KPIs of the new digital manufacturing setting - Eric Whitley presents the plant manager’s guide to measuring success
Digital transformation is occurring in manufacturing businesses at an exponential rate. A recent Gartner survey reported that 31% of the surveyed CEOs place digital transformation as their number two strategic priority, yet half have no metric for digital success. When justifying expenditure in post-investment reviews, correlation does not imply causation even though EBITDA may be up. Additionally, at what point does an investment cross the threshold of diminishing returns?
The development of meaningful operational metrics requires revisiting the original investment premise and linking to the business context.
Key performance indicators (KPI) development must be not only relevant to an industry but also laser-focused on a specific organisation. Businesses looking for lists of KPIs that they may borrow from are missing the point and inviting mediocrity.
The terms smart factory and digital transformation are often used concerning greater productivity and efficiency in manufacturing. However, what those terms mean for one business will differ from a similar business around the corner.
Start with the tenet that central to all business is the push for value creation. The three pillars of value creation are: client satisfaction; business improvement; and workforce productivity. Your digital transformation should be positively impacting at least one of these pillars. From that point, drill down to understand metrics meaningful to the employees, with the ability to influence decision-making within the firm.
When brainstorming metrics, consider those that spotlight the contribution margin, or value-add, produced by the digital transformation. Use the three pillars of value creation to isolate a metric and capture historical performance data as a baseline against which to measure.
If the digital transformation affects client satisfaction, you may track on-time-in-full (OTIF) delivery achievement, manufacturing cycle time, or customer returns as the KPI upon which to focus. A business improvement focus might target overall equipment effectiveness (OEE), capacity utilisation, or work in progress (WIP) inventory turns. When measuring workforce productivity, consider overall operating efficiency (OOE), revenue per employee, or reportable health and safety incidents.
Whatever your selection, be sure to calculate the value that each percentage gain adds by reducing costs or increasing profitability. The cumulative contribution margin from carefully selected KPI becomes invaluable data, as it not only justifies the previous investment but also identifies proposed investments that may, at best, provide marginal returns.
KPIs must be more than vanity metrics; they exist to influence decision-making. Where possible, they should be leading indicators that highlight changes or trends responsive to intervention. If the KPI is too strategic or impacted by multiple variables, its value is diluted. Meaningful KPI should have a granularity providing insight and the easy identification of causality.
Define thresholds within which inevitable and acceptable variation may occur. When the metric triggers the boundary, clear, predefined procedures and processes may be rapidly deployed for rectification and recovery.
Remember the three 'A's of writing KPI: audience, alignment, and adequacy.
KPIs should be written with the audience in mind. A meaningful metric for a chief information officer (CIO) is probably meaningless to a maintenance shift leader and vice-versa. In the same way that you cascade annual objectives to ensure everyone's efforts support the chosen annual business focus, pursue a similar tactic with your KPI.
Operational metrics should roll up into tactical measures, which support strategic KPIs. A synergistic effect results from an aligned and united focus on the variables deemed important for business success. Each must supply clarity and insight to the audience for whom they're developed.
Remember, too, that quantity does not enhance understanding. An adequate number of KPIs is between four and eight, having little to no overlap. Metrics that tell the same story add no value, neither do twenty metrics that confuse.
An interesting side note to the Gartner survey introduced at the beginning of this article is an earlier CEO survey Gartner also sponsored. In this survey, 56% of CEOs say digital investments have improved net profit. With 53% of those same CEOs saying they have no metrics to measure digital transformation impacts, the next question must be - how can you tell?
Digital transformation is accelerating as new technologies and new products become integral to manufacturing. Maintaining a grip on the growth, expenditure, and analysis of digitisation requires identifying metrics that demonstrate the tangible business impacts of transformation initiatives, providing a clear picture of your digital return on investment (ROI).
Eric Whitley is with L2L