You’ve heard the saying “What gets measured gets done.” While this is true in all businesses, it is especially important in manufacturing. 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:
- S = Specific purpose
- M = Measurable
- A = Achievable
- R = Relevant
- T = Time-phased
Step 1 – Identify the Proper Metrics
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 can add value to the product or to the bottom line when impacted. There are several areas to review to determine which metrics to choose. Here are some examples:
- Performance: actual vs. budget or forecast (sales, gross profit margin, net profit margin)
- Working Capital
- Cash flow from operations = net income plus depreciation, plus net accounts receivable changes, plus accounts payable changes, plus inventory changes, plus operating activity changes
- Average payables for the year/cost of goods sold for year
- Backlog – open orders
- Labor efficiency
- Machine utilization
- Scrap rates
- % on-time delivery
- Quality (PPM defects)
- Safety (number of days without an accident)
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 weekly monitoring. Others may be more financially oriented and can therefore be measured to coincide with the financial statements. It is acceptable to measure multiple items at different frequencies – measure sales by day, backlog by week and days outstanding by month.
Regardless of the frequency, track the trend of each metric. How is the company doing this week compared to last week? How is it doing this week compared to the same week last year? The budget should also compare each metric to a budget established at the beginning of the year. This budget should be updated throughout the year (referred to as continuous budgeting) and is sometimes then called a plan or projection. Each metric should be compared to the budget, plan and prior year, and variances should be investigated.
Step 3 – Distribution (Who should receive the metrics?)
Some metrics should be posted in the plant (e.g., number of days without an accident, machine/labor utilization). 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 understand how the metric is measured and agree with both the calculation and the importance level.
Management must be on board with the metric and may even need a direct or indirect incentive to increase its performance. If several departments are posted together in the same area, the incentive may be personal (“I want my department to be first.”). Public postings and rankings can be motivators. However, caution should be maintained to make sure a manager is not blindsided by an incorrect posting.
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.