Are your production processes efficient enough to meet business goals, customer demand, and quality standards?
At a very basic level, this is the key question that production planning key performance indicators (KPIs) aim to answer.
There is, however, much more to it—and this guide will explore these KPIs in detail, so you feel confident about using them to make data-driven decisions that drive business success.
Read on to learn more, including:
- What production planning KPIs are
- The different types you can track
- Why they’re important
- Tips for improving them
What are production planning KPIs?
Production planning KPIs, a subset of manufacturing KPIs, are indicators that track the performance and effectiveness of production planning processes against strategic goals and objectives.
There are many different types of KPIs, from inventory turnover ratio and production cycle time to unit cost and lead times. You can use these KPIs to identify bottlenecks in production and take the necessary corrective action.
For example, if you operate an automotive manufacturer, you can use cycle time to track how long it takes to complete a production cycle at different manufacturing stages. You may discover that it’s taking too much time to integrate electronic systems into the vehicles due to a shortage of skilled labor. So, you decide to assign extra resources and invest more in training your technicians.
So, what are the different types of production planning KPIs?
There are a wide range of production planning KPIs. While the below list is by no means all-encompassing, it does cover key areas, including:
- Production capacity and resource utilization
- Process efficiency
- Inventory management
- Production scheduling
- Quality control
- Cost management
Production capacity and resource utilization
These metrics track the efficiency and effectiveness of labor, equipment, and production capacity.
Workforce or labor utilization
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- What it is: Tracks how efficient the workforce is in relation to capacity.
- Calculation: (Hours Worked / Hours Available) x 100.
Machine Utilization
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- What it is: Measures how effectively a machine’s capacity is being used during a specific time.
- Calculation: (Hours Worked / Hours Available) x 100.
Capacity utilization
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- What it is: Evaluates how efficiently production capacity is being used.
- Calculation: Actual Production / Maximum Production Capacity. For example, the capacity utilization of an automotive manufacturer who produces 200 cars in a facility that can produce 5000 is 4% ((200/5000) x 100).
Process efficiency
These KPIS assess the effectiveness and productivity of specific processes or machines in those processes.
Process efficiency
These KPIS assess the effectiveness and productivity of specific processes or machines in those processes.
Production cycle time
- What it is: How long it takes to complete one production cycle or transform raw materials into a complete product.
- Calculation: Tally productive and unproductive hours required to complete manufacturing. Productive hours include process (actual manufacturing time) and inspection time (quality control measure to check for defects). Unproductive hours include move (time spent moving the product and materials between workstations) and waiting time (idle time before a process starts).
Machine efficiency
- What it is: Measures how productive machinery and equipment are.
- Calculation: Divide the actual output by what it’s designed to produce. For example, if a machine designed to make 500 units in an hour produces 420, it’s operating at an efficiency of 84% ((420/500) x 100).
Inventory management
Inventory management metrics help you assess how efficiently you’re managing stock.
Inventory turnover ratio
- What it is: A measure of the speed at which inventory is sold and replaced.
- Calculation: Divide the Cost of Goods Sold (COGS) by the average inventory value where:
- COGS = Starting Inventory + Purchases in Current Period – Ending Inventory
- Average Inventory = (Starting + Ending Inventory) / 2
Days of Inventory on Hand (DOH)
- What it is: A KPI used to assess the average number of days it takes to deplete stock.
- Calculation: (Average Inventory Value / (Annual COGS / 365 days)). For example, if your average inventory value is $50,000 and COGS is $150,000, your DOH is $50,000 / ($150,000 / 365) = 121.67 days.
Excess inventory rate
- What it is: Measures the percentage of surplus stock.
- Calculation: Follow these four steps:
- Step 1: Calculate your optimal inventory value. Determine your ideal or necessary quantity of each item to meet demand and multiply this number by the unit cost. If it’s 500 units and the unit cost is $1.00, then the ideal inventory value is $500.
- Step 2: Determine your current inventory value. Calculate the current value by multiplying the current quantity of each item by the unit cost. Assuming you have 700 units on hand at a cost of $1.00, the current inventory value is $700.
- Step 3: Calculate excess inventory value: Current inventory value ($700) – Optimal Inventory Value ($500) = $200.
- Step 4: Calculate excess inventory percentage: (Excess Inventory Value ($200) / Current Inventory Value ($700)) x 100 = 28.57%.
Stockout rate
- What it is: Measures the percentage of time certain products were out of stock.
- Calculation: (Number of Stockouts / Total Time Period). For example, if baked beans were out of stock seven times in one month, your stockout rate would be (7/30) x 100 = 23.33%.
Production scheduling
Production scheduling metrics measure your ability to meet delivery commitments.
On-time delivery rate (OTD)
- What it is: A measure of the percentage of orders delivered on time.
- Calculation: (Total on-time deliveries / Total Deliveries) x 100.
Customer lead time
- What it is: The time between when a customer orders and receives a product.
- Calculation: Delivery Date – Order Receipt Date.
Quality control
Quality control metrics help you determine how effective your quality control measures are.
First pass yield (FPY) or throughput
- What it is: A manufacturing KPI that measures the percentage of products that pass quality checks on the first attempt
- Calculation: Quality Units Produced on First Attempt / Total Units Produced. For example, if 980 units out of 1000 pass quality checks on the first go, the FPY is 98%.
Scrap or defect rate
- What it is: Percentage of units produced that are defective and never reach the market.
- Calculation: Defective Units / Total Units Produced.
Cost management
Cost management metrics help you keep a firm handle on your production expenses.
Production unit cost
- What it is: The cost to manufacture one unit of a specific product.
