12 Key Performance Factors to a More Competitive Shop

The Dozen Indicators That Leading Shops Follow To Sales And Profit.

BY BRUCE VERNYI
EDITOR-IN-CHIEF

AMERICAN MACHINIST launched in February an extensive survey to develop the tools that U.S. machine shops need to gauge their competitive positions, and to help them to make plans to improve and empower them to control their future.

These tools are designed to help our readers to systematically improve their operations, and to become more competitive; and we now are beginning to present them to you.

These are American Machinist's Machine Shop Benchmarks.

We have identified several factors in the survey as best practices, and we used responses to questions about them to determine a benchmark set of shops—those that consistently lead the pack. We suggest that the results reported from those leaders—hat we are identifying as the benchmark set—are the numbers that shops should be target and performance measurements that shops should strive to reach.

Here's why:

  • More than 33 percent of the benchmark shops expect their revenues to increase more than 10 percent in 2006 over 2005. Meanwhile, only 17.7 percent of the other shops expect their revenues to increase that much this year.
  • The benchmark shops report their return on invested capital is an average of 34.6 percent, up from 21.4 percent three years ago. The other shops expect a return on invested capital of 19 percent this year, up from 14.8 percent three years ago.

So, in these two vital areas—sales and profit—the industry leaders are doing at least 45 percent better as all other shops. We are presenting to you the 12 business factors that those leaders excel in, and we suggest that, if you tune up your shop to match these results, you could begin to report similar outcomes.

The information we have received in the survey is elaborate and cannot be presented in a single report, so we intend to share it in segments over the next three months.

This month's report is just the first step, a snapshot of information that shows the current state of the U.S. machine tool industry. We will make more detailed information available in the coming months.

The shops whose owners and managers returned our survey represent job shops, contract shops and units of large manufacturers (in-house operations), and the survey results demonstrate consistency that reinforces the conclusions drawn from it are authoritative. Shops have participated from all parts of the United States, with—as we expected—a slightly heavier concentration in the Midwest. However, shops from the Pacific Northwest to the Southeast, and from New England to southern California included themselves in this survey.

Our partners in the survey, the MPI Group, advised us at the outset that we would do well—and have a representative sampling of the U.S. machine tool industry—if we had about 100 responses. More than double that number of readers responded, and they gave us their time —at least 30 minutes each in our estimation—to answer hard questions about their operations. Based on our estimates, our readers devoted 124.5 manhours to the results we are beginning to report in this issue.

We knew when we started this effort that the survey would be rigorous, and we questioned whether we would have a good response.

"The response to this survey is overwhelming, and shows the need for this information in this industry," according to John Brandt, chief executive officer of MPI Group. MPI is one of the world's most respected research firms, and has conducted a wide number of surveys for a variety of industries worldwide.

"This is the most comprehensive look at performance ever conducted in the machine tool industry and more importantly, offers insight into how certain firms maintain world class standards in the face of global competition," Brandt said.

1: Annual labor turnover rate for 2005.

ALL SHOPS BENCHMARK SHOPS OTHER SHOPS
5.0% 5.0% 5.0%

Annual labor turnover is an indication that a business is—or is not—keeping its skilled employees. Businesses that retain key employees and trained employees tend to do better than those that do not. * The shops responding to our survey reported a median labor turnover rate of 5 percent for 2005, and this statistic was the same across each group of shops that responded. The average annual labor turnover rate across all U.S. manufacturing as reported by Industry Week magazine is 6 percent.

2: Job-related injuries and illnesses that resulted in lost work days per employee in 2005.

ALL SHOPS BENCHMARK SHOPS OTHER SHOPS
2.5% 2.8% 2.6%

Job-related injuries decrease productivity and result in lower profitability. * All the shops that responded to the survey reported an average of 2.6 job-related injuries or illnesses that resulted in lost workdays in 2005. Curiously, the benchmark shops reported a slightly higher number—2.8 injuries or illnesses—than all the other shops. However, the benchmark shops also reported nearly three times fewer injuries per employee—0.04 for 2005—than all of the other shops.

3: How have per-unit manufacturing costs, excluding purchased material, changed in the past year?

