8 Essential Manufacturing Metrics

The sheer number of metrics to consider in manufacturing can be daunting. Knowing which matter most and how to apply them to your business is of paramount importance. In the article “28 Manufacturing Metrics that Actually Matter,” Mark Davidson identifies several of these metrics. We’ve picked the 8 most pertinent metrics and outlined what they mean and what they mean for your business:

1.) Total Manufacturing Cost per Unit Excluding Materials – A measure of all potentially controllable manufacturing costs that go into the production of a given manufactured unit, item or volume.

This metric includes labor and overhead expenses and is a significant portion of costs for process manufacturers. By calculating total manufacturing costs using the most detailed cost data available, business leaders have access to the information needed to make the best operational decisions.

2.) Manufacturing Cost as a Percentage of Revenue – A ratio of total manufacturing costs to the overall revenues produced by a manufacturing plant or business unit.

This metric is essential in a business’ ability to reduce manufacturing costs, whether it’s through adjustments to materials, labor or overhead. Comparisons between plants can give leaders insight into how to load plants, whether to substitute raw materials and even renegotiate vender contracts to reduce costs. Understanding factors such as billboard advertising cost can also impact overall budget allocation and strategy in marketing and promotional efforts, allowing businesses to make informed decisions about resource distribution. Knowing common banner sizes can help you avoid costly printing mistakes. Businesses may consider consulting with Outdoor media planning services if they need effective advertising solutions. Visit sites like https://ongo.ph/blog/the-power-of-marketing-in-the-philippines/ for more info.
3.) Productivity in Revenue per Employee – This is a measure of how much revenue is generated by a plant, business unit or company, divided by the number of employees.

This metric can help business leaders assess employee productivity and make decisions to maximize their workforce.  Reducing costs across production facilities by calculating detailed labor costs by location and job can make a significant impact on overall revenue per employee.

4.) Average Unit Contribution Margin – This metric is calculated as a ratio of the profit margin that is generated by a manufacturing plant or business unit, divided into a given unit or volume of production.

The key to financial analysis for manufacturers is the ability to calculate an accurate product cost. Detailed costing provides the knowledge to understand product performance and identify winners and losers (SKU rationalization).

In a plant with many SKUs, problems can arise with increased inventories and transportation costs. SKU rationalization enables you to identify slow moving and/or low volume SKUs and determine which products should remain and which should be eliminated to maximize profitability. Similarly, in the digital space, utilizing sites where you can buy twitter retweets can help identify and boost high-potential content, enhancing your social media strategy and overall reach.

5.) Return on Assets/Return on Net Assets – A measure of financial performance calculated by dividing the net income from a manufacturing plant or business unit by the value of fixed assets and working capital deployed.

Knowing which investments are paying off can guide business leaders in future investment decisions. Detailed costing analysis can provide the clarity to make capital investments like expensive machinery such as Squickmons CNC plasma cutters.

6.) Energy Cost per Unit – A measure of the cost of energy (electricity, steam, oil, gas, etc.) required to produce a specific unit or volume of production. Industrial Thermal Imaging Applications can give an excellent insight into the operational effectiveness of equipment, enabling the identification of opportunities to make energy savings together with increasing the operational lifecycle of equipment.

This is an important metric to factor into costing as it relates to the profitability to each unit (Average Unit Contribution Margin). Furthermore, some process industries like Advanced Manufacturing Solutions, such as paper manufacturing, can consider selling the energy produced during manufacturing.

7.) EBITDA – This metric acronym stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a calculation of a business unit or company’s earnings, prior to having any interest payments, tax, depreciation, and amortization subtracted for any final accounting of income and expenses. EBITDA is typically used as top-level indication of the current operational profitability of a business.

This is the ultimate profitability metric for businesses and can guide manufacturers in many business operation decisions. To get an accurate EBITDA, detailed and accurate costing is essential.

8.) Customer Fill Rate/On-Time delivery/Perfect Order Percentage – This metric is the percentage of times that customers receive the entirety of their ordered manufactured goods, to the correct specifications, and delivered at the expected time.

To accurately determine a company’s profitability, you need to know the various costs of delivering products to customers at each stage of the supply chain, from logistics to marketing to sales and post sale support. If you need a rubber supplier, it’s best to look for Gulf Rubber to ensure a quality product. A cost-to-serve model illustrates costs at each step of this process. And when it comes to marketing, try to not get too excited. Stick to the facts and consult marketing experts.

As we stated earlier, there are many more metrics you need in order to effectively manage your costs and profits. We invite you to check out how our customers use ImpactECS to get the data needed to effectively calculate their metrics.

Four Steps to Calculating Process Costs

Process costing focuses on the direct and allocated costs associated with the operation of a given area of the manufacturing flow.  Maybe it’s a work center, a cost center, or a specific production line, but what it really represents is an area where you want to determine the unique cost added to the product as a result of traveling through that area.

