What is KPI for Lean Manufacturing?
Lean thinking involves going through all manufacturing process steps to monitor performance, determine which areas contribute the most value, and know where improvements can be made. KPIs for Lean manufacturing focus on increasing production efficiency and reducing waste across operations in the supply chain. They are directly tied to a manufacturer's primary concerns; quality, efficiency, and profitability.
Why Use Specific Key Performance Indicators in Lean Manufacturing?
As the management expert Peter Drucker said, “If you can't measure it, you can't manage it.”
That’s a fact and a major one. Measuring the right KPIs is vital to the health and success of your business. Managers understand performance, machine efficiency and utilization, process integrity, and more by implementing specific KPIs in Lean manufacturing.
These quality KPIs can also provide priceless and actionable insights that help to make informed decisions toward optimizing your production process, maximizing return on assets, and improving efficiency. Other core benefits of using the right KPIs include:
● Enhancing maximum capacity utilization of resources and raw materials;
● Gaining new opportunities to design predictive maintenance strategies;
● Reducing waste while eliminating the drivers of this waste, such as slow cycles, breakdowns, quality control defects, production rejects, and more;
● Increased level of production;
● Increased revenue;
● Achieving business goals.
How to set Lean manufacturing KPIs
Taking the right initiative toward setting meaningful KPIs for your manufacturing operations is essential. They should be unit framework actionable and your goals. When defining your metrics, consider the SMART framework (specific, measurable, actionable, realistic, and time-based). Let's break this down:
● Be specific about why each KPI is important and what it will measure;
● Ensure your production KPIs are measurable and quantifiable to a specific standard;
● Use KPIs that are achievable and actionable;
● Come up with realistic KPIs that measure critical operations and provide data that can be used to make improvements as needed;
● Ensure your goals are achievable within an agreed time frame.
When all your KPIs fulfill these SMART criteria, you will achieve manufacturing efficiency in the long run. It's best to avoid too many KPIs. Ensure you have enough to measure your company's performance against key objectives and define which metrics will indicate that you are successfully pursuing your strategy and vision.
15 top Lean manufacturing KPIs
The secret to a successful business is setting appropriate metrics you can track in real-time and developing a culture of sustainable operational excellence. By establishing the following Lean manufacturing KPI examples, managers can make decisions that align with their growth plan.
Productivity indicators
1. Throughput
Throughput is the holy grail of manufacturing metrics, also known as capacity utilization. It measures a machine's production capabilities, giving manufacturers appropriate data on how much they can produce over a specific period.
Ideally, companies should monitor throughput on a real-time weekly basis. If you are wondering why it's because any significant decrease in the number of produced units can highlight a major issue that you can quickly resolve.
Formula: Throughput = number of Units Produced / Time (hour or day)
2. Cycle Times
Cycle times refer to the average amount of time spent producing products. They represent the total production time required to convert raw materials into finished goods. A good example is creating a new Toyota vehicle whose cycle time is roughly 4-12 weeks.
Manufacturers break this KPI into more layers, such as the time it takes to produce a driver's seat or gearbox of a finished car. This measure determines a machine's efficiency while allowing real-time reporting of its performance.
Formula: Cycle time = Process End Time – Process Start Time
3. On Standard Operating Efficiency (OOE)
Another KPI worth tracking in Lean manufacturing is standard operating efficiency or OOE. It tracks the performance of employees against the labor goals set when determining the cost of your products. Manufacturing industries also use this metric to evaluate their processes and identify rework and improvement areas for optimal output.
Formula: On-standard Efficiency = Total minutes produced / Total minutes attended for on-standard jobs x 100
4. Overall Equipment Effectiveness (OEE)
Abbreviated as OEE, overall equipment effectiveness is an invaluable KPI that measures the efficiency of all manufacturing operations. It is a must-have for all manufacturers who want to ensure their machines are effective and productive.
A high OEE translates to the increased effectiveness of your equipment. This metric combines availability, quality, and performance but only includes scheduled time.
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Availability: How often is a machine available for production during the scheduled operating time?
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Performance: How many units does the machine produce within its planned operating time?
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Quality: How many of the produced units are defect-free?
If a machine isn't scheduled or undergoes maintenance, OEE doesn't factor this time.
Formula: OEE = Availability x Performance x Quality
Financial indicators
5. Manufacturing Costs per Unit
A manufacturing business must know the total cost associated with producing a single product. How will you know how to price your products without knowing how much you used to generate them? The standard manufacturing costs include material costs, labor, overhead, and more. To get the cost per unit, you need to divide the total production costs by the total number of units produced.
