This is article is part of a series of monthly articles produced by Harbour Results for PMA’s MetalForming Business Edge e-newsletter. Click here to view the full collection of articles.

When my manufacturing career began in a plant machining automotive brake knuckles and rotors, my engineering department had one computer and one CAD station that we shared. It wasn’t a problem because I was the only one who used the computer. Production and scrap data were collected on paper and took days to compile and eventually published in a monthly report. Overall performance and financial data for the facility weren’t available until nearly a month after the prior month’s end. The senior engineer I reported to was particularly frustrated when the plant manager came down hard on him about a spike in scrap. Afterward that senior engineer expressed to me, “How can we get in front of the problem if we’re steering the boat by watching the wake?”

Today, data and information tools and systems are much more advanced. Instead of a month later, monthly financial books are typically closed within a week. And, mid next month the management team can review the financial results, determine what happened, and discuss needed corrective actions. Wait - isn’t that still watching the wake to steer the boat? Maybe the view of the wake comes a little faster, but it is still looking back to make course corrections.

There is a Better Tool

What if there was a better way to get a sense of how the whole plant was financially performing in real-time? Yes, there are MES systems that provide machine up-time and cycle counts in real-time, which can be a powerful tool. However, not every machine is easily adapted to these systems, and not every manufacturer uses this technology. Additionally, ERP systems can provide live visibility to what machines are running, which are down and why. Again, what if your manufacturing plant doesn’t have that sophistication? Are there other tools to understand production and financial performance in real-time beyond MES and ERP technology?

The answer is, yes. A simple metric that might take a little work to collect and calculate but can tell the operations manager if yesterday was a good day, and what the operations are shooting for today: Dollars of value-added revenue per full-time equivalent employee per day, or daily VAR/FTE.

The Daily Decision

There are a lot of decisions that can be made over the course of a month or year that can impact costs and profitability. But at the start of each day, the operations manager only has one thing to control - what am I going to do with the people who work each day?

Understanding how to best use the human resources to maximize the amount of value-add that can be generated in a day is the first step in the battle to drive profit at the end of the month and year. Yes, other constraints need to be considered - capacity, raw materials and demand. However, setting a daily goal and managing the resources within the constraints will drive profitability by ensuring sufficient value is created to make money (assuming the overhead burden is not too large for the revenue).

And looking back at yesterday’s performance against that goal enables course correction much more rapidly. Asking the question - why wasn’t the goal hit yesterday - can bring attention to efficiency killers such as downtime or scrap, rather than waiting until two weeks after the month ends and the books are closed. This is how operations can begin to steer the boat by looking forward, and responding to problems more quickly, than by making course corrections long after the wake of the boat is created.  

Calculating the Daily Goal

Participants in the first quarter of the PMA Metalforming Insight have the latest information on the median and upper quartile benchmark for annual dollars of value-added revenue per full-time equivalent head. But to illustrate the math, I will use $100,000 $VAR/FTE as the annual goal. Convert that to a daily goal by dividing it by the number of days your operation is expected to run for the year. I will use 5 days/week for 48 weeks, or 240 total working days. That starts my daily goal calculation at $100,000/240 or $417 of value-add per FTE per day.

The next step is to calculate the full-time equivalent employee count. For example, with a single ten-hour shift per day, I would count the number of direct and indirect employees who showed up and multiply that by 10-hours/8-hour day, or 1.25, then add the number on paid vacation, and add the total number of salaried staff to arrive at my full-time equivalent headcount. Within that example, if I had 32 hourly employees show up in the morning, 2 on paid vacation, and 8 salaried, that would total 50 full-time equivalent heads. Multiplying 50 by $417 would set my daily goal to create $20,850 of value-added revenue with the equivalent of 50 people.

Determining my daily value add may be easy as running a daily report from my data and information systems, or I might have to hand calculate it. I might be able to calculate the total sales value produced and subtract the actual material consumed. Or I might have to have a count of saleable parts produced by part number and multiply that by the value-add by part number at standard to get directionally correct. There may be other ways depending upon your daily production recording methods.

Better Steering the Boat

Regardless of the calculations utilized, the point is to set a daily value creation goal for the operations given the constraint of human resources available on that day. And then measure the performance against that goal the very next day. If the goal wasn’t hit, then ask why not? What prevented us from generating value with the resources we had available? Did we produce too many parts we can’t sell in scrap? Did we have unplanned downtime? Did we run slower than our standard based upon our price? Take action to address those issues while they are still impeding performance rather than waiting until financial results are set-in-stone with the month-end close. The goal is to proactively steer the boat with a daily operations target rather than by watching the wake.

About the author: 

Jason C. Brewer, a Director at Harbour Results, helps clients drive profitable growth through strategic direction and matching their operations to the strategy.  He has extensive experience consulting and working within metals manufacturing companies in roles from engineering to sales to executive team management.