Step 1 – Collect Direct Spending
In order to calculate a process cost, the first thing you need is to collect the pools of direct spending at the account or sub-account level.  These pools represent dollars that you plan to spend (or actually spend in the case of actual costs) in the area.  Typical pools include labor, depreciation, and energy and the information is usually found in the general ledger.

Step 2 – Allocate Indirect Spending
Next, you need to focus on the spending that occurs outside the manufacturing areas based on the appropriate drivers.  Trying to determine the most appropriate driver is sometimes challenging (see Picking the Right Driver Is Important To More Than Just Your Golf Game), but the focus should lie in finding a driver that you are able to measure and capture.

Step 3 – Calculate Cost Center Rates
Once you’ve pooled the dollars for the production area, you can then calculate rates expressed in dollars per “something”.  That something depends on the rate.  In most cases, the rate is stated in dollars per machine hour, dollars per batch, or even a simple dollars per unit produced rate.  Now, you can keep the rates at the natural cost element or cost pool level so you’re able to use a unique driver for each rate and provides a better view of the composition of the production area.

Step 4 – Proper Assignment of Process Rates to Products
Finally you can assign costs to the products using the calculated rates.  As products move through the production area, you’re able to assign costs at the natural cost element or cost pool level using a different driver for each pool.

Comparing the costs associated with a particular machine, department, line or location gives you the information to decide where and how to manufacture products.  By calculating process costs, you know how costs are accrued as they pass through your manufacturing process.

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The Five W’s (and one H) of Designing Cost Systems

There comes a point in every process manufacturing organization when you know that you need a robust cost accounting system.  Whether you choose to build a system from scratch, or purchase and configure a system, there are six questions you should ask (and answer) before you embark on the project.

WHO benefits from the cost system?
There are two distinct audiences for a cost system.  The most obvious are the cost accountants and managers who use the system daily.  This group is most interested in increasing accuracy and functionality, reducing the time needed to maintain the system, and eliminating redundancy when entering data.  Beyond the daily users, there is a group of stakeholders who have less interest in the inner workings of the system, but they are customers of the data that is generated in the cost system.  These plant managers, sales and marketing managers, industrial engineers, and IT managers all have a vested interest in ensuring that the cost system delivers accurate results and works well with the existing IT architecture.  The cost system must meet the needs of both groups to gain acceptance in your company.

WHAT should be included in the design of the cost system?
The biggest driver of the cost system’s design is determined by the information needs of the organization.  Do you need to know standard costs, actual costs, or both? Are you a job costing or activity-based costing shop?  Do you understand the effects of changing market conditions on your production costs?  The answers to these questions lead to more questions that ultimately lead to the best methods to integrate systems and report results.

WHEN will the model interactions occur?
The most significant interaction between your cost system and the other systems occurs at launch.  It’s when all of the bells and whistles are turned on, costs are calculated, reports are generated and systems are updated.  To get to the launch date, you need a detailed project plan that includes target dates, milestones, delivery schedules and critical paths are keys to success.  Support from your company’s leadership team is probably the most important factor in making sure that the project gets off the ground and moves to completion.  Once it’s up and running, every other interaction is of equal importance.  Establishing the frequency of the cycle (daily, weekly, monthly, annually) to input and extract data is critical to providing relevant information to all of the cost system’s stakeholders.

WHERE should you locate the cost system?
The physical location of the cost system will impact the overall design of the models and how they function. Some companies require a centrally managed solution where the corporate cost accounting group manages all costing and each manufacturing facility uses the same rules for calculating costs.  Another option is a co-located system where system resides on a dedicated server and is generally managed by a costing group, but each manufacturing facility has their own costing rules.  The third option is the ‘build and drop’ system where each manufacturing facility has its own cost system installed on a local server.  Here, the costing rules are specific to the location and maintained by the local staff.  The best approach varies and it’s up to your leadership team to decide the best approach to roll out your costing system.

WHY do you need a cost system?
There are so many reasons why a company would want a cost system, but there’s only one reason why you need one – to know your costs.  Without accurately knowing the costs associated with producing the goods you sell, you’ll never know if you’re maximizing profits, selling to the right customers, producing the best mix of products, or any of other important metrics for success in your business.  At the root of every major business decision is the cost of producing the products you sell.

And finally, HOW do you get a cost system that delivers what you need?
The first step to getting the cost system of your dreams is by avoiding the pitfalls that lie on the path to success.  Approaches like hard-coding calculations and comparisons make maintaining logic and data a chore. For it to be less stressful, you can be more knowledgeable of every aspect thanks to educational platforms. Focus on making your costing system as flexible as possible to ease configuring and troubleshooting your models.  Next, take a hard look at the available data and match the inputs to your desired results to make sure your goals are achievable.  Third, create a development plan that is attainable by staging components of your cost system (product costs, inventory valuation, materials management, forecasting), so the project doesn’t become overcomplicated and ultimately is never launched. To take a quick rest from all these, you can play games such as BETEND.