- Calculation: Total Production Cost / Total Units Produced. Production costs include everything from direct materials and labor to packaging and utilities.
Cost variance
- What it is: A metric that measures the difference between budgeted and actual production costs.
- Calculation: Actual cost – Standard Cost, where:
- Actual cost is the true cost of an item.
- Standard cost is the pre-determined costs set for specific items.
Why do production planning KPIs matter?
Whether you’re looking to control costs, increase customer satisfaction, improve inventory management, or simply make better business decisions, production planning KPIs are a valuable tool to improve production processes. Here’s why:
Performance assessment
They help assess how effective your production planning processes are. For instance, by tracking on-time delivery, you can determine what percentage of orders are delivered on time and whether you’re in line with targets or not.
Informed decision-making
They provide historical data you can use to make better decisions. For instance, by analyzing the inventory turnover ratio, you can learn how quickly inventory is being depleted. A high ratio may indicate you have excess stock, tying up cash and warehouse space. You can use this information to reduce excess inventory and improve your procurement strategies.
Improved quality control
Certain production planning KPIs provide insights you can use to improve your overall quality control. By tracking them, you can identify quality issues and then take action to fix these problems.
For example, suppose you operate a food and beverage company. In that case, you can use first pass yield to determine what percentage of your food products pass quality checks on the first attempt at different production stages. You may discover a significant bottleneck during the packaging stage due to equipment malfunctions. From there, you can repair the faulty equipment and implement a more vigorous preventive maintenance schedule.
Improved inventory management
Inventory management KPIs help you identify how well you’re managing inventory. You can use the data to maintain optimal stock levels, reduce varying costs, and boost cash flow. For instance, a higher days of inventory on hand (DOH) may indicate overstocking, prompting you to review when and how much you order.
Enhanced customer satisfaction
KPIs like OTD directly impact overall customer satisfaction, with a higher OTD leading to improved customer satisfaction. Tracking these metrics and making adjustments where needed helps maintain a high OTD.
Effective cost management
Unit costs and cost variance help you manage production costs, highlighting areas where you can control them. For instance, if you notice rising unit costs over time, it may be due to rising labor or even overhead costs. You can then implement cost control measures in those areas.
Benchmarking opportunities
You can compare your performance on certain KPIs against other companies and industry benchmarks to identify your relative position. From there, you can pinpoint areas to improve to surpass the competition.
What are some tips for improving production planning KPIs?
Improving your production planning KPIs requires the right combination of strategy, technology, communication, and resources. Here are seven best practices for improving these KPIs:
Use the right technology
The right technology will improve processes, make data collection more efficient, and give you real-time data on manufacturing KPIs that you can use to improve operations.
For example, certain manufacturing software will help you track and manage all the steps, parts, and people involved in the production process from a single platform—from material handling to production tracking to capacity projection. You can control key elements like BOMs and work orders for more accurate production planning and scheduling.
Prioritize KPIs
Prioritizing KPIs allows you to focus your efforts on those metrics that will have the biggest impact on improving production performance. Choose those most relevant to your production goals. These may include quality control, cost management, inventory management, or production scheduling metrics.
For example, if you run a manufacturing company, your primary focus may be to minimize defects. You’ll then prioritize manufacturing KPIs like first pass yield and defect rate over other metrics.
Establish clear objectives for each KPI
Defining what success looks like for each KPI gives everyone a clear target to aim for and a common purpose. The objective should be measurable so you can track progress in a quantifiable way. For instance, an objective for tracking on-time delivery may be to aim for an OTD rate of 95% or higher for the year.
Set baselines and targets for each KPI
Establish the baseline values for your KPIS and set targets you want to achieve. The targets should be realistic and achievable but challenging enough to drive improvement. For instance, if you determine that your baseline measurement for cycle time is five hours, a realistic target may be to aim for four.
Invest in training to help staff meet targets
Your employees are crucial in helping you achieve KPI targets. Training is an investment in those employees, empowering them to work efficiently towards those targets. You can provide them with the latest tools and skills to get the job done.
Regularly review and adapt
You need to constantly assess the relevance and effectiveness of your chosen KPIs to ensure they’re aligned with evolving business needs and objectives. Remove KPIs that no longer serve you, modify existing ones, and add new ones.
For example, let’s say on-time delivery is one of your KPIs. Over time, you notice you’re not achieving your OTD rates when products are out for delivery in specific neighborhoods. To improve accuracy, you could add a new KPI that measures the OTD rates in those areas. This allows you to monitor and improve service where it really matters.
Encourage cross-functional collaboration
Cross-functional collaboration ensures that production planning KPIs are not viewed in a vacuum but as part of a bigger, interconnected organization. It allows you to leverage the collective knowledge when setting, tracking, and reviewing KPIs. It also provides a holistic view of the impact KPIs have on all areas of business, from customer service to the supply chain.
A few ways to encourage cross-functional collaboration include:
- Establishing clear and open communication channels that make it easy to share information. Use messaging platforms like Slack and have regular meetings.
- Having workshops that concentrate on improving internal communication and collaboration.
- Getting leaders to actively support and promote it. Leading by example encourages others to do the same.
Use production planning KPIs to drive business success
Production planning KPIs can help you control costs, increase customer satisfaction, improve inventory management, boost product quality, and make better business decisions.
Just make sure that you select the right KPIs, constantly monitor them, and make every effort to improve them over time by following certain best practices like using the right technology, setting baselines and targets, investing in training, and encouraging cross-functional collaboration.
Do that, and you’ll be able to capitalize on production planning KPIs to make business decisions that will truly drive business success.