Manufacturing KPIs for better financial and workforce decisions
Key takeaways:
KPIs (key performance indicators) help leaders untangle the connections between financial decisions, workforce decisions, and business results.
Manufacturing KPIs help leaders look backward at what caused a problem and forward at what may happen next.
Manufacturing KPIs are most useful when financial, workforce, and production numbers are mapped together.
Manufacturing KPIs can help leaders act early before small problems become bigger issues with margin, staffing, quality, or customer satisfaction.
How do I untangle the cause of my business challenges?
It would be nice if every business result came with a little tag that said where it originated. If the cash shortage came labeled with “created by poor inventory planning.” Or the late deliveries came stamped “made by staffing gaps.”
They don’t, of course, and figuring out what’s causing sub-optimal results in your business can drain off energy that could be used to solve the problem.
Even if you don’t have those imaginary little labels, you do have a tool you can use to make tracking down the connections between financial and human resources decisions and business results: manufacturing KPIs.
What are manufacturing KPIs?
Manufacturing KPIs (key performance indicators) are exactly what they say they are: concrete metrics that help business leaders understand company performance. The key is choosing the right KPIs to help you make strong strategic and tactical decisions.
Why manufacturing KPIs matter for financial and workforce decisions
Remember that tangle of business cause and effect we mentioned earlier? That’s the reason KPIs are so important.
Take this example: Production volume is up. Great news! Right? Maybe, but if overtime is climbing, scrap is increasing, or job margins are shrinking, more production volume might not equal higher profit. How can you tell? Manufacturing KPIs.
Or, let’s look at a human resources scenario. Demand is up. Great! But so is overtime, which could signal understaffing, scheduling problems, or training gaps that could lead to long term problems. How do you know? KPIs!
Financial KPIs can show whether production activity is turning into healthy margin and cash flow. Workforce KPIs can show whether the team has the capacity, stability, and support to keep operating well. Operational KPIs can reveal where delays, rework, downtime, or quality problems are creating pressure on both people and profit.
This is key: not every KPI works the same way. Some KPIs help explain what already happened, while others give leaders an early warning about what may happen next.
High turnover, for example, is usually a symptom that requires looking backward toward hiring, onboarding, management, compensation, workload, or culture. Rising overtime works the same way. It could point to demand, staffing, scheduling, absenteeism, or workflow problems that are already putting pressure on the team.
Other KPIs help leaders plan ahead. Machine downtime, for instance, may signal that production will slow, labor productivity will drop, delivery timelines may slip, and overtime may increase unless you adjust quickly.
The value is in mapping these KPIs together, not reading each one in isolation. If you do that, you have a more complete picture of your business, and a structure for decision making.
Financial KPIs for manufacturing
While all parts of a business are ultimately interconnected, it’s useful to put KPIs into broad categories for tracking. Let’s look at financial KPIs first. These KPIs help manufacturers understand whether the work moving through your lines is actually creating healthy cash flow and growing profit.
Gross margin
Definition: Gross margin is the percentage of revenue left after accounting for the direct costs of production, like materials, direct labor, and equipment rental.
Equation: Gross margin = [(Revenue - COGS) / Revenue] × 100
Look backward: A shrinking gross margin could indicate rising material costs, labor inefficiencies, excess scrap, rework, or pricing issues.
Look forward: Gross margin can also help you anticipate whether current production activity is likely to create healthy profit. If margin is tightening, you may need to revisit pricing, estimating, vendor costs, labor planning, or production efficiency.
Job profitability
Definition: Job profitability is the profit generated by a specific job, product, project, or customer account.
Equation: Job profitability = Total job revenue - Total job cost
Look backward: Low job profitability could indicate underpricing, material waste, poor estimating, excess labor hours or inefficient processes.
Look forward: Job profitability can also help you decide which work is worth pursuing again. If certain jobs, products, or customers consistently produce low profit, that may point to future pricing changes, scope adjustments, staffing decisions, or a need to rethink your customer mix.
Cost of goods sold
Definition: Cost of goods sold, often called COGS, is the total direct cost of producing goods sold during a specific period. For manufacturers, that usually includes direct materials, direct labor, and manufacturing overhead tied to production.
Equation: COGS = Beginning inventory + Production costs added during the period - Ending inventory
Look backward: If your COGS are going up, it could indicate higher material prices, increased labor costs, overhead pressure, vendor pricing changes, production waste, purchasing issues, or inefficient use of labor and materials.
