For midsized manufacturers competing in the world of Industry 4.0 technologies, effectively achieving key business objectives such as maximizing productivity, providing an excellent product and successfully meeting deadlines is critical for long term success.
Key Performance Indicators (KPIs) are quantifiable values that businesses can use to help meet those objectives. Without setting clear KPIs, a business can’t set realistic deadlines, make progress in reducing backlogs or inventory surpluses, and determine which products earn the highest profit. This can cost time, money and customers, and may also influence the success of new or well-established midsized manufacturers.
Top KPIs for Midsize Manufacturers
As Nick Ismail, editor of Information Age has pointed out: picking the right KPIs and using the correct metrics to monitor them are critical to making the transition to 4.0 technologies worthwhile. Although not all businesses have identical needs, our experience with midsized manufacturers indicates that these are the most meaningful:
Overall Equipment Effectiveness (OEE)
OEE is the gold standard for measuring manufacturing productivity for Industry 4.0 manufacturers. It measures how well your assets work compared to their full potential.
The three main aspects of OEE are:
- Availability: monitoring planned and unplanned production stops and their duration.
- Performance: monitoring cycle-time and determining factors which cause manufacture to run at suboptimal levels; and
- Quality: the percentages of good vs. rejected units produced per production starts.
The basic equation for OEE is Availability * Performance * Quality. A “world class OEE” is attained when Availability is ranked at 90%, Performance at 95% and Quality at 99%, for an OEE of 85% ( 90%* 95%* 99%= 85%).
Knowing your OEE is the first step in improving it. Using a comprehensive OEE program helps manufacturers effectively monitor production, benchmark progress, save costs, and maximize productivity, leading to higher customer satisfaction and retention.
On-Time Delivery (OTD)
OTD refers to a range of times surrounding a due date, typically several days before to 0 days after. OTD is typically set as a function of production line requirements and cash flow. Once a delivery date is set, it must be met. Several factors, including the timing of purchases, lead time, and supply problems affects OTD. An integrated ERP system helps manufacturers monitor and manage factors influencing OTD by tracking purchase history, billing and shipping details, accounting information, and supply chain management details.
As recently noted in Forbes, OTD is no less important than quality: “A perfect product delivered late by friendly, caring people is the equivalent of a defective one”. This means that implementing and maintaining a workable OTD schedule is crucial to any business.
Average Profit Margin (APM)
APM refers to long-term average gross, operating and net profit margins.
Gross profit margin refers to the percent of revenue that is actually profit after direct manufacturing costs are taken into account, calculated as: (Net Sales – Cost of Goods Sold) / Net Sales. Operating profit margin, a ratio of operating income to revenue, takes all operating expenses into account, calculated as: Operating Income / Sales Revenue. Tracking these margins can help companies focus on profit rather than just revenue, and helps identify potential areas of improvement.
Net profit margin, “the bottom line”, is expressed as average net profit divided by revenue. This refers to how effective a business is at generating profit on each dollar of revenue earned after accounting for all a company’s expenses. However, net profit margin doesn’t provide information on how well production costs are managed.
Tracking APM, rather than just gross, operating or net profit margins provides managers with a comprehensive picture of costs and revenues, and helps them predict how much cash their business will have for growth. Tracking and comparing APM for different products provides managers with the information they need to make the decisions necessary to guide short and long term production and marketing strategies, and to ensure maximum profit from revenue.
Work In Progress (WIP) Management
WIP refers to inventory that has begun the manufacturing process, is no longer “raw material” but is not yet a completed product. An excess of WIP is indicative of problems in the supply chain and/or in production, and even small amounts of WIP mean large amounts of cash tied up. Implementation of measures to keep WIP at optimal level increases productivity and cuts costs. “Lean production measures”, including Just In Time inventory, are management systems which help monitor and manage WIP and make manufacturing more efficient.
Just in Time (JIT) Inventory
JIT inventory is designed to increase efficiency and decrease waste by making sure that there is just enough inventory on hand to meet demand, without stockpiling. JIT inventory management helps manufactures map and optimize their value stream, creating flow and establishing a pull system. This, in turn, will lower inventory holding costs, improve cash flow and decrease dead stock.
However, implementing JIT entails continuously low inventory levels, an accurate demand forecasting system which integrates inventory, and customer demand information. Customer demand information can be fed into ERP systems and analyzed and integrated with production schedules to help manufacturers decide how to pace production. It can also match inventory to dynamic production needs, and spend only what is needed on supplies and storage.
The system integration necessary to implement JIT inventory management is typical of the technologies needed by manufacturers in the Industry 4.0 age.
Monitor and Manage Excellence
For midsized manufacturers competing in the world of Industry 4.0, identifying and implementing KPIs to cut costs and to optimize inventory and production is crucial. Overall Equipment Effectiveness, On-Time Delivery, Average Profit Margin, Work in Progress and implementing Just In Time Inventory are among the most important KPIs for midsized manufacturers.
State of the art monitoring and management of KPIs requires automated system integration and real-time connectivity to anticipate machine failures, supply chain and inventory considerations, schedule accuracy, and much more, enabling managers to make smart, dynamic, and proactive decisions for their company.
