If you’re running a manufacturing or construction firm, it’s important to know whether you’re “winning” or “losing” from a production standpoint. How many units did you produce? How does this compare to your goal?
Ideally you should be tracking this every day. This way if things aren’t going well, you’ve got time to take action before things get too far out of whack.
To track this information, I recommend using a daily key performance indicator (KPI) report card. Distributing this daily gives everyone from top management to your foremen and supervisors a clear understanding of where things stand.
Calculating your KPI goal
Of course, in order to determine your “units produced” KPI goal you need to first understand your fixed and variable costs. Knowing these lets you calculate your break-even point.
Let’s do the math. If, for example, your fixed costs are $400,000/month and your gross profit is 20%/unit, your breakeven point is $2,000,000/month in sales. If your sales price is $200/unit, this translates to 10,000 units per month. On a simple 20-day month, this means your daily production KPI goal is 500 units.
Of course, most people don’t go into business to just break even. Say you want to clear an operating profit of $200,000/month. Now you need to make and sell another 5,000 units/month (250 units/day), which makes your daily production KPI goal 750 units.
Matching your production goals to your workforce (and vice versa)
I believe that for most businesses the best way to approach this KPI is by looking at how many units you want to produce each day given the work force that you have. Why? Because typically most businesses are more successful if they can keep their workforce relatively static, rather than letting it fluctuate wildly based on variable production needs. This lets you avoid going into overtime mode because you don’t have enough people, or end up with the expense of excess capacity.
Yes, reaching the ideal production level per man hours employed can be easier said than done, but it’s certainly a worthy goal. And having a daily KPI report card can help get you there!
Need help getting a daily KPI report card in place? Give me a call. As your part-time CFO, this is one of the many services that I provide.