Look forward: COGS can help you anticipate pressure on gross margin and cash flow. If production costs continue rising without pricing, purchasing, staffing, or process adjustments, the business may become busier without becoming more profitable.
Labor costs as a percentage of revenue
Definition: Labor costs as a percentage of revenue is the portion of revenue that’s spent on payroll, payroll taxes, employee benefits, overtime, and other labor-related costs.
Equation: Labor costs as a percentage of revenue = (Total labor costs / Total revenue) × 100
Look backward: If this KPI is rising, it could indicate understaffing, inefficient scheduling, productivity issues,or overtime pressure, pricing problems.
Look forward: Labor costs as a percentage of revenue can help you anticipate margin pressure, hiring needs, scheduling changes, or capacity problems. If labor costs keep rising faster than revenue, the business may need to adjust pricing, improve workflows, reduce overtime dependence, or rethink staffing plans.
Overhead rate
Definition: Overhead rate is the share of indirect operating costs assigned to specific jobs or products. It includes costs like utilities, insurance, equipment depreciation, software, and administrative labor.
Equation: Overhead rate = Total overhead costs / Allocation base
Note: The allocation base may be direct labor hours, machine hours, direct labor cost, or another measure the business uses to assign indirect costs to jobs or products.
Look backward: If your overhead rate is rising, it could indicate that you have some back-office bloat, indirect costs are growing too quickly, or indirect costs are being allocated incorrectly. If you’re uncertain what your overhead rate is, then you probably have an allocation issue to tackle.
Look forward: Overhead rate can also help you anticipate whether your pricing and job costing are accurate enough to protect profit. If you’re carrying a high overhead, accurately pricing it into bids is essential.
Budget vs. actual
Definition: Budget vs. actual is the comparison between budgeted revenue or expenses and the real revenue or expenses recorded during a specific time period.
Equation: Variance = Actual amount - Budgeted amount
Look backward: Large discrepancies in this KPI could indicate unexpected changes in budget or revenue factors, cost increases, lower-than-expected sales, production delays, or an operating budget process that needs some tweaking for accuracy.
Look forward: Budget vs. actual can help you anticipate where the business may drift from plan. If the same variances keep showing up, you may need to adjust forecasts, pricing, hiring plans, purchasing assumptions, or spending controls before those gaps become normal.
Cash flow
Definition: Cash flow is the net movement of money into and out of your business during a specific time period. It’s typically calculated by subtracting cash outflows from cash inflows.
Equation: Cash flow = Cash inflows - Cash outflows
Look backward: Weak cash flow could indicate slow customer payments, too much inventory, poorly timed vendor payments, high payroll pressure, or unexpected equipment costs.
Look forward: Cash flow can help you anticipate whether the business has enough liquidity to cover payroll, materials, vendor payments, equipment, hiring, and growth. If cash is tightening, leaders may need to adjust billing, collections, purchasing, payables, inventory, or staffing plans before the business runs out of room to maneuver.
Accounts receivable aging
Definition: Accounts receivable aging is the breakdown of unpaid customer invoices based on how long they’ve been outstanding. It’s typically calculated by grouping open invoices into aging categories, such as current, 30 days past due, 60 days past due, and 90 or more days past due.
Equation: Accounts receivable aging = Open invoices grouped by days outstanding
Look backward: If you’re seeing an increase in older unpaid invoices, it could suggest slow collections, high-friction payment workflows, unclear payment terms, billing delays, or customer credit issues.
Look forward: Accounts receivable aging can help you anticipate cash flow pressure before it becomes a bigger problem. If too much money is tied up in unpaid invoices, the business may need to adjust collections, billing workflows, customer payment expectations, or short-term spending decisions.
Revenue per employee
Definition: Revenue per employee is exactly what it sounds like: total revenue divided by the number of employees.
Equation: Revenue per employee = Total revenue / Number of employees
Look backward: If this KPI is decreasing, it could indicate inefficient workflows, management gaps, overstaffing, underpricing, or, less worrying, a recent, planned increase in labor to support revenue growth that hasn’t happened yet.
Look forward: Revenue per employee can help you anticipate whether the business is scaling in a healthy way. If headcount is growing but not driving as much revenue increase as expected, leaders may need to revisit staffing plans, pricing, productivity, management structure, or the timing of future hiring.
Workforce KPIs for manufacturing
Next, let’s take a look at the workforce KPIs you’ll want to keep an eye on and what they might indicate for your business.
