Due to the disruption in the global markets and forced shutdowns, the COVID-19 pandemic has led to conditions that negatively affected most manufacturers. Noticeable effects of the pandemic include weak commodity prices, trade tensions, and restrictions, such as with Canada. In turn, the value of industry exports has declined. These lower prices have limited the value of domestic products sold. Overall, this has caused a reduction in domestic demand across the manufacturing supply chain.
Regardless of the constant reminders of a post-pandemic economic environment, IBISWorld anticipates revenue for the manufacturing sector to continue to grow over the next five years.
This article dives into manufacturing benchmarks and how you can then use this information to drive growth in your business. By reviewing some of the key benchmarks and metrics that surround the manufacturing industry, management can begin to understand how their manufacturing company is performing compared to their peers in the industry.
Cost Structure Benchmarks – Manufacturing Industry
- PROFITS – expected to account for 7.5% of earnings before interest and taxes in the manufacturing industry for 2021. Items that affect the industry’s profit include the overall trading environment, demand for products, input prices, cost strategies implemented by individual operators, etc. Despite falling commodity prices leading to a slight reduction in purchase costs, the anticipated declines in selling prices for operators and a decline in overall demand will likely outweigh this benefit.
- WAGES – expected to account for 12.1% of revenue in the manufacturing industry for 2021. This has increased over the past five years due to the strong economy and low unemployment pre-COVID-19. The wage share of revenue can vary dramatically across the manufacturing industry. Companies with high technological integration degrees that operate in process industries see lower wage costs, while those requiring research and development from skilled labor see higher wage costs.
- PURCHASE – costs are expected to account for 54.1% of revenue in the manufacturing industry for 2021. This consists of raw materials purchased from suppliers, along with packaging for the manufactured goods. This depends on the specific manufacturing industry in which your company operates, based on the need for raw materials and other commodities for the production process. Prices for crude oil, lumber, or steel could lead to changes in the percentage based on these commodities’ prices.
- RENT & UTILITIES – Rental costs for the sector is expected to account for an estimated 0.7% of revenue in 2021. Utility costs for the sector are anticipated to account for 1.5% of revenue in 2021. This includes power and electricity costs. Based on the level and size of production, these costs fluctuate throughout the industry.
- DEPRECIATION – expected to account for 3.1% of revenue for 2021, based on the industry’s subgroup, this could range from 0.3% up to 4.7%. This varies based on the machinery and equipment’s lifespan, replacement costs, and the overall machinery and equipment needed for the production process.
Metrics – Manufacturing Industry
Base metrics in any company can revolve around quality, cost, delivery, safety, morale, or other items. Your company’s best metrics will depend on your customers, shareholders, management, and employees’ value. Metrics help to drive desired changes and to promote goals within the company. The following is a brief outline of the process of setting up metrics:
1. Create Metric Goals – Decide what information is most critical for each management level to help improve their operations. Choose a metric that will help measure this information and a benchmark the metric can be compared against. Benchmarks can include industry information, budgets, strategic plans, or even internal goals.
2. Develop a Plan for the Metric – A metric plan can include a title, description for the metric, documenting the goals or objectives the metric is linked to, potential decisions to be made based on analysis of the metric, who collects and analyzes the data required, how often to measure it, and how the metric will be reported.
3. Analyzing the Metric – Once enough data is available related to the metric, it should be compared to the plan’s benchmark. Ways to analyze include setting the lowest and highest acceptable numerical value, a target value, or another method based on the metric type. Analyzing also includes determining when a metric outlast its usefulness and should be discontinued if no longer providing a benefit.
4. Display the Metric – The metric should be displayed so all affected employees can access the information. The information should be presented as often as you desire the change in behavior the metric was built to measure.
5. Use Metrics to Change Behavior – Metrics are meant to change behavior. Everyone needs to see a need for the metric and how the metric will be used to create a benefit. It is essential to communicate and educate all employees on why the metric is being used and how it will improve operations. If metrics are not meeting the benchmark, explain to everyone why this may be an issue and negatively impact the company. If metrics are exceeding the benchmark, consider offering rewards or incentives for a job well done.
The best metrics for your manufacturing company will depend on your current situation. They may be metrics used throughout the industry or metrics specific to something your company is working to accomplish. The following examples are standard metrics used in the manufacturing industry:
- On-Time Delivery – This metric is the percentage of times customers receive the entirety of their ordered, manufactured goods to the correct specifications and delivered at the expected time.
- Capacity Utilization – Indicates how much of the total manufacturing output capacity is being utilized at a given point in time and is measured as the actual manufacturing output ratio to potential full capacity output.
- Cycle Time – Measures the time it takes to produce a given product from when the order is released to production to make it to finished goods.
- Changeover Time – Measures the time it takes to switch a manufacturing line from making one product to a different product.
- Yield – Indicates a percentage of manufactured products correctly and specifications for the first time through the manufacturing process without scrap or rework.
- Customer Returns – A measure of how many times customers reject products or request returns based on receipt of a bad or out-of-specification product.
- Throughput – Measures how much product is produced on a machine, line, unit, or plant over a specified period.
- Schedule Attainment – A measure of what percentage of time a target level of production is attained within a specified schedule.
- Overall Equipment Effectiveness – This metric is a multiplier of (Availability x Performance x Quality). It is used to indicate the overall effectiveness of a piece of production equipment or an entire production line.
- Planned Maintenance Percentage – This metric indicates how often scheduled maintenance occurs versus more disruptive/unplanned maintenance.
- Asset Availability – The ratio of downtime to operating time for assets.
These are just a few examples and are not a complete list of the potential metrics your manufacturing company could use. As mentioned before, we recommend developing goals and a plan for which metrics you feel are most important for measuring the things you would like to see changed within your manufacturing company.
How can we help your manufacturing business plan for the future? We work with approximately 100 Minnesota manufacturing companies helping them grow with tax, accounting, and consulting solutions. For more information on benchmarking your business or budgeting and forecasting services, please email us at [email protected].