(See Part I of this article for an intro to KPIs and a list of KPIs for SaaS companies: Top Leading & Lagging SaaS KPIs: Select Meaningful Metrics To Track and Grow Your Business)


Part 2: Manufacturing KPIs

Manufacturing KPIs are crucial for monitoring and improving operational efficiency and profitability. Manufacturing facilities have complicated processes while often having very tight profit margins, which are pushed further down by competition from lower-cost, offshore manufacturing plants. There are many costs and processes to manage, and every decision matters.  Let’s review some of the leading financial KPIs that can help you spot troubles in advance, and lagging KPIs that can help you assess your performance in retrospect.


Leading KPIs: Steering Manufacturing Success

1.    Order Backlog: Projects future production volume and revenue. Indicates demand and future sales, however increasing figures could also mean issues on the production line.

Calculation: Total value or number of unfulfilled orders

2.    Capacity Utilization Rate: Measures how much of the manufacturing capacity is being used. Indicates efficiency and potential for scaling up. Low utilization means you have a lot of extra capacity and can process more orders without fixed costs going up, however it also means that you are paying for capacity you are not using and your profit margins are lower than they should be.

Calculation: (Total capacity used during a specific period / Total available production capacity) * 100

3.    Throughput: Measures the amount of product created over a specific period of time. You can measure this for a machine, a location, a business segment, etc. Weekly measurements can help spot declines in throughput and fix issues quickly.

Calculation: Total number of good units produced / Specified time frame

4.    Production Cycle Time: The amount of time required to produce or process an order from the beginning of the production process to the end. This can be measured for a single process, or a combination of processes required to create a finished good. Faster cycle time typically signify higher efficiency, lead to higher profit margins and quicker delivery to clients. Measuring individual cycle times of several sequential tasks can help identify bottlenecks. An increase in cycle times can signify upcoming delivery failures.

Calculation: Net production time / Number of units produced

5.    Work in Process: Measures goods that are in mid-production or waiting to be completed and sold. Indicates how efficiently you are using raw materials and the value of unfinished goods.

Calculation: Beginning WIP + Manufacturing Costs – Cost of Goods Manufactured

6. Defect Density: Tracks the number of defective products compared to the total volume of manufactured products.

Calculation: # of defective units / Total units produced

7. Customer Order Frequency:Predicts future sales through customer engagement. Reflects customer loyalty and repeat business. These figures should be compared to operating or industry norms to identify issues.

Calculation: Number of orders per customer in a given period

8. Preventive Maintenance Completion Rate:Indicates future operational efficiency. Affects production uptime.

Calculation: (Preventive maintenance tasks completed / Total scheduled tasks) * 100

9. Employee Productivity Rates: Shows potential for increased output. Indicates operational efficiency. Decreases in rates can forecast lead time and product delivery issues.

Calculation: Total output / Total number of employees


Lagging KPIs: Assessing Manufacturing Performance

1. Cost of Goods Sold (COGS): Measures direct costs involved in production. Indicates cost control efficiency.

Calculation: Direct labor + Direct material + Overhead costs assigned to production

2.    Fixed to Variable Cost Ratio: Measures the proportion of fixed costs to variable costs, a higher ratio indicates high fixed costs and implies less flexibility in scaling.

Calculation: Fixed costs / Variable costs

3.    Gross Margin:Reveals profitability post-production costs. Critical for pricing and cost management. Should be tracked against industry benchmarks.

Calculation: (Revenue – COGS) / Revenue

4. Inventory Turnover: Shows efficiency in inventory management. Indicates product demand and stocking efficiency. If the ratio is higher than 1, it means you do not have enough material in inventory currently to produce as many products as were sold and constitute COGS. If sales orders have not declined, this may mean that you don’t have enough materials to fulfil the current orders.

Calculation: COGS / Average inventory

5.    Lead Time: The amount of time it takes to deliver a product from the time a customer places the order to the moment it’s delivered. It is used to plan for inventory restocking, production planning and customer satisfaction monitoring.

Calculation: Procurement time + Manufacturing time + Shipping time

6. Return on Assets (ROA): Indicates asset profitability and asset utilization. Manufacturing companies have large machinery on balance sheets if they operate their own plants, this ratio tracks the yield of the assets in terms of net income. The higher the ratio, the better. If you have a large cash balance that is not deployed into the business, it will lower the ratio because you are not utilizing all assets.

Calculation: Net income / Total assets

7.    Working Capital: Measures operational liquidity. This metric represents available, liquid assets after payment of all short term liabilities. If your working capital is negative, a drop in sales or delay in collections from clients may lead to a cash shortage.

Calculation: Current assets – Current liabilities

8.    Total Manufacturing Cost Per Unit Sold: Reveals cost efficiency per product. Helps with product pricing and profitability analysis.

Calculation: Total manufacturing cost / Number of units sold

9. Debt-to-Equity Ratio: Assesses financial risk and leverage. Indicates financial stability and should be tracked against industry standards.

Calculation: Total liabilities / Shareholders’ equity



Remember to select manufacturing KPIs that track what matters to you most and that provide you with information that helps you reach your business goals. Likewise, make sure the data used for the calculations is correct and reliable, and track changes over time.  Seeing trends develop over periods can bring about powerful insights.


Stay tuned for the next issue, focusing on financial KPIs for the Service industry.

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