If you are an owner or a manager of a job shop or contract manufacturing facility, the old management adage of “you can’t manage what you don’t measure” is more true today than ever before. With the economic uncertainty that still abounds, the demands placed on you by customers for high quality parts at lower and lower prices, and the skills gap between those employees that you might be losing and those available in the workforce, it is critically important to understand the current state of your business through the use of real time key performance indicators or KPIs. The challenge for many job shop owners is understanding first WHAT to measure, then setting a goal or standard METRIC by which your current state is measured against also known as benchmarking, and then putting corrective actions into place to help you achieve or surpass these goals in a regular, sustainable fashion.
WHAT TO MEASURE
Key performance indicators should be uniquely personal for your shop. However, for most small and mid-sized manufacturers there are the obvious indicators which EVERY shop should consistently measure at least on a monthly (or even weekly) basis. These indicators should represent a cross-section of your business focusing on the key elements of customers, productivity, vendors/suppliers, and financial.
For example, when a business establishes their customer indicators, these indicators should focus on quote backlog, quote win rate, order backlog in weeks or dollars, new orders placed this week/month, on-time performance, etc. When the shop establishes productivity metrics, these indicators should focus on utilization by work center or department, efficiency by work center or department, throughput in days both from a production standpoint (lead days from first time entry to first shipment) and administrative throughput (lead days from order date to first shipment), overbook or underbooked work centers, rework hours, scrap cost, and direct vs. indirect hours.
For vendor metrics, the shop should establish metrics for a vendor on time performance, average lead time by vendor, acceptance rate by vendor, and valuation of stock and WIP inventory. Finally, key financial indicators should focus on customer and vendor aging, past due invoices, average days to pay (customers and vendors), and current cash position.
HOW TO MEASURE
Now that you have established the WHAT TO MEASURE, you will want to spend time evaluating HOW TO MEASURE. If you are like most small companies, and have even a small number of key performance indicators, you should quickly come to the conclusion that without some level of automation and a system to capture the data in real time, there will be significant manual efforts required to get the data that support the compilation of these metrics. As a result, you will want to evaluate ways to acquire this data in real time through automated or bar code collection systems that are tightly integrated with your shop management or ERP solution—preferably from the same vendor.
MAKE IT VISIBLE AND REWARD THOSE WHO DIRECTLY IMPACT IMPROVEMENT
Establishing key performance indicators is critical for driving continuous improvement in your shop. Every shop employee should be aware of how the shop is performing against these key indicators and be rewarded to their level of contribution in meeting or exceeding these goals.
The data should be posted in a conspicuous location on the shop floor, presented in such a way that is easy to understand (pie charts, graphs, etc. are the best), is timely, and illustrates the overall trend of the company. Finally, these results should be used by key managers to drive decision making and improvements from the shop floor to the top floor.
Today’s economic environment has dictated a change in owner and manager mindset. You can no longer afford to run your shop “on the back of a napkin” or based on one person’s gut or intuition. The stakes are too critical and the implications are too monumental. Every shop should embrace the continuous improvement cycle of measuring what’s important for the business, establishing metrics and benchmarking against those metrics, and rewarding employee behavior that directly impacts the accomplishment of those metrics. Only then, can you expect to grow your shop to the next level.