Measuring performance and setting production standards is critical in today's manufacturing environment because it has a significant impact on company profitability. 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. In this article we will look at three (3) manufacturing production measures in order to understand how these measurements can impact both production efficiency and profitability.
Capacity Utilization –
The first manufacturing metric we defined in part 1 of this article was Capacity Utilization which indicates how much of the total manufacturing capacity is being utilized at a given point in time. Specifically the formula for Capacity Utilization is:
Capacity Utilization = Capacity utilized or gross production / Optimum capacity or production level
It represents the amount of available capacity that is being used to supply current demand at the time of the measurement. It is a good indicator of business and market conditions because most manufacturing facilities are able to run at 70-80% of capacity when times are good, and in some instances may approach 100%.
Capacity Utilization is a widely held and respected key performance indicator (KPI) in many industries because it helps to determine optimum capacity in looking at market potential, new and emerging markets, and the effects of market demand. A business either has sufficient cushion in their ‘capacity’ to permit them to deal with major advances in market demands, or they simply will not be able to keep up with increasing market pressures if running at too great a capacity during normal or lean times. When Capacity Utilization is at a high level it is important that the manufacturers’ gross production is actually saleable production, not simply stock production.
It is extremely important to project Capacity Utilization at various market loads by measuring and adjusting factors such as production costs including fixed and variable costs, inventory levels, staffing capacity, overtime functionality, and facilities demand, including maintainability.
Labor Productivity
Labor Productivity measures the relationship between units of labor and units of production (output). The formula is:
Labor Productivity = Units of Productivity (Output) / Units of Labor
In this formula the Units of Productivity are some measurable quantity of production, and the Units of Labor are measures used during the creation of the productive output. For example, if we were a concrete plant we might measure cubic yards of concrete against work (man) hours to produce those cubic yards. Let’s look at a ‘real world’ type example:.
If our plant produces 120 cubic yards of concrete in an 8-hour day, and it requires the efforts of 3 workers working the entire 8 hours to produce that number of cubic yards, we can calculate the labor productivity as:
120 cubic yards produced / 24 man (3 X 8) hours = 5 cubic yards per man hour
Of course it rarely is this simple, there are a lot of different factors that go into play, even when making concrete. Things like supply availability may impact Labor Productivity, for example if you start the day with a shortage of ‘Portland cement’ with which to make the concrete, and have to wait for an hour to get an additional delivery, before resuming production, you still have paid your people for that hour (3 man hours total), but have produced nothing. Imagine who high your Productivity (output) would have been if all the supplies had been in place to run the plant for the entire 8 hour period?
Re-visit of Capacity Utilization
Let’s take a minute to re-visit Capacity Utilization now that we have our real world example, of the concrete plant, because it is easy to perform the measure.
We had 5 yards of concrete per man hour in our Labor Productivity example, despite the fact that the plant was down for 1 hour (3 man hours) due to insufficient inventory of Portland Cement; if we take that 3 man hours and multiply them by 5 yards, then we can easily see that if the plant had run for the entire 8 hour shift (for which the men were paid), our total yards of concrete produced would have been 135 yards (120 produced + 15 potential yards). That would have been maximum productivity. So if we look at the day on a capacity Utilization basis then our formula is: 120 yards / 135 yards = 88.88%.
It always helps to have ‘real world’ examples when we look at the principles of Key Performance Indicators. Now let’s look at another KPI, Yield.
Yield
The percentage of products that are manufactured correctly and to specifications the first time through the process without scrap or rework. Sometimes this KPI is referred to as First-time-through Yield, the formula to compute Yield is:
Yield = Units Produced - Defective Units / Units Produced
For purposes of the formula, defective units includes all units of production which are scrapped, re-worked, do not meet standards, require repair, or are not saleable.
This is a measure of production efficiency in terms of how well all the various aspects of the production or manufacturing process work together. If workers are failing to follow proper production steps, flaws may exist in the final product; but if supervisors are failing to catch potential defects early due to inadequate quality control, the result maybe a product that ends up ‘defective’ (using the definition above). Yield is an important Key Performance Indicate because it helps you identify efficiency and inefficiencies that will allow you to target necessary changes in performance of the manufacturing process and/or workers.
So let’s look back at our concrete plant; I know you are thinking how can there be defective units of concrete, but if the ‘mix’ isn’t right, the cubic yards of concrete are defective. Wet or dry there is a formula for the production of concrete, it requires Portland Cement, Rock and Sand (plus water if you are making ‘wet mix’, but if you are producing bags of dry concrete (for self-mixing) the formula still has to be right or it simply will not set-up right when mixed, it could be too stiff, or too loose.
So when the Portland in our earlier example started running low, perhaps there was a tendency to make it go as far as it could, so just add a little extra sand to make the bags ‘weigh out’. But now the formula isn’t right. Those bags with excess sand really are ‘defective’ because they lack sufficient Portland Cement. But it gets worse, when the Portland came in and the plant started producing bags of concrete mix again, the extra sand used in those earlier bags means that there is really insufficient sand to mix with those last remaining bags of the day and so there is more Portland in relationship to sand in those bags. In effect the plant has produced just as many defective bags due to insufficient Portland as it has excessive Portland. Does anyone want to venture a guess as to how many ‘defective bags’ that is?
The metrics used in evaluating a production/manufacturing facility are just as important as the metrics used in evaluating financial activities of any business. Next time we will look at a few more of our Manufacturing (and Production) Metrics, how they are computed, and real world examples that can guide us in putting theory into practice.