What type of business are you responsible for managing? Is it a distribution center (DC)? Is it an assembly facility? Is it a machine shop with assembly and DC characteristics? Is it a chemical plant? No matter what type of business you manage, you should have a solid set of metrics that measure whether your business is: A.Meeting customer expectations, and B. Performing in an efficient and profitable manner. I’m not going to spend time discussing measures of profit. Instead, I will focus on operational metrics that have served me well in the past. Many of these metrics may seem like common sense, but you would be surprised by how often they are overlooked and in some cases not even tracked. Also, I hope not to bore you with an never-ending list of metrics. Sometimes you can get buried in the metrics and lose track of how the business is really doing. There is always a balance that one must strive for.
Below are a list of metrics that I always like to have in my tool bag:
- On-time delivery (OTD): Based on my previous posts, this metric may not be surprising. You have to measure your ability to deliver products on-time: whether to customer expectations or to promise dates that have been provided to the customer. There are many different methods to measure customer satisfaction. And by no means is OTD the holy grail, but for a business that is delivering a product (and maybe even a service) to a customer, this is one of the best operational metrics that you can have in place.
- Percentage of orders past due: What percent of your backlog is past due? A high percentage of past due orders is typically correlated with a low percentage of OTD. Both of these metrics must be looked at hand-in hand. It is very possible to have high OTD and a high percentage of your orders past due. Look at both these metrics to make sure the system is not being gamed.
- Lead Time: How long does it take you to ship an order from the day of order receipt? This is another key metric that I always want to view. You might have an excellent OTD rate, but lead times of 90+ days. In many industries 90 days is not acceptable.
- Vendor OTD. Without decent performance from your vendors, it is tough (not impossible) to perform well for your customers.
- Purchase Price Variance (PPV): This metric allows me to tell how the purchasing team is performing. It also provides good insight on material prices (are they going up or down).
- Capacity Utilization: Are you overstaffed? Understaffed? Do you have enough equipment? How do you tell if you don’t don’t measure? There seems to be an acceptable rule of thumb that capacity utilization of 85% and above requires additional capacity. I like that rule of thumb. Many companies don’t heed this metric. This is one of many reasons you need a detailed sales forecast by product line. Without it, it becomes hard to determine how much additional capacity you might need to add.
- Cycle count accuracy: I always joke that inventory is the root of all evil. Well if we have to keep inventory, lets make sure we know what we actually have on hand. The importance of cycle counts cannot be underestimated.
- Gross Margin by Product – specifically I look for low margin products: typically below 35% to identify if I have: 1. A sales price issue, 2. A bill of material issue, or 3. A purchasing issue.
- DSO: What good is it to ship a product on-time (or deliver a service) if you can’t get paid in a timely basis?
- Dock to Stock: How long does it take from the day you receive a product to the time you actually put it on the shelves? You might be understaffed in your warehouse if it takes you 5+ days to put inventory away.
Different businesses use different metrics. The ones above are ones that I have always found useful. What metrics do you track in your business?
Rindge Leaphart
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