Why It’s Critical to Link Manufacturing Performance Metrics to the Life of Your Business
Setting manufacturing performance metrics is the process of collecting, analyzing and/or reporting information regarding the performance of an individual, group, organization, system or component, and for our purposes, a manufacturing organization.
In the work our independent ERP consultant team does in the field, we put the focus on this important business performance process.
To achieve effective performance management, the correct manufacturing performance metrics must be well defined, understood and routinely used. Continued business success requires appropriate performance measurements.
The Importance of Manufacturing Performance Metrics
Measurements influence behavior.
The old saying “you get what you pay for” is completely relevant when it comes to metrics used in business and the results that are achieved. It is also true that you cannot control that which you cannot measure. Without metrics, the explanation of results becomes anecdotal with little to no accountability.
Manufacturing performance metrics focus attention to the desired performance and provides feedback to both the manager and the performer as to how well the desired results are being achieved.
Continued business success requires appropriate performance measurements.
Tie Metrics to Results
Well defined performance measures will tie the specific results to the overall objectives of the organization.
For a typical ERP project team, manufacturing performance measures include:
- Customer-related: bookings, service, and responsiveness
- Quality – product and process
- Operating – capability and throughput
- Quality: first time through, corrective actions
- Equipment – utilization and efficiency
- Inventory – investment and accuracy
- Equipment maintenance – planned and unplanned downtime
- Employee Development – flexibility and innovation
- Financial – cost and profitability
- Compliance – issues and corrective actions
Considering offerings from today’s ERP software vendors, business analytics and business intelligence tools help make this monitoring easy, fast and reliable without having to dive deep onto computer programming skills.
These tools can be used to correlate one measure to another to draw conclusions and identify root cause problems.
Types of Manufacturing Performance metrics
Traditional metrics are generally related to financial measurements that are more symptomatic of problems than identifying the problem itself. These are historically based and are not future-oriented. They may be stated in terms of future goals, but they are poor at defining how to achieve these goals.
Traditional metrics tend to emphasis control of a specific activity rather than focusing attention on a bigger picture. They have a tendency toward localized goals, are lagging performance rather than leading it and tend to be closely held to few key people.
Not-so-traditional metrics are much more leading in their nature and are related to the strategic objectives of the organization. These measures tie to the lifelines of the business such that each activity being monitored is adding value to what the organization is trying to achieve.
These concepts are key to consider during ERP selection. By incorporating key business drivers into the measures being used, they tend to be more process oriented, tend to encourage integration across company boundaries and focus on the results desired in terms of what the customer deems as value.
A Real-World Scenario
As an example of effectively setting manufacturing performance metrics, a company of 100 people produced handmade musical instruments. Our team had a goal to catch up on the backlog by shipping horns against our order book (a novel idea!).
With nine departments, each of which was measured on their individual performance, not tied to any quality measures and with no regard of what was being shipped, we were not achieving our goal. We had a year’s worth of inventory in the pipeline (the actual total lead time was four months) and we were producing horns that were not needed and visa versa.
As a solution, we implemented a monthly bonus program that awarded hours of PTO for producing quality product according to the production schedule. Product produced that was not on the schedule (nor was it expedited) did not count and if a subsequent department rejected an instrument due to a previous department defect, it was subtracted from the total.
In addition, the nine departments were grouped into three groups, the third department of each group being the production that was counted. With this, each of the three departments had to work together to facilitate the production that counted.
Another part of the solution was to implement a second bonus related to total shipments where all employees received another hour of PTO if we matched or exceeded the shipment plan. Instruments that were produced but not shipped did not count. This helped to link everyone to the desired goal of shipping the right horns at the right time.
Since these were monthly metrics, we broke them down to weekly metrics which could also be broken down to daily numbers as needed. These were posted in the most public place we could find so that everyone had a chance to see what was happening. With this, we could monitor results along the way and make adjustments without having to wait until the end of the month when it was too late.
As a result of this business process analysis, we reduced in-process inventory to half of where we started and were able to catch up on our past due order book.
What’s Important When Setting Manufacturing Performance Metrics
When developing manufacturing performance metrics, it is important to create metrics that are easy to understand and be one that an individual can affect.
To illustrate, in another organization that produced a twelve-week lead time product, the key metric was ship-on-time.
This sounds great, but when the last division of several operations received the order six weeks late due to upstream process failures, it was a meaningless metric to those involved. They could do nothing to affect the metric, so they didn’t even worry about it.
Instead, by instituting a cycle time metric where time spent in front of each operation was measured, we were able to reduce the total cycle time of the division. Cycle time was something everyone understood and knew how to affect.
Link to the Life of the Business
With manufacturing performance metrics, attention needs to be paid to be sure that the measures are linked to the lifelines of the business. They need to emphasize the real desire of what is to be accomplished.
Attention must also be paid to the culture of the organization so that there is a fit how the metrics are used and how they will be received. Select only a few key metrics to display in ERP reports for overall performance so that people can focus on the key factors. If your report of metrics is several pages long, it is likely that it includes too many metrics.
Consider the drawbacks of performance measures. If not designed properly, they can cause people to focus on attaining the metric without regard to a higher purpose of delivering value to the customer.
If it is a be-all-end-all environment for attaining the metric, people can also “game the system” which demoralizes the workforce. Remember, you tend to get what you pay for so designing a system of performance measures need to have some flex in it so that people do not get caught up in the attainment of a number at all costs.
When achieving the metrics becomes more important than delivering value, the measures in place need to be reviewed.
The Bottom Line
In all, manufacturing performance metrics are necessary to monitor and achieve results, but as the measurement system is designed, care must be used to
- tie the measures to the lifelines of the business
- match the culture of the organization
- create metrics that are simple to understand and compute
- measure results that people can affect
- use only a few key measures
The 7 Deadly Sins of ERP Implementation
Some mistakes are just bad strategic or financial decisions. Some are the inevitable consequence of situational or organizational factors. Some, however, are the result of process-oriented or people-centric choices – and are easily avoided. These are The Seven Deadly Sins of ERP Implementation.
Jeff is the founder of Ultra Consultants, a well-known voice in the ERP consulting industry and an expert on ERP solutions for discrete and process manufacturers. Over the last 40-plus years, his companies have helped more than 2,000 organizations improve their business processes, select ERP software and implement advanced solutions.