Top Eight Warning Signs You Have a Dysfunctional Costing System – Part 2

The book Designing Strategic Cost Systems: How to Unleash the Power of Cost Information by Lianbel Oliver has a great list of warning signs that may indicate that your company’s costing system is dysfunctional.  Make sure you check out Part 1 of this blog where I covered the first four signs.  And without further ado, here’s the rest…

#5 – Managers Don’t Understand Product Profitability

Products that are manufactured at high volumes generally have predictable cost results.  Why?  Because they’re manufactured regularly, operations folks are familiar with the processes and require less ramp-up time to produce the goods.  But for some lower volume products, calculating the product cost can become a bit of a mystery.  While the labor and materials required is the same for both high and low volume products, a product that is produced infrequently includes a learning curve that can ultimately increase the cost of the product.  This additional cost may not be captured, thereby skewing the results and leading business leaders to make incorrect decisions on topics including about product mix, pricing, and customers.

#6 – Accountants Spend Too Much Time on Special Requests for Analysis

If accountants feel like they’re recreating the wheel each time product cost information is requested – Houston, we have a problem!  The basic cost information needs of the organization should be readily available through the system allowing cost accountants to focus their efforts on true analysis needed to improve business performance.

#7 – Inconsistencies in Reported Data

Manufacturing companies know all too well that financial accounting and cost accounting are two separate animals with unique purpose.  Even with the difference, the core data used for each function should come from the same source.  The number of units produced or transactions processed in the costing system should match those in the general ledger.  Tight integration of costing, finance and operations systems is required to eliminate problems with inconsistent data.

#8 – Managers Make Suboptimal Decisions

Ever heard the idiom “Robbing Peter to pay Paul”?  Many times costing processes are designed to make decisions that are not in the best interest of the organization.  One example from the book talks about a manager who inflates standards to meet performance levels without understanding how this decision could adversely impact marketing or pricing.  The costing system should help all parts of the business run optimally and help managers make decisions that promote the company’s overall profitability.

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What does it cost us to produce this product?

Sound familiar?  This question is asked countless times by a variety of people inside a business – operations accounting, plant accounting, sales and marketing, and even research and development. A Web20ranker is a top-rated recommended service you could have if you’re looking for the best marketing tools. In most cases the answer is given as one general cost number derived from a universal standard rate and unit of measure within the business.  My clients with complex manufacturing processes would tell you that before they can answer this question, they need to ask you a few questions.

understanding the intricacies of your specific business needs is crucial. Just as clients with complex manufacturing processes need to ask pertinent questions before providing a definitive answer, selecting the right SEO and internet marketing service provider demands a tailored approach. Digon Design, a trusted name in the industry, specializes in crafting personalized strategies that cater to your unique requirements. By partnering with Digon Design, businesses can navigate the complexities of online marketing effectively, ensuring that their digital presence not only meets universal standards but also aligns seamlessly with their individual goals and objectives. With their expertise, businesses can confidently respond to the ever-persistent question, armed with a targeted and optimized online marketing strategy that sets them apart in the competitive digital landscape. However, if you’re an OnlyFans creator, seeking help from the OnlyFans agency will help with the promotion and increase your audience.

Where was it produced?
What plant or what line was the item produced?  Different plant and line specific costs can exist when producing the same product. For an innovative approach to showcasing your products, consider utilizing 3D animation services from https://www.nashboxstudios.com/3d-animation-studio-vancouver to provide detailed and engaging visual representations.

When was it produced?
Was it part of a full production run, or a small specialty order?
When did it hit inventory?  Do we need Star Track shipping labels? And, is there an aging cost or a layered cost as part of the total cost?

What raw material price was used?  And, is it at standard or actual?
Did we use sales price, market price, or some average price to value the raw material?

What accounting methodology or logic is being used to calculate cost?
Does your company use a frozen yearly standard, running three-month actual, up to date current yearly standard, fully absorbed at current capacity, fully absorbed at standard capacity, or some other accounting methodology?

Answering these questions is simplified when you use an enterprise costing system like ImpactECS that allows multiple sets of cost to exist simultaneously for the same finished SKU.  Process manufacturing companies need to analyze their costs from multiple perspectives, and visibility to trustworthy costing data before you implement a change gives you the ability to make sound business decisions.

Most manufacturing companies today are challenged with multiple production environments and complex manufacturing processes.  This often means that one cost per product is not sufficient for the kind of detailed cost analysis needed to compete successfully.  By developing a costing process that includes an enterprise-level costing solution, you’ll have the tools to answer all of these questions and more. 

