By Karen Shenk, CPA, CVA, CCIFP, CEPA, CFE and Evan Flynn
In an industry defined by precision, efficiency, and margin control, manufacturers must rely on more than just gut instinct to make operational decisions. Key Performance Indicators (KPIs) serve as the backbone of performance measurement, enabling leadership teams to track progress, identify inefficiencies, and align daily operations with long-term strategic goals. Most organizations look at big picture financial metrics like gross margin by product line, return on assets, and productivity by employee, but there are other KPIs specific to manufacturing that can be critical to streamlining operations.
Here, we outline some of the most impactful KPIs for manufacturing companies, including how each KPI is calculated, industry benchmark standards, the recommended reporting frequency for leadership, and strategies to structure goals around them.
Key Points
- Manufacturing business owners should regularly review key financial reports, even without a financial background.
- Monthly reports should include the income statement, balance sheet, cash flow, KPIs, and reconciliations.
- Quarterly and annual reports should cover inventory checks, tax filings, and CPA-prepared statements when applicable.
- Watch for red flags like unexplained changes, negative balances, or outdated receivables.
- Consistent oversight helps prevent errors, detect fraud, and support better decision-making.
What to Require from Your Finance Department
- Income Statement (Profit & Loss) (monthly)
The income statement should be for the current month and should include the same month last year, year-to-date, and last year’s year-to-date. For example, if your business runs on a calendar year, and you’re looking at May’s packet, you should see May of the current year, May of the prior year, January-May (YTD) of the current year, and January through May (YTD) of the prior year. This way, you can compare the month to the same month last year, and you can compare the year-to-date to the prior year.
Also consider income statements by location or by product line. This can help identify specific areas of strength or weakness and provide insight to help make strategic decisions.
2. Balance Sheet (monthly)
Similar to the income statement, you should request the balance sheet compared to the end of the last fiscal year and the balance sheet as of the same month last year. Again, if you’re looking at May, you’d request May of this year, May of last year, and December of the prior year.
3. Cash Flow Statement (monthly)
This should include the current month and year-to-date of the current year.
- KPIs specific to your industry (monthly, although some software allows for getting certain KPIs daily, and in real time)
- Bank Reconciliation Reports as of the current month-end (monthly)
- Accounts Receivable and Payable Aging Reports as of the current month-end (monthly)
- Inventory Reports (monthly)
- Budget vs. Actual Report (monthly)
- Tax Filings and Payments (quarterly, annually)
- Inventory Physical Count Reconciliation (quarterly, annually)
- Fixed Asset Register or Depreciation Schedule (annually)
- Audited, Reviewed, or Compiled Financial Statements from your outside CPA, if applicable (annually)
- If you receive prepared financial statements from an outside party, also ask for the journal entries made in preparing the financial statements.
Key Questions and the KPIs That Help Answer Them
1. How efficiently are our machines and equipment operating compared to their maximum potential?
Answer: Overall Equipment Effectiveness (OEE)
What it Measures:
OEE is a comprehensive metric that evaluates how efficiently manufacturing equipment is used. It combines availability, performance, and quality into a single percentage.
Formula:
OEE = Availability × Performance × Quality
- Availability = Run Time / Planned Production Time
- Performance = (Ideal Cycle Time × Total Count) / Run Time
- Quality = Good Count / Total Count
Benchmarks:
- Excellent: 85%+
- Competitive: 60-75%
- Needs Improvement: Below 60%
Planning Tip:
Track OEE by line, shift, and operator to see where things are slowing down or running well. This helps spot bottlenecks and learn from high performers. If OEE drops, bring together the operations, maintenance, and quality teams to find and fix the cause. Set simple, realistic goals, like improving OEE by 3-5% each quarter, to keep making steady progress.
2. What percentage of our products are manufactured the first time correctly, without needing rework or repairs?
Answer: First Pass Yield (FPY)
What it measures:
FPY reflects the percentage of products manufactured the first time correctly without rework.
Formula:
FPY = (Good Units Produced on First Attempt / Total Units Produced) × 100
Benchmarks:
- Excellent: 98%+
- Competitive: 95-98%
- Needs Improvement: Below 95%
Planning Tip:
Leverage FPY to assess quality at every stage of the production process, not just at final inspection. In-process monitoring helps identify where defects and rework are most common, allowing for targeted improvements. Reducing rework during production can uncover hidden cost savings by minimizing excess labor, material waste, and shipment delays. To drive consistent quality improvements, set FPY targets by department and align them with operator training programs and preventive maintenance efforts.
3. How quickly are we selling and replacing our inventory over a given period?
Answer: Inventory Turnover Ratio
What it measures:
This KPI shows how many times a company’s inventory is sold and replaced over a period (usually a year).
Formula:
Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory
Benchmarks:
- Ideal: 6-10 times per year (varies by industry)
- Too Low: Less than 4 times per year indicates excess stock or slow-moving inventory.
- Too High: More than 12 times per year indicates a risk of stockouts or poor planning.
Planning Tip:
Pairing inventory turnover with demand forecasting helps manufacturers set precise turnover goals by product, balancing stock efficiency and availability. This reduces excess inventory and holding costs while preventing stockouts that disrupt production. It also identifies slow-moving items to discount or reorder less, freeing up cash for faster-selling, higher-margin products.
4. Are we consistently delivering products or services to customers by the promised deadlines?
Answer: On-Time Delivery
What it measures:
OTD tracks the percentage of orders delivered on or before the promised date. This key metric gives insight into supply chain reliability, customer satisfaction, and operational efficiency.
