It seems we cannot go through the day with out measures and controls. Often we take them for granted, but cannot live without them. We measure the fuel in our vehicles and calculate miles-per-gallon. We control the temperature in our homes and track the balance in our checking account.

However, when it comes to our business, we tend not to measure as much. Sure, we measure accounting numbers – but what about operations? It isn’t necessarily that we do not want to measure, but rather that we may not know what to measure. In this article, I want to address specific Lean metrics. Responding to your organization’s performance in a balanced way requires evaluation of metrics. Though there are many things that can be measured in your company, the right ones need to be selected for your needs. Metrics fall into categories such as financial, behavioral and core-processes. I will provide some examples of core-process here; however, there are upwards of a hundred I can think of throughout the organization in all three categories. Core-process metrics look at results and productivity. Examples of result-based metrics are measures such as on-time-delivery (OTD), dock-to-dock (DTD) or order-fulfillment-lead-time (OFLT).  Whereas productivity based metrics could be inventory turnover (ITO), build-to-schedule (BTS) or overall equipment effectiveness (OEE).

Results Metrics
On-time-delivery reflects whether you have met your customer’s expectation for having the right product, at the right place, at the right time. OTD is calculated on an order-by-order basis at the line item level using the following formula:OTD = line items received on time ÷ total line items received

Dock-to-dock measures how long it takes raw materials coming into your plant to be turned into finished products. Improving your DTD time can improve your ability to make on-time deliveries. DTD is calculated using the following formula: DTD = Total number of units ÷ end-of-line rate

The end of line rate is determined as: End-of-line rate = units manufactured per week ÷ production hours per week

Order-fulfillment-lead-time is the average time from your company’s receipt of an order and when you send an invoice for the finished product. It is similar to DTD, but includes order-entry, engineering changes, production planning and procurement lead-time as well as invoicing time after production. You can break down the individual function such as:
•  Sales Order (SO) – time from when order is received until
placed in the production schedule
•  Production Schedule (PS) – time from being placed into the
production schedule until actual production begins
•  Manufacturing (M) – time in fabrication
•  Shipping (S) – time from when the unit is delivered to shipping
until it leaves the plant
•  Invoicing (I) – time accounting in notified the unit has shipped
until the invoice is sent

So, taking all of these into account we can calculate OFLT with the following formula: OFLT = SO+PS+M+S+I

For all of these result metrics we want to track the numbers and work to improve the metric.

Productivity Metrics
Inventory Turnover represents how fast your company moves raw material through to sales. High ITO rates improve your return-on-assets and provides less dollars tied up in excess inventory. Most companies struggle with low, single-digit ITO rates. The goal is to achieve double-digit ITO rates. Highly efficient companies are able to achieve triple-digit ITO rates. 

The formula to calculate ITO is: ITO = Cost of Goods Sold (COGS) ÷ Average Inventory 

If you are having difficulty determining your average inventory, just use year-end inventory (taken from your company’s balance sheet). Higher inventory turnover numbers result in fewer dollars tied up while freeing storage space to be used for production and making money.

Build-to-schedule measures the percent of units scheduled for production on a given day that are actually produced on the correct day, in the correct mix and in the correct sequence. BTS can be complex. However, it enables you to lower your inventory levels, can indicate potential overproduction and will improve your DTD time. 
BTS is calculated using the following formula: BTS = volume performance x mix performance x sequence performance

Volume Performance = actual number of units produced ÷ Scheduled number of units

Mix performance = actual number of units built to mix ÷ Actual units produced or units scheduled to be produced

Sequence performance = actual number of units built-to-schedule ÷ Actual units built to mix

Overall equipment effectiveness measures the availability, performance efficiency and quality rate of your equipment. A high OEE provides a more stable process with improved production predictability. This in turn can improve your BTS. OEE is calculated using the following formula: OEE = equipment availability x performance efficiency x quality

This calculation, with an easy to use table, was provided in the August/September 2011 issue of Tracks (see NATM Tracks archives at www.natm.com). As with the build-to-schedule metric OEE takes several factors into account. However, with these metrics, high throughput is achieved along with lower rework and scrap costs leading to improved total costs.These metrics provide just an example of the many available throughout the organization and as we have seen here in your core-processes our goal is to select the metrics that accurately portray your company’s performance. Additionally, metrics can help employees understand how well they and the company are performing. This encourages improvement by focusing employees’ attention and efforts on the organization’s goals.  In deciding the metrics to use, consider the total number of measures you use. Too few might not provide you with enough detail to improve your operations whereas too many may confuse employees and slow your improvement efforts. Either way, take time to research metrics that can help your organization and put them into action in your organization.