More and more emphasis is being placed on financial analysis and various measures of profitability and business value by means of ratio data that lends dimension to traditional financial reports. Within the past year I wrote a 4 part series on Business Analysis and Datametrics that was intended to coincide with Section 5 of the new QuickBooks Online Advanced ProAdvisor Certification. I am now writing to tell you that there are many more datametrics than just the few ratios we have already studied, especially when it comes to manufacturing companies. These articles are intended to provide guidance and understanding in the use of these additional metrics within a manufacturing environment.
Today’s highly competitive environment, with shrinking margins and overseas competition, has forced domestic manufacturers of all types to strive for as high a degree of productivity as possible, but measuring that productivity maybe difficult without some specific measures that can be applied across a wide variety of manufacturing environments. Measuring performance and setting production standards is critical in today's manufacturing environment because it has a significant impact on company profitability.
When using metric analysis to make a production system more efficient, translating the data into meaningful system improvement is easier when you set definitive goals. Goals should be definite and have a timetable with specific milestones. A realistic plan can then be put into effect to achieve the goal(s) by a set date. The goals there-by establish the timetable and milestones that must be reached in order for a job to be considered a success. Once the timetables and milestones are set, metrics can be used as the basis for measuring success. Here are a few of the manufacturing metrics that can most significantly impact production efficiency and profitability:
Capacity Utilization – Indicates how much of the total manufacturing capacity is being utilized at a given point in time.
Downtime in Proportion to Operating Time – Ratio of downtime to operating time; a direct indicator of asset availability for production.
Efficiency - A measure of how well some resource performed relative to an established standard.
Labor Efficiency – Expressed as a percentage of actual hours vs. planned hours.
Manufacturing Cycle Time – The time it takes for manufacturing to produce a specified product from the time the order is released to production, to finished goods.
Manufacturing Cost as a Percentage of Revenue – A ratio of total manufacturing costs to the overall revenues produced by a manufacturing facility.
On-Time Delivery to Commit – The percentage of time that manufacturing delivers a completed product on the schedule that was committed to customers.
Productivity – This measures the overall production ability for manufacturing the product.
Throughput – Measures how much product is being manufactured over a specified period of time.
Total Manufacturing Cost per Unit Excluding Materials – A measure of all potentially controllable manufacturing costs used in production of a manufactured unit, item or volume.
Utilization – A measure of how intensively any resource was used in production of a product.
Work in Progress – The amount of inventory tied up in Work in Progress, expressed as a dollar amount.
Yield – The percentage of products that are manufactured correctly and to specifications the first time through the process without scrap or rework.
QuickBooks, even the Manufacturing & Wholesale versions (of Premier or Enterprise), can not provide this kind of data; this is one reason that almost any business composed predominately of manufacturing based sales should be using add-on manufacturing software that provides tools with which to gather and interpret these metrics. Obviously the extent to which these metrics are automated vs. manual in terms of collection and computation will significant impact the cost of such software. Programs which offer integrated shop-floor control with timekeeping are usually the most efficient at gathering this data as well as tracking job/project progress from start to finish.
In Part 2 of this article we will look at some of these production measures in real situations to interpret how the measurements impact both production efficiency and profitability .