Formula: Manufacturing Cost Per Unit = Total Manufacturing Cost / Total units Produced
6. Energy Costs per Unit
Energy costs are increasingly rising, and businesses can easily make losses without the right strategies. That makes energy costs per unit an important KPI relevant every year. Getting the costs per unit requires you to divide the total energy costs by the number of units produced. It's a great way of ensuring optimal energy usage within manufacturing operations to reduce costs.
Formula: Energy Cost Per Unit = Total Energy Cost/Number of Units Produced
Process indicators
7. First-pass yield
First-pass yield (FPY), or production yield, refers to the ability to deliver a product correctly without it having been corrected. This measure of quality reduces waste by optimizing the use of available resources and, at the same time, improves customer satisfaction.
Formula: FPY = Quality Units / Total Units Produced
8. Quality (Scrap Rate)
This KPI, identified as the scrap rate, allows tracking of products with manufacturing defects that cannot be corrected. These same products cannot be sold. It is therefore important for the company to know the proportion of products considered as rejects in the total production, allowing it to identify inefficient manufacturing processes.
Formula: Scrap Rate = number of Scrap Units / Total number of Units
9. On-Time Delivery
On-Time delivery is linked to takt time (the rate needed to complete a product to meet customers’ demands). Managers can use this KPI to measure the percentage of orders delivered on time. For statistical relevance, the metric is tallied monthly with the goal of 100% fulfillment. With this information, you can determine whether you're meeting customer demand by respecting the lead times established on the production schedule. You can also identify areas of improvement to achieve customer satisfaction and avoid customer returns.
Formula: On-Time Delivery = (number of Units Delivered On-Time x 100) / number of Units Delivered
10. Machine Set-Up Time
Machine setup and changeovers are among the primary reasons for downtime. Whenever there is a change of programs, materials, tools, or parts of a machine, chances are that it will be at a standstill at some point.
Such situations can be very costly to manufacturers, explaining why tracking machine setup time is imperative. You can reduce downtime and increase the efficiency of your production line schedules by cutting down on changeover time.
11. Machine Downtime
We often hear about uptime, machine downtime is also a critical manufacturing KPI to track on its own. It represents the total time that a machine is not producing products. This can be attributed to machine setups, personnel issues, routine preventative maintenance, or equipment breakdowns that shut down the machine unexpectedly.
Sometimes, unscheduled downtime can occur, causing considerable losses. Forbes reports that unplanned downtime could cost manufacturers up to $50 billion annually. You don't want to be part of this statistic. Track this metric to discover what you need to do to stop your machines from shutting down and reduce maintenance costs.
Formula: Machine Downtime = Downtime Hours / (Downtime Hours + Operational Hours)
Human indicators
12. Labor as a Percentage Cost
More often, labor costs are miscalculated in the budgeting process. It's worth noting that these costs do not only refer to employee paychecks. You should include other benefits like paid time off, insurance costs, taxes, and sick days. Measuring your labor as a percentage cost gives you a clear picture of how much it's costing you, helping you identify opportunities to optimize or reduce costs.
Formula: Labor Cost Percentage = (labor cost / gross sales) x 100
13. Employee Turnover Rate
Successfully hiring and training new employees requires a significant amount of money. Not to mention that new employees take time to gain confidence in operating machinery and equipment. For this reason, you need to keep your current workforce happy to reduce the amount of turnover and maintain consistent, efficient production lines.
Formula: Employee Turnover Rate (%) = (Employees who left x 100) / Avg. number of Employees
14. Total Recordable Injury Frequency Rate (TRIFR)
This performance indicator is essential for measuring the total number of workplace safety incidents requiring medical attention. It is the ratio of this accident rate to the number of hours of exposure to risk, multiplied by one million. The TRIFR thus helps the company to find solutions to reduce the risk of accidents, and therefore of absences and work stoppages.
Formula: (Total number of workplace fatalities and injuries requiring medical treatment x 1 000 000) / Employee total hours worked
15. Overtime Rate
By comparing the amount of overtime worked to the number of hours planned, this indicator makes it possible to identify points of inefficiency in the planning of tasks, but also in the placement of personnel, for more effective management.
Formula: Overtime Rate (Percentage) = (Overtime Hours x 100) / Regular Hours
Conclusion
Lean manufacturing KPIs help manufacturing companies maintain a sustained production rate while reducing waste and ensuring the highest quality output. At Proaction International, we help improve your operations' efficiency by rethinking your best practices, implementing the right manufacturing KPI dashboard, optimizing your production line, and eliminating all forms of waste.
