The 5 “Golden Metrics”

The 5 “Golden Metrics” to Know in order to Drastically Improve Manufacturing Operations

In Lean Manufacturing consultant Bill Waddell’s paper entitled, “Manufacturing’s Five Golden Metrics,” Waddell outlays what he believes all manufacturing operations managers should know.

His 5 golden metrics center on performance management.

Waddell opens with:

One widely discussed aspect of lean manufacturing is performance measurement. This makes sense because it is probably the most important element of manufacturing management. You get what you measure. Because most companies measure performance by metrics based in traditional accounting principles, they get traditional — that is to say, not very lean — results.

A good provider of any data used as any part of your business intelligence should be involved intimately with your organization. They should offer controlled and accurate data that is presented in a manner that speaks specifically to your organization’s objectives and initiatives, producing KPIs specific to departments responsible for their consideration.

With that stated and clear, Mr. Waddell goes on to state how to optimize manufacturing operations with what he calls the 5 Golden Metrics of Manufacturing:
There are five golden metrics that really matter:

Total cost, total cycle time, delivery performance, quality and safety. All others are subordinate. Activities and efforts in manufacturing that result in improving one or more of these performance measurements, without degrading performance to any of the others, support good performance. Actions resulting in improvements to subordinate metrics but not to any of these five are meaningless.

Total Cost

The only meaningful measurement of total cost is on a cash basis. All money spent on manufacturing must be summarized and the total compared to the previous period — not to a flexible budget or a plan. What matters is whether the total cash spent on manufacturing was more or less than it was in the previous period. It is important that this cost figure is exclusive of all allocations, and does not exclude sales, general and administrative expense.

The only exceptions are that major capital investment spending is excluded, and expenses are adjusted for accounts receivable and payable. While these amounts must be added back in to create a total lean-accounting-based income statement, manufacturing performance should be measured as if payment were made at the time materials and services were delivered, and payment were collected at the time finished goods were shipped to an outside customer.

Total Cycle Time

Total cycle time is calculated by studying major purchased components and determining the total days on hand of each one. The total days on hand is the sum of all of such components in the plant regardless of form — still in its original purchased state, embedded in assemblies or subassemblies, in a modified state in work-in-process inventory, or embedded in a finished product.

That total days on hand figure is divided by the planned shipments per day for all products that require that component. For example, if there are 5,000 of a component in the plant in all its various forms, and it goes into two final products that are each projected to ship 100 per day, the cycle time for that component is 5,000/200 = 25 days. The total cycle time for the plant or for an individual value stream within the plant is the cycle time of the component with the greatest cycle time.

It is important to note that only low-cost, bulk items can be excluded from this calculation, and that the total cycle time is not an average cycle time, nor is it weighted in any way for the cost of the component. This is a measure of manufacturing performance — not financial inventory.

Delivery Performance

Delivery performance is the percentage of customer orders shipped when the customer requested them to be shipped. It should not be modified to accommodate company policies or shipping promises. It is purely a metric of manufacturing’s ability to meet customer requirements.

Quality

What is meant by quality will vary by company, but it must be quality in the eyes of the customer. As a result, customer returns or warranty claims are typically the basis for this metric. It is not a summary of internal quality metrics. It is important to realize that those metrics are only important to the extent that they provide information management can use to minimize cost, improve flow and meet customer quality requirements.

Safety

The standard metrics of accident/incident frequency and severity are sufficient.

These five measurements are manufacturing’s bottom line. All efforts must be aimed at improving one or more of them without degrading performance of any of the others in order to optimize manufacturing. All other performance metrics are subordinate and useful to management only to the extent that they help improve performance of one of the golden five.

As posted by Business Intelligence Data Manufacturing // Adam Robinson

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