Formula:
OTD = (Orders Delivered On Time / Total Orders) × 100
Benchmarks:
- Excellent: 95% or higher
- Competitive: 90-94%
- Needs Improvement: Below 90%
Planning Tip:
On-Time Delivery (OTD) is a crucial metric that provides clear insight into supply chain reliability, customer satisfaction, and overall operational efficiency. By integrating OTD tracking directly into an ERP system, it allows for real-time visibility across production, warehousing, and logistics functions. This integration helps identify bottlenecks early and enables faster response to potential delays. Setting short-term goals on a weekly basis keeps teams focused on immediate improvements, while establishing longer-term quarterly targets drives sustained performance gains. Together, these goals foster better coordination and communication across departments, ensuring that delivery commitments are consistently met and customer expectations are exceeded.
5. How much of our production ends up as waste or unusable material?
Answer: Scrap Rate
What it measures:
Scrap Rate measures the percentage of materials wasted during production.
Formula:
Scrap Rate = (Scrap Material / Total Material Used) × 100
Benchmarks:
- Excellent: Under 1%
- Competitive: 1-5%
- High Waste: Over 5%
Planning Tip:
To make scrap reduction efforts more effective, tie scrap rate goals directly to specific product lines and material types. This targeted approach allows the ability to address high-waste areas with tailored strategies rather than applying broad, less impactful goals. Encourage operators and production teams to consistently report root causes such as machine issues, material defects, or process errors. Consider incentivizing teams for identifying and implementing improvements that lead to measurable reductions in waste. This not only boosts accountability but also fosters a continuous improvement culture across production lines.
6. How much does it cost us to hold inventory over a given period?
Answer: Inventory Carrying Costs
What it measures:
Inventory Carrying Costs represent the total expenses associated with holding inventory, including storage, insurance, taxes, depreciation, and opportunity costs. This KPI helps management understand the financial impact of excess inventory and informs decisions about optimal stock levels.
Formula:
Inventory Carrying Cost = (Average Inventory Value × Carrying Cost Rate)
- Average Inventory Value is typically calculated over a year.
- Carrying Cost Rate includes costs for storage, insurance, taxes, depreciation, and cost of capital (often expressed as a percentage).
Benchmarks:
- Ideal: 20-30% of average inventory value per year (varies by industry)
- Too High: Greater than 30% indicates excessive inventory or inefficient storage practices.
- Too Low: Less than 15% may suggest underestimating the true costs or risks of stockouts.
Planning Tip:
Regularly review carrying costs by product category and warehouse location. Use this KPI alongside inventory turnover to identify slow-moving or obsolete stock. Reducing carrying costs can free up capital for growth initiatives and improve overall profitability. Consider strategies such as just-in-time inventory, renegotiating storage contracts, or investing in inventory management technology to optimize carrying costs.
7. Are our performance reports being generated often enough, and do they reflect progress toward our strategic objectives?
How Often Should KPIs Be Reported to Leadership:
- Daily: OEE, FPY, scrap rate (for operations teams)
- Weekly: Production schedule adherence, OTD, quality incidents
- Monthly: Inventory turnover, customer satisfaction, profit per unit
- Quarterly: Trend analysis and strategic KPI goal alignment
Building Goals Around KPIs:
To make KPIs actionable, consider the following:
- Align with Strategy: KPIs should support core business objectives (e.g., faster delivery, lower rework).
- Use SMART Goals: Keep them Specific, Measurable, Achievable, Relevant, and Time-bound.
- Set Tiered Targets: Establish both baseline and stretch goals.
- Tie to Incentives: Link key KPIs to performance bonuses or recognition.
- Review Often: Adjust goals as capacity, demand, or tools change.
Planning Tip:
Dashboards should be visible to leadership and floor-level managers. Consistent review builds accountability and allows for proactive decision-making rather than reactive problem-solving.
Conclusion
Establishing and tracking the right KPIs is essential for manufacturers aiming to boost efficiency, improve quality, and protect margins. Metrics like those described above offer valuable insights, but it’s important to remember that these are broad industry benchmarks. Ideal targets can vary based on the specific manufacturing process, product type, and operating environment. The real value comes from pairing KPIs with regular reviews, realistic goals, and data-driven action plans.
How Trout CPA Can Help
Need help building or fine-tuning your KPI dashboard? Visit our Contact Us page. Our advisors work closely with manufacturers to turn performance data into strategic results.
About the Authors
Karen R. Shenk, CPA, CVA, CCIFP, CEPA, CFE
Karen joined Trout CPA in 2012 after working at a firm in the Chicago area since 2004. She graduated from Trinity International University with a Bachelor of Science degree in Business, with an emphasis in Accounting and a minor in Philosophy. She chairs the firm’s Manufacturing & Distribution Industry Group and is an active member of the Construction & Real Estate Industry Group and the firm’s Executive Committee.
As a professional, Karen gains a deep understanding of her clients' industry, goals, and needs so she can better advise them. She enjoys working closely with entrepreneurial business owners and their finance departments to contribute to their success. Her experience in manufacturing, distribution, and construction positions her to provide insightful advice on complex industry-specific issues. Her experience with transactions and succession planning gives her the ability to advise clients who want to explore their options.
Evan Flynn
Evan joined Trout CPA in August of 2023. He graduated from Penn State University with a Bachelor of Science in Accounting and a minor in Information Sciences and Technologies in 2022. As an Associate, Evan assists with tax preparation, assurance services, and outsourced accounting.