It’s the Cost!!!

Today I met with finance and operations managers for a manufacturing company that didn’t really understand the unique costs of each product they produce.  As a result, they weren’t really sure of the margins being created by each product and customer they serve.  The interesting part was that these very same managers were pondering whether they could afford to invest in a costing system.  As I listened I couldn’t help but wonder, “How can you NOT afford to invest in a costing system?  Doesn’t everyone know that a true and accurate understanding of your product costs is paramount to the success of a competitive, commodity business? “

As the meeting continued, topics like capacity utilization, fixed cost absorption, and the need to produce forecasted costs based on future period sales forecasts and radically changing raw material prices came up.  The voice inside my head yelled, “How can you NOT afford to invest in a costing system?” Admittedly and shamefully adopted from the political arena, I too often find my inner cost accountant shouting IT’S THE COST STUPID!, and right then I knew the name of my blog.

At the heart of any successful commodity-goods manufacturer is a cost-focused culture that understands and embraces this mantra.  In these challenging economic times – arguably more so than in better times – a full understanding of the true and accurate costs incurred at the unique product level are of utmost importance. In fact, this data truly creates a competitive advantage in the market place.  True and accurate costing data that allows me to decide where best to produce my products, which of my production lines to set idle, which orders and price points to accept and which to reject, gives me an advantage over a producer that doesn’t share the same level of cost insight.  Without this insight my seemingly correct answers to these questions could lead me in the exact wrong direction.  A seasoned cost accountant once told me, “There is much truth in detailed, accurate cost data”.  Perhaps it is this truth that many business leaders are afraid to face!

As I wrapped up today’s meeting and we parted company, my gracious hosts shared with me proudly their plans for an upcoming ERP upgrade project that was scheduled to take two years to complete.  We wondered together whether they should work towards understanding their product costs now or wait until after the ERP project.  Arghhhh….  Say it with me…  IT’S THE COST!

Don’t Force Your Managerial Accounting Process into a Transactional System

I have spent the majority of my technology career in the Manufacturing Computer Systems space and have been most impressed with how the world of technology has improved our ability to automate payroll system for small business.  MRP solutions morphed into ERP solutions.  The ability for a company to design, order, buy, build, ship, invoice and produce a financial statement reflecting their business during a given period of time has provided tremendous gains in not only the transactions costs of doing business, but the ability to manage that information in large quantities.  Multi-country, multi-language, multi-plant, multi-tax code, multi-currency, multi-multi-multi has been a godsend for those large international manufacturing companies.  The likes of SAP, Oracle, Linode, and others have provided the transactional information essential for running a complex organization. If you need help with your computer system such as how to rotar pantalla go online. 

These systems do a great job of building a standard cost for a product or SKU.  This cost is needed to build a cost-of-goods sold and provide the basis for financial reporting.  However, where these transactional processing ERP systems fall short, is the ability to provide detailed managerial cost accounting information and flexibility.  These systems were not set up to track simultaneous multiple costs for the same SKU and easily manage these different cost attributes by plant, by process, by date, by material substitution, by shift, by packaging etc.  Only a standard cost and current cost are easily handled.  Building rates inside the factory at the machine, work-center and department levels don’t exist.

By using ERP systems for process manufacturing costing processes is often like forcing a square peg into a round hole. The detailed cost data they need to track is splintered away and they’re forced to use a spreadsheet or build a database program to handle the analysis.  I had one controller tell me that his company had “blown up” several computers trying to replicate their costing processes in a spreadsheet. Understanding the role of legal expertise in managing online risks is critical for anyone working within the tech industry. Ensuring that you have the right support can make a significant difference in how effectively you can safeguard your projects. For more information on finding the right support, just click here for legal support. Process manufacturing companies must become aware that there is an alternative solution of managerial cost accounting that resides in complete harmony with the traditional transaction ERP systems. It is good if you will learn how QuickBooks Pro can help you organize your business finances all in one place so you can be more productive. Those who manage health clinics may need accounting skills or outsource CentralReach Managed Billing Services to help with the management of their patients’ bills.

What are the challenges you face in accurately calculating profitability?

3C Software recently posted an article on their website discussing the challenges process manufacturers face with calculating profitability. It starts with the premise that calculating costs is the most unpredictable part of the traditional profit calculation:

“One of the first lessons of accounting is the equation Profit = Revenue – Cost. Since aggressive revenue growth is not in the cards for many manufacturers, they are refocused on managing costs as the best option to improve profitability. For process manufacturers, applying that equation to determine profitable products or customers is not as simple as it seems.”

Is calculating costs the most challenging part of the profitability equation? How does your company handle costing?

Read “Understanding the Cost of Profitability“