Turnover rate
Definition: Turnover rate is the percentage of employees who leave the business during a specific period.
Equation: Turnover rate = (Number of employee departures / Average number of employees) × 100
Look backward: If your turnover rate is ticking up, you may have compensation issues, ineffective onboarding workflows, unclear HR policies, advancement limitations, weak management, workload problems, or culture issues.
Look forward: Turnover rate can help you anticipate hiring needs, training demands, supervisor strain, lower productivity, increased overtime, and possible quality issues if open roles aren’t filled quickly or new employees aren’t brought up to speed effectively.
FREE RESOURCE >> Check out our guide on reducing high turnover rates
Absenteeism rate
Definition: Absenteeism rate is the percentage of scheduled work time missed because of employee absences.
Equation: Absenteeism rate = (Total absent hours / Total scheduled work hours) × 100
Look backward: If you’re experiencing high absenteeism, it could be a sign that your hiring processes need tweaking, your team is experiencing burnout, or your attendance expectations aren’t clear.
Look forward: Absenteeism rate can help you anticipate staffing shortages, overtime pressure, missed production targets, supervisor scheduling strain, and inconsistent output. If absences become a pattern, the business may need to adjust staffing coverage, attendance policies, scheduling practices, or employee support.
Overtime hours
Definition: Overtime hours are the hours worked beyond an employee’s standard scheduled hours during a specific period.
Equation: Overtime hours = Total hours worked beyond standard scheduled hours
Look backward: If overtime hours are up, it might suggest that you’re understaffed, dealing with scheduling inefficiencies, or relying on overtime to work around production bottlenecks.
Look forward: Overtime hours can help you anticipate higher labor costs, employee fatigue, retention risk, quality problems, and margin pressure. If overtime becomes the default way to meet demand, the business may need to revisit hiring, scheduling, production planning, or workflow efficiency.
Overtime cost
Definition: Overtime cost is the amount your business spends on overtime wages during a specific time period.
Equation: Overtime cost = Overtime hours × Overtime pay rate
Look backward: While using overtime to meet temporary increases in demand isn’t necessarily a bad thing, long-term increases in overtime cost can be an indicator of labor inefficiencies that affect margin, cash flow, and retention.
Look forward: Overtime cost can help you anticipate whether labor spending is putting pressure on profitability. If overtime costs keep rising, leaders may need to decide whether it’s more cost-effective to hire.
Open roles by production need
Definition: Open roles by production need is the number of unfilled positions tied to current or upcoming production requirements. You can calculate it by comparing approved staffing needs against filled roles by department, shift, skill set, or production line.
Equation: Open roles by production need = Approved staffing need - Filled roles
Look backward: If there’s a growing number of open roles, it could indicate hiring delays, unclear staffing plans, skills shortages, or uncompetitive pay.
Look forward: Open roles by production need is a warning signal for future capacity risk, production shortfalls, increased overtime, and employee burnout.
Training completion rate
Definition: Training completion rate is the percentage of required training completed by employees during a specific period.
Equation: Training completion rate = (Completed training assignments / Total assigned training requirements) × 100
Look backward: A low training completion rate could indicate onboarding gaps, inconsistent supervision, or unclear training ownership.
Look forward: Training completion rate can help you anticipate quality issues, safety risk, and productivity gaps. The business may need to strengthen onboarding, clarify accountability, or build training time into production planning.
Productivity per employee
Definition: Productivity per employee is the amount of output generated per employee during a specific time period.
Equation: Productivity per employee = Total output / Number of employees
Look backward: Declining productivity could indicate workflow inefficiencies, equipment downtime, training gaps, or staffing imbalances.
Look forward: Productivity per employee can help you anticipate whether the current team can support future production goals.
Production KPIs for manufacturing
Production KPIs are often thought of as operational metrics, but they’re also essential signals for leaders making financial and workforce strategic decisions. A production slowdown might affect delivery timelines, but it can also affect labor costs,
Throughput
Definition: Throughput is the amount of product completed during a specific time period.
Equation: Throughput = Total units completed / Time period
Look backward: If your throughput is declining, it could indicate equipment issues, staffing shortages, workflow bottlenecks, or supply-chain slowdowns.
Look forward: This KPI can help you anticipate whether your business will meet production targets, delivery commitments and revenue expectations.
Cycle time
Definition: Cycle time is the amount of time it takes to complete one full production cycle.
Equation: Cycle time = Total production time / Number of units produced
Look backward: If your cycle time is increasing, look for process inefficiencies, machine downtime or material delays.
