Using Manufacturing Performance Measures

In last month's column, I described some key manufacturing performance measures. This month, I will explain how these performance measures can be used to manage a manufacturing business.

• Sales booking performance to sales plan (current month and year-to-date): While both the current month and year-to-date measures are important, they are of value for different reasons. The current month figure can point out one-time surges or drops in business and can lead to questions such as whether a big order was lost to a competitor or whether a key customer was experiencing tough times.

The year-to-date figure is valuable because it reflects trends in your business. A significant increase in sales booking performance for the year may require an increase in manufacturing resources, while a significant reduction may force you to implement austerity measures.

• Sales booking projection to sales plan (three-month projection): A significant increase in actual sales booked compared to the sales plan may lead you to adjust your three-month projection. If the market is experiencing a growth cycle, increased sales bookings may continue for the foreseeable future. If the market is flat, the increase may be short term and your projection for the next three months may be reduced.
• Shipment performance to sales plan (current month and year-to-date): A reduction in the shipment performance compared to the sales plan is a symptom of a problem needing immediate attention. The problem could include any of the following: key machines not running properly, labor shortages or insufficient skills, and delays in obtaining raw materials.

Higher than expected shipment performance, while generally good news, can cause concern also. For example, an increase in shipments will lead to an increase in operating expenses that could result in a cash flow problem if "receivables" are behind schedule.

• Shipment projection to sales plan (three-month projection): The three-month projection of shipments should be reviewed on a regular basis and adjusted based on actual shipment results. The three-month shipping projection is important because it requires analysis of both present backlogs and projected bookings.
• Backlog: The backlog, or total of all orders booked and not shipped, is truly a double-edged sword. It is comforting for companies to know they have work "in the pipeline," however, too high a backlog may be a sign that the manufacturing operation needs attention.
• Capacity by workcenter (three-month projection): Understanding your work- center capacity, based on past performance, is an important consideration when developing a production plan. Increases in sales bookings may require increased production capacity. In this case, the only alternatives may be overtime, outsourcing, or additional equipment. You cannot effectively choose between these alternatives without knowing the demonstrated capacity of existing workcenters.
• Workcenter performance: Once you understand the demonstrated capacity of workcenters, it is important to measure the performance of these workcenters. If workcenter performance levels remain consistently below demonstrated capacity, a company is not getting the most from its resources.
• Quotation conversion (current month and year-to-date): If your business requires spending time quoting individual jobs, you want to be sure that this time is used effectively. Although no company can expect to convert all quotations into orders, steps can be taken to increase this conversion rate. Customers that are "just shopping" are candidates for "no quote" responses. Other customers who have placed orders in the past should be approached about the cost advantages of placing blanket orders. An unusually high quotation conversion rate is not necessarily good news. It may be a sign that either your prices are too low, or your customers are ones nobody else wants.
• Quoted prices versus actual costs (job-by-job basis): Every company has lost money on some jobs. A trend of unprofitable jobs should be a call to examine your quotation practices.

Each of the previous performance measures can provide valuable information. The key is to begin to measure something. After a short time, you will find the factors that are most critical to your manufacturing operation.