currency exchange rates, labor and transportation costs, or even trade regulation. A wrong bet can transform what should be a competitive advantage into a mess of underutilized or high-cost assets. Our findings reveal that, the missing ingredient in many manufacturing-strategy decisions is a careful consideration of the value of flexibility and innovation.
a. Rate of New Product Introduction– This indicates how rapidly new products can be introduced to the marketplace and typically includes a combination of design, development and manufacturing ramp up times.
b. Engineering Change Order Cycle Time– This is a measure of how rapidly design changes or modifications to existing products can be implemented all the way through documentation processes and volume production.
4. Quality management
Quality management ensures that the product or services of a business are consistent and also meet the needs of the customer. . To achieve this, the process of producing such products and services are also monitored to guarantee the final output. Manufacturing businesses should always strive to beat their best achievements in the name of continuous improvements since customer expectations keep growing by the day. The underlying philosophy of continuous quality improvement is that when problems arise it is generally a result of poor work design, unclear instructions, or the failure of leadership not the people performing the processes. It is therefore an ongoing process that evaluates how an organization works and ways to improve its processes. The key metrics in here are;
a. Yield– Indicates a percentage of products that are manufactured correctly and to specifications the first time through the manufacturing process without scrap or rework.
b. Customer Rejects/Return Material Authorizations/Returns– A measure of how many times customers reject products or request returns of products based on receipt of a bad or out of specification product.
c. Supplier’s Quality Incoming– A measure of the percentage of good quality materials coming into the manufacturing process from a given supplier.
5. Efficient systems and processes
Getting things done is one thing and how they get done is another. Manufacturing businesses must continuously access how efficient they are in order to have a position in the future. We have identified the following metrics that can give a manufacturing business an edge in regards to efficiency.
a. Throughput– Measures how much product is being produced on a machine, line, unit, or plant over a specified period of time.
b. Capacity Utilisation– Indicates how much of the total manufacturing output capacity is being utilized at a given point in time.
c. Overall Equipment Effectiveness (OEE)– This multi-dimensional metric is a multiplier of Availability x Performance x Quality, and it can be used to indicate the overall effectiveness of a piece of production equipment, or an entire production line.
d. Schedule or Production Attainment– A measure of what percentage of time a target level of production is attained within a specified schedule of time.
e. Percentage Planned vs. Emergency Maintenance Work Orders– This ratio metric is an indicator of how often scheduled maintenance takes place, versus more disruptive/un-planned maintenance.
f. Downtime in Proportion to Operating Time– This ratio of downtime to operating time is a direct indicator of asset availability for production.
6. Supply Chain Management
Supply chain management is a systematic approach to managing the distribution of goods from producers of raw materials, through manufacturers and eventually down to end users. Supply chain management affects manufacturing companies in a variety of ways, including the availability of inputs needed for production processes, costs and profitability of manufactured items, company infrastructure and ways in which companies interact with their suppliers and customers. Understanding the ways that supply chain management affects manufacturers from both a daily operational perspective and a strategic viewpoint is important for all managers and entrepreneurs in the industry. Here below is the key metrics to always follow;
a. WIP Inventory/Turns– A commonly used ratio calculation to measure the efficient use of inventory materials. It is calculated by dividing the cost of goods sold by the average inventory used to produce those goods.
7. Cost Management
Manufacturing industries are becoming increasingly competitive as price-sensitive consumers continue to seek savings wherever possible. In order to stay competitive in your marketplace by offering consumers value for money, cutting costs and streamlining your production processes wherever possible are vital.
a. Total Manufacturing Cost per Unit Excluding Materials– This is a measure of all potentially controllable manufacturing costs that go into the production of a given manufactured unit, item or volume.
b. Manufacturing Cost as a Percentage of Revenue– A ratio of total manufacturing costs to the overall revenues produced by a manufacturing plant or business unit.
c. Net Operating Profit– Measures the financial profitability for all investors/shareholders/debt holders, either before or after taxes, for a manufacturing plant or business unit.
d. Productivity in Revenue per Employee– This is a measure of how much revenue is generated by a plant, business unit or company, divided by the number of employees.
e. Average Unit Contribution Margin– This metric is calculated as a ratio of the profit margin that is generated by a manufacturing plant or business unit, divided into a given unit or volume of production.
f. Return on Assets/Return on Net Assets- A measure of financial performance calculated by dividing the net income from a manufacturing plant or business unit by the value of fixed assets and working capital deployed.
g. Energy Cost per Unit– A measure of the cost of energy (electricity, steam, oil, gas, etc.) required to produce a specific unit or volume of production.
h. Cash-to-Cash Cycle Time– This metric is the duration between the purchase of a manufacturing plant or business unit’s inventory, and the collection of payments/accounts receivable for the sale of products that utilize that inventory – typically measured in days.
i. EBITDA– This metric acronym stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a calculation of a business unit or company’s earnings, prior to having any interest payments, tax, depreciation, and amortization subtracted for any final accounting of income and expenses. EBITDA is typically used as top-level indication of the current operational profitability of a business.
j. Customer Fill Rate/On-Time delivery/Perfect Order Percentage- This metric is the percentage of times that customers receive the entirety of their ordered manufactured goods, to the correct specifications, and delivered at the expected time.
Whereas all the above metrics may be important for your business, every manager must prioritise giving more attention on the areas that deliver the biggest impact. Manufacturing enterprises should first focus on activities within their operations, where they can exercise the most control; they can turn their attention later to activities that require the cooperation of other organizations, customers, or other stakeholders. Specifically, companies should prioritize the activities that offer the greatest potential for impact given their position on the production circle.
In our next issue, we shall write about Lean Manufacturing and why it is important for every manufacturing business to know about it.
By Brian Ahabwe Kakuru
Brian is the Managing Director at BLEGSCOPE®, and has 10+ years of management consultancy experience notably in the finance & banking industry, MSMEs, FMCG companies and in the service industry. You can follow him on twitter >> @BrianAhabweK