Look forward: Cycle time can help you anticipate future capacity limits. You may also need to reevaluate production schedules.
Capacity utilization
Definition: Capacity utilization is the percentage of available production capacity the business is actually using.
Equation: Capacity utilization = (Actual output / Maximum possible output) × 100
Look backward: Low capacity utilization could suggest weak demand, staffing gaps, equipment downtime.
Look forward: Capacity utilization can help you anticipate whether the business has enough room to grow with straining people and equipment. If utilization remains high, leaders may need to consider hiring or equipment investments.
Machine downtime
Definition: Machine downtime is the amount of time equipment is unavailable for production. It could include planned and unplanned maintenance.
Equation: Machine downtime = Total time equipment is unavailable for production
Look backward: Increasing machine downtime could indicate aging equipment, parts shortage, or a failure to plan for preventative maintenance.
Look forward: Machine downtime can help you predict lower throughput, missed production targets, and increased overtime if the production time has to be made up later to meet your commitments. It also may indicate that new equipment purchases are necessary.
Scrap rate
Definition: Scrap rate is the percentage of materials or products that can’t be used or sold because they don’t meet requirements.
Equation: Scrap rate = (Scrapped units / Total units produced) × 100
Look backward: If you’re experiencing an increase in scrap rate, it could mean that you’re having issues with material quality, training gaps, or weak quality controls.
Look forward: A high scrap rate can lead to higher COGS, lower gross margin, or delayed orders.
On-time delivery rate
Definition: On-time delivery is the percentage of customer orders delivered by the promised date.
Equation: On-time delivery = (Orders delivered on time / Total orders delivered) × 100
Look backward: If your on-time delivery rate is low, it could indicate staffing shortages, production bottlenecks, quality issues, or supplier delays.
Look forward: On-time delivery rates are a strong indicator of future customer satisfaction, which affects revenue. If this KPI is slipping, leaders may need to adjust schedules, staffing, and customer communication to compensate.
Inventory turn
Definition: How many times a company sells through and replaces its inventory during a specific period.
Equation: Inventory turnover = Cost of goods sold / Average inventory
Look backward: A low turnover rate may point to excess stock, slow-moving materials, weak demand, or cash tied up in inventory. An unusually high turnover rate could also mean the business is running too lean, risking stockouts, production delays, or missed sales
Look forward: Inventory turnover can help leaders decide how much inventory they actually need to keep on hand. By looking at sales patterns, production needs, supplier lead times, and cash flow, the business can set inventory levels that support demand without overbuying, understocking, or tying up more working capital than necessary.
Connecting manufacturing KPIs across finance, human resources, and operations
The reason the list above is so long is that KPIs ideally form a constellation of data to help you untangle, or better, predict business performance. Business challenges rarely stay neatly inside one department, so taking a company-wide approach to KPI interpretation is essential.
Imagine this: A manufacturer sees three things happening at the same time.
Machine downtime is increasing.
Overtime hours are rising.
Gross margin is beginning to shrink.
If you look at these manufacturing KPIs separately, you might come to these conclusions about what’s causing the KPIs to change:
There are some equipment or maintenance issues.
The team is making up for lost production time after hours.
The added labor costs of overtime are cutting into profit.
Those insights are valuable. But what’s even more valuable is using all three of the KPIs together to support strong decision making for the future.
If the current situation is left as is, the problems start to compound. Continued machine downtime decreases long-term production capacity and limits the throughput during regular hours. The team has to work more and more overtime to make up for the missed output. Overtime costs rise, employees get more fatigued, turnover increases, supervisors spend more time adjusting schedules and hiring instead of managing the floor, quality decreases … you get the picture. It doesn’t take long for a small problem to become a big problem in manufacturing.
But, if this company acts early based on KPIs, they may be able to prioritize preventative maintenance immediately, shift staffing coverage, communicate realistic delivery timelines to their customers, and avoid taking on additional low-margin work until they’ve sorted out their capacity issues. Then they’re back on track for success.
Need help interpreting your KPIs in terms of HR and finance?
Even companies that have all the right KPI tracking in place sometimes need a helping hand to interpret the data and plan strategically to correct course.
Aerial specialized in helping manufacturing businesses strengthen their financial strategy and implementation and increase HR efficiency and efficacy. We look at your manufacturing KPIs and then help you respond to any challenges and map a path to future success.
Curious how it works? Schedule a call with one of our experts, and we’ll get you started!
