A question that invariably arises when I’m implementing manufacturing budgeting and planning software with clients is – which metrics should we be tracking? I could list any number of perfectly valid metrics, but at that point, I steer the discussion to priorities and strategy. In my experience, key performance indicators (KPIs) are an excellent means for ensuring that budgets align with strategy. Specifically, what are the factors necessary for them to improve competitiveness over both the shorter and longer term? Where should they be focusing their time, effort and investment? For example, a company may wish to prioritize cost efficiency, safety, compliance, quality, or delivery.
The discussion about KPIs can get overwhelming as it can often be varied based on the industry as a whole or the company in particular. There are several financial as well as non-financial metrics that can and should be closely managed. For the purposes of this post, let’s focus on some of the financial KPIs that can be applied broadly across manufacturing. Not surprisingly, they involve measurements around units. Here is my shortlist of must-have KPIs:
Cost volume profit analysis: Also known as CVP, this analysis goes beyond break-even analysis, which is essential in its own right. CVP is particularly valuable for ascertaining short-term goals in profitability as production is planned or projected to scale. It does have limitations as it assumes there won’t be changes to fixed and variable cost. It also assumes that all units will be sold, which as we all know doesn’t always happen. However, it does provide guidance for aligning production with profit targets.