In today’s highly competitive environment, continuous improvement is necessary just to maintain the business you have. Yet how do we know whether or not we are getting better? What should we be measuring in our manufacturing operations? The following are those measures I believe are the most important to today’s manufacturers.
Although cycle time may mean different things to different companies, I like to define it as the time it takes to move a part through the entire manufacturing process. For example, if I have a process that requires saw cutting, CNC machining and vibratory finishing, the cycle time is the total time from the moment I start the cutoff operation to the time the part exits the vibratory finishing equipment—wait times between operations included. A fast cycle time is desirable because it means you are turning cost into revenue sooner.
There are three types of inventory to track. First, there is raw material, or all the items we have purchased to go into our products. Next, there is probably the most onerous type of inventory, work-in-process, or partially finished parts that have incurred cost but cannot be sold in their current condition. Finally, there is finished goods inventory, which is better than work-in-process inventory because even though it has incurred cost (and most likely more cost than work-in-process inventory) it is ready for immediate sale and can therefore quickly be turned into cash.
Measuring inventory in terms of “turns,” or the cost of goods sold (on an annual basis) divided by the average inventory level (throughout the year), lets us know how much money we are tying up. Although it is difficult to say what an acceptable inventory turns level is, as this number will vary by industry, type of product, and whether production is make-to-order or make-to-stock, the general rule is the higher the number the better. Companies with turns of 5 or less are tying up a lot of money in inventory, while companies with turns in excess of 20 are probably containing operating costs, satisfying customers and being competitive in the markets they serve.
On-time Shipment Rate
I am always amazed at the number of times I ask what an organization’s overall on-time shipment rate is and then get a blank stare in return. On-time shipment is perhaps the ultimate measure of customer satisfaction, and if a manufacturing operation does not know how well it is satisfying its customers, it is living on borrowed time. I also find it interesting how many companies do track this number but incorporate “extenuating circumstance factors.” Factors such as not counting orders as late if all customer information is not supplied in a timely manner, suppliers not delivering materials when needed, or even internal departments not providing necessary information, distort the reality that if a product is not delivered when the customer expects it, it is late!
Revenue Per Employee
How many people are involved in the production operation? This is a useful start to measuring the revenue per employee figure, which is so important to an organization. Using this as a benchmark from year to year is a very effective indicator of a company’s performance.
Part movement adds cost, but no value, so the farther a part moves during its manufacture, the costlier it is to the company. When parts travel a great distance they inevitably incur the costs of transportation, waiting, inventory buildup, damage and more. If we see a product is moving about too much, we must make a concerted effort to cut that movement down.
First Pass Yield
We need to know how effective our overall manufacturing process is, and the best way to understand this is by knowing the first pass yield rate, or what percentage of parts go through the process without any problems. Interestingly enough, the overall process yield is a product of all the individual first pass yields. Some may think that a first pass yield of 98 percent in each of six operations is pretty good, but this leads to an overall process yield of 88.5 percent (.98 × .98 for each operation). Once you start measuring first pass yield in this manner, you may find that you do not have the kind of quality control you thought you had.