What are production KPI‘s? What is the relationship between production KPI’s and company profitability? How do these two factors coincide and what are their overall effects on the bottom line of any company? The answers to these questions can help managers determine whether the best way to improve the bottom line is to follow a specific strategy or make the changes in company culture and productivity that may need to be implemented in order for the company to run at a higher level of efficiency. The purpose of this article is to provide insight into how to use production KPI’s to their benefits by introducing three specific areas that are often overlooked or not properly recognized by company management.
First Pass Yield: This is a production KPI indicator that measures the number of seconds it takes for a resource to leave the production line before being replaced. This metric is important because it allows managers to assess a company’s capacity utilization. Many companies believe that a high production KPI means that the company is always producing more than it is replacing, but this is usually not the case. Capacity utilization is a function of the total number of products manufactured and/or delivered vs. the total number of hours or days a product is produced. It is a company wide numbers game and understanding it is imperative for any company to utilize this valuable metric.
First Pass Rate Metrics: There are two production KPI examples of this type, namely the first pass rate and the second pass rate. The first pass rate is determined by an analytical model that models the relationship between production cost and output. The second pass rate is an arithmetic mean of this model using historical data. Both of these metrics can prove to be very useful indicators for evaluating the health of a company’s production processes and methods. Both of these metrics should be used with the other examples of this kind to derive the best possible results.
Other Metrics: Similar to the first two production KPI metrics mentioned above are others that should also be examined closely. Some of these examples include the value-added price metrics, customer satisfaction metrics and the cost of sales metrics. These are just a few of the many manufacturing metrics available and it would be impossible to mention them all in one article. However, once a manager discovers which statistics represent the best possible production management approaches, he will then be able to effectively use these indicators in his plans and procedures.
There is another popular metric that should be utilized in production KPI analysis. This one is the cost of good sold to gross profit margin. Good selling and gross profit margin are directly related to one another because the former refers to the amount of revenue that has been generated by a company’s products and services and the latter refers to the amount of profit that the firm has generated over the course of its operations. Using this particular production KPI indicator can help managers to determine the areas in their companies in need of improvements so that they may be able to achieve higher levels of success in their businesses.
This particular production KPI indicator takes into consideration the total cost of merchandise divided by the gross profit made. In addition, it also takes into account the factors that affect the level of production. This means that a company can calculate its actual production cost per unit or its total cost per unit and its gross profit margin and still come up with a number that will indicate the effectiveness of its management methods.Read More