Benchmarking Your Manufacturing Business with KPIs

If you are like most of us, you have some form of competitive nature in you. Being competitive can be a good quality, especially in manufacturing. As a business leader, this comes naturally to you. You start a project or new endeavor with zeal—wanting to be the best.

But when you are evaluating your business, how can you tell if you are competitive in your industry?

In LEAN manufacturing, we use the term benchmarking. Benchmarking is a comparison tool that helps establish how your company and its processes, product, and successes compare to similar businesses—typically your competitors.

Why should you benchmark your business?

• Know where you are in comparison to your peers.
• Helps you hold yourself and your staff more accountable.
• See where you can improve.
• Creates a culture of continuous improvement.
• Generates good quality data.
• Helps generate new customers.

Start the benchmarking process by identifying similar businesses. If you manufacture food items like bread, it won’t do you much good to compare yourself to a high-volume machine shop. The businesses are too different to draw conclusions and relevant comparisons.

You can start to acquire this data by asking your business or industry associations. Ask what data and key performance indicators (KPI) they have for your industry.

You can also use your business network to talk with owners of similar businesses to see what data they track and ask if they will share their information with you.

Also, contact a commercial benchmarking business or consulting firm. Some might provide data for a cost. Others might give you data for free. If you can’t find data of your own, this is a great place to start.

In addition, many governmental agencies, like the Small Business Administration (SBA), the United States Department of Commerce (DOC), and  state or local manufacturing extension offices, can give you benchmarking data for your industry.

Once you have data, you need to review it to ensure it is clean and accurate. Ask questions about how the data was collected and tabulated, when the data was last updated, and how it was processed. You want to understand how the numbers were calculated so you can establish a process of comparison.

Next,  you need to identify the KPIs you want to compare.  It would take a great deal of effort for you to match each and every indicator that others in your field use. Decide what the key performance drivers are for your business and start using only those.

Once you have identified the KPIs you want to use, you need to establish how to collect and manage the data within your operation. This is a very critical step. You need to ensure your data is collected and processed the same way every time. Otherwise, your data might not give you the real picture.

You may be asking yourself what KPIs you should measure, and there isn’t really an easy answer. The KPIs you select really depend on your company and industry segment. Most companies measure things like:

Financial performance KPIs:

• Profit
• EBIT (Earnings before income and taxes)
• Revenue per employee
• Earnings per labor hour

You want some financial comparison indicators, as many companies sell a great deal of product but are not very profitable. After all, you are in business to make money and grow, not to just hang on.

Inventory performance KPIs:

• Inventory turnover
• Inventory accuracy
• Cost of carrying inventory
• On-time delivery

Inventory indicators can tell you a lot. If your inventory is not moving, you might not have the right product mix or your sales might be dropping off. On-time delivery can be an indicator of whether your customers are happy with your performance, getting what they need when they want it. Satisfied customers rarely go shopping around.

Production KPIs:

• Scrap
• First time quality (FTQ)
• Defective parts per million (DPPM)
• Parts per labor hour
• Reworked parts
• Overall equipment effectiveness (OEE)

Many of these indicators show how effective and efficient your processes and operations are actually running. Just saying you made 3,000 parts isn’t giving the full picture, as many companies make thousands of parts, but have to scrap hundreds out. This causes them to lose money and efficiencies. These KPIs will also help you pinpoint areas of improvement and can determine if you need to invest more into capital equipment or if your ROI is not what it should be.

• Additional KPIs:
  • Annual training hours per employee
  • Turnover rate
  • Days to fill an open position
  • Cost of recruiting per position

This indicator can provide you with insight into underlying issues that might impact some of the other KPIs. If it takes you three months to fill an open position, you might have equipment sitting idle, causing you to lose market share or dragging your OEE down.

A word of caution—I worked at a few places that went overboard with KPIs. We measured everything, but never took the time to fix any of the issues. We were too busy adding and measuring new KPIs. In benchmarking, KPIs are just a tool to collect data that you can roll into your matrix, so you see how you compare with your peers. Your KPI selection should reflect your benchmarking matrix.

In business you have three choices: be a leader, be average, or be a follower. The choice is yours. Benchmarking is a great way to find out where you are in comparison to your peers and what you can do to become a leader. You need to decide where you want to be and set your business and operational goals accordingly and realistically. Remember, benchmarking and KPIs will show you what you need to do, but you still need to do the work.