What are KPIs and what are they (Part 1)
A performance indicator, or key performance indicator (KPI), is a type of performance measure. KPIs measure the success of an organization or a particular activity (such as projects, programs, products, and production).
Often, success is simply the repeated, periodic achievement of certain levels of an operational goal (e.g., zero error, 10/10 customer satisfaction), and often success is defined as progress toward strategic goals. Accordingly, the selection of appropriate KPIs is based on knowledge that is important to the organization. What they consider important often depends on the class measuring performance.
It is necessary to have a good understanding of what is important to select performance indicators to assess the current state of the business and its key activities. These evaluations often lead to the identification of potential improvements, so performance indicators are regularly associated with “performance improvement” initiatives.
The importance of such performance indicators is evident in the typical decision-making process. When a decision maker considers multiple options, appropriate KPIs should be assigned to them to analyze the current state. In this way, they can predict the consequences of future measures. If the analysis is based on erroneous or incomplete information, the forecasts will not be reliable and, consequently, the decision may produce unexpected results. Therefore, the proper use of performance indicators is vital to avoid such errors and minimize risk.
We can define several different KPIs, because of this and the scope of the topic, I discuss the topic in several parts. I can’t emphatically focus on every KPI, so I’ll present what I’ve used so far. In the first part, we look at indicators related to logistics.
Logistics indicatorsLet’s look at material management KPIs first.
Warehousing, inventory indicatorsManufacturing companies usually have their products in three production stages.
Raw materials: materials used to make candles
Work in progress: work-in-progress that progresses in production
Finished products: products ready for sale
These are dealt with in the calculation of the lead time.
Dock to Dock (DTD)
DTD is the internal lead time from dock to dock, which can reduce costs, shipping time and inventory cost.
In other words, the total time required to complete the physical process, including the waiting time and the inventory time.
Its value is always a number that specifies the days.
For example:
The raw material is accepted and used in 15 days, and the production process takes 7 days, including the time spent in buffer stocks.
Calculation:
DTD=RMI + IPI + PT + EPI
Where:
RMI (raw material inventory)
The stock of raw materials refers to the total cost and quantity of all the parts used to produce the product. These substances can be classified as direct substances (DM) or indirect substances (IM).
Direct materials are parts that can be easily reconnected to a finished product. The raw material is easy to return to its original state, and the amount used in each product is probably almost the same.
Raw materials do not have to be in the same state. These can also be semi-finished products.
Calculation:
RMI (raw material inventory)
The stock of raw materials refers to the total cost and quantity of all the parts used to produce the product. These substances can be classified as direct substances (DM) or indirect substances (IM).
Direct materials are parts that can be easily reconnected to a finished product. The raw material is easy to return to its original state, and the amount used in each product is probably almost the same.
Raw materials do not have to be in the same state. These can also be semi-finished products.
Calculation:
RMI = Raw material stock / daily demand
This calculation method seems simple enough, but the more products involved, the more complicated it can become.
If you manage your own production line, inventory is an important part of your business. You need to understand how much ROI you get for your raw material by acquiring and removing production lines with high production overheads but low profit margins.
With multiple products, each with different production cycles, tracking raw materials can be a nightmare for small and growing businesses.
IPI (in process inventory) also known as WIP (work in process)
Calculating the IPI in the process inventory is a complex and time consuming process as the percentage of work completed and the associated costs need to be assessed. Therefore, many companies only consider how many days the material is sufficient for production.
PT (production time)
Production time in days.
EPI (ended product inventory)
This data gives you how many daily demands are found at the finished product level.
Calculating the value of finished goods inventory can help business owners better understand the value of their inventory and record that value as an asset in the company’s balance sheet. Knowledge of the true value of manufactured inventories is an important factor in reducing material waste, determining profitability, and optimizing inventory management processes.
Of course, all the parameters described so far can be linked to costs, thus determining the proportion of capital in the material.
Calculating the value of finished goods inventory can help business owners better understand the value of their inventory and record that value as an asset in the company’s balance sheet. Knowledge of the true value of manufactured inventories is an important factor in reducing material waste, determining profitability, and optimizing inventory management processes.
Of course, all the parameters described so far can be linked to costs, thus determining the proportion of capital in the material.
Let's look at an example:
Calculation of RMI: Our raw material for the production of 3000 units and the customer demand is 2000 units / day -> RMI = 3000/2000 = 1.5 days
Calculating the IPI: we need to add all the kits we use at different stages of production. Imagine that there are materials at different stages of production to produce 5,000 units. -> IPI = 5000/2000 = 2.5 days
EPI: ready-to-ship products. Imagine that there are 4000 products in stock -> EPI = 4000/2000 = 2 days
PT: time required for each process (SMD + inspection + THT + assembly + +. + OOB inspection) is added to each unit in days. Imagine that this time is 4800 sec / unit -> 0.05555 days
Thus DTD = 1.5 (RMI) + 2.5 (IPI) + 0.05555 (PT) + 2 (EPI) = 6.05555, which means the time elapsed from the raw material to the finished product.
The size of companies usually determines how high this number can be.
Delivery indicators
The following are usually taken into account for this indicator:
CSL (Customer Service Level) customer service level measurement: order fulfillment rate (OFR), item fill rate (IFR), on-time delivery (OTD) delivery quality (QD)
Where:
OFR = volume of orders fulfilled / volume of orders received from customers
IFR = total finished products delivered / quantity requested by the customer
OTD = orders placed on time / orders received from customer
QD = quantity of products delivered without complaint / total products delivered
The last two parameter (OTD and QD) already takes us to the field of production. I will write about these indicators next time.
Calculation of RMI: Our raw material for the production of 3000 units and the customer demand is 2000 units / day -> RMI = 3000/2000 = 1.5 days
Calculating the IPI: we need to add all the kits we use at different stages of production. Imagine that there are materials at different stages of production to produce 5,000 units. -> IPI = 5000/2000 = 2.5 days
EPI: ready-to-ship products. Imagine that there are 4000 products in stock -> EPI = 4000/2000 = 2 days
PT: time required for each process (SMD + inspection + THT + assembly + +. + OOB inspection) is added to each unit in days. Imagine that this time is 4800 sec / unit -> 0.05555 days
Thus DTD = 1.5 (RMI) + 2.5 (IPI) + 0.05555 (PT) + 2 (EPI) = 6.05555, which means the time elapsed from the raw material to the finished product.
The size of companies usually determines how high this number can be.
Delivery indicatorsThe following are usually taken into account for this indicator:
CSL (Customer Service Level) customer service level measurement: order fulfillment rate (OFR), item fill rate (IFR), on-time delivery (OTD) delivery quality (QD)
Where:
OFR = volume of orders fulfilled / volume of orders received from customers
IFR = total finished products delivered / quantity requested by the customer
OTD = orders placed on time / orders received from customer
QD = quantity of products delivered without complaint / total products delivered
The last two parameter (OTD and QD) already takes us to the field of production. I will write about these indicators next time.
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