I’ve spoken to a number of industrial product manufacturing business owners who are interested in improving their firm’s operational performance, but aren’t exactly sure where to start.
Here are a few KPIs to evaluate yourself against to determine which areas of the business may need attention.
Sales per Employee
A good measurement of how efficient you are in your business of controlling costs and maximizing profitability is sales per employee.
A good number for a machine or fabrication shop would be somewhere between $300 – $400k per employee.
In other words, for an operation making 15% EBITDA/Sales would be around $300k – $350k per employee.
That equates to around 17- 20 employees for a $6m in revenue business.
If your business has a lower ratio, there could be some opportunities for efficiency improvement.
EBITDA to Cash Conversion
You should be looking to convert 100% of your EBIDA from operations
Now obviously, this excludes depreciation, cash from/for investing, and funds
But, if you are not at 100% conversion rate, there may be opportunity for
Working Capital vs. Revenue
Is your working capital (generally in a manufacturing business, we are talking inventory plus receivables minus payables) less than 10% of revenue?
Thus, if you have $6m in annual revenue which is generating $900k in EBITDA, your working capital should not be greater than $600k.
If higher, there’s potential for improvement which directly effects cashflow in a positive way.
Waste Cost vs. Revenue
Is your waste cost (scrap, rework, warranty) less than 1% of revenue?
I always hated this one because it is like burning money needlessly. I would say that 1% is an acceptable performance in this category, but not world class.
Anything above that certainly indicates room for improvement.
Supply Chain Performance
Is your supply chain contributing to your success in regards to quality, OTD, working
capital reduction, new product development? The goal should be 0 defects, 100% OTD, Kanban, VMI, or Consignment terms for inventory. Payment greater than 30 days.
Do you have world class safety performance (incident rate of < 2, no lost time accidents, no workers comp claims)?
Operational improvements are a big source of better top and bottom line numbers.
Butyou might be surprised how much excellence in these other areas can contribute to increased profits and cash flow.
The bottom line is: any underperformance in these areas represents potential profit and growth left on the table that you could be taking advantage of.
Define it, measure it, improve it!