ALL SHOPS BENCHMARK SHOPS OTHER SHOPS
Decreased more than 20%: 0.9% 2.0% 0.6%
Decreased 11-20%: 8.7% 12.0% 7.7%
Decreased 1-10%: 24.7% 40.0% 20.4%
Stayed the same: 19.5% 10.0% 22.1%
Increased 1-10% 34.6% 20.0% 38.7%
Increased 11-20% 9.1% 10.0% 8.8%
Increased more than 20%: 2.6% 6.0% 1.7%

Lower manufacturing costs directly increase profit, and should be a constant goal, especially with customers who demand continuous price reductions. * For all of the shops that reported this number, 19.5 percent said their manufacturing costs stayed the same in the past year, while 24.7 percent said they decreased by 1 percent to 10 percent, and 9.6 percent said their manufacturing costs decreased by more than 11percent. Meanwhile, 34.6 percent said their costs increased by 1 percent to 10 percent, and 11.7 percent said their costs increased by more than 11 percent. * The benchmark group of shops reported the following: 10 percent said their manufacturing costs stayed the same, while 40 percent said their costs decreased 1 percent to 10 percent and 14 percent said their costs decreased by more than 11 percent. In the benchmark group, 20 percent said their costs increased by 1 percent to 10 percent and 16 percent said their costs increased by more than 11 percent.

4: Reduction of machining cycle time over the past three years (in hours)

ALL SHOPS BENCHMARK SHOPS OTHER SHOPS
Current year 0.3 0.2 0.6
3 years ago 0.4 0.3 0.9

Machining cycle time is the time measured from placing a workpiece for a typical product onto a machine until it is removed. Reducing machining cycle time increases productivity and profit. * Combined, the shops that reported indicated that they reduced their machining cycle times by 25 percent over the past three years, from a median time of 0.4 hours to a median time of 0.3 hours. The benchmark shops reported a greater reduction, a 33 percent cut in machining cycle times, from 0.3 hours to 0.2 hours. Shops outside the benchmark group reported a similar 33 percent reduction, but had a median time that was three times greater than the benchmark shops. The shops outside the benchmark group reported a median machining time of 0.6 hours in their most recent year, compared to a median time of 0.9 hours three years ago.

5: Set-up time (in hours)

ALL SHOPS BENCHMARK SHOPS OTHER SHOPS
Current year 1.5 1.3 1.5
3 years ago 2.0 2.8 2.0

Set-up time is the time it takes to prepare a job for machining, and includes fixturing the workpiece for a typical product and setting the tooling for the job. * All the shops reported a 25 percent reduction in set up time, based on the median number reported. The shops said set up time went from 2 hours to 1.5 hours in the past three years. However, the benchmark shops reported a 53.6 percent reduction in set-up time, from a median of 2.8 hours to a median of 1.3 hours, while the shops outside of the benchmark group reported a 25 percent reduction from 2 hours to 1.5 hours.

6: On-time completion rate

ALL SHOPS BENCHMARK SHOPS OTHER SHOPS

Current year

87.3% 92.0% 85.0%
3 years ago 81.5% 82.0% 81.2%

This measures the percentage of goods that are delivered on time and to customer orders. Keeping on schedule and keeping customers happy are good business practices that lead to improved profit. • All of the shops in the survey reported significant gains in ontime completion rates, moving to an 87.3 percent rate in 2005 from an 81.5 percent rate three years ago. In this category, the benchmark group of shops improved to a 92.2 percent rate from an 82 percent rate three years ago, while shops outside of the benchmark group went to an 85 percent rate from a rate of 81.2 percent three years ago. This category stood out as setting the benchmark group of shops ahead of the others.

7: Finished-product first-pass quality yield

ALL SHOPS BENCHMARK SHOPS OTHER SHOPS
Current year 94.3% 94.7% 94.1%
3 years ago 88.9% 88.7% 89.1%

This measures the number of products that require only one final inspection, and do not have to be returned to manufacturing for rework. Companies with a high finished-product first-pass quality yield are more profitable because they spend less on rework. * This is another category in which all shops reported gains from three years ago. Combined, the shops in the survey said 94.3 percent of their products now pass final inspection the first time, compared with 88.9 percent three years ago. The benchmark shops reported 94.7 percent of their products pass final inspection the first time through, compared with 88.7 percent three years ago, while shops outside of the benchmark group reported 94.1 percent of their products pass final inspection compared with 89.1 percent three years ago.

8: Scrap and rework costs

ALL SHOPS BENCHMARK SHOPS OTHER SHOPS
Current year 6.7% 4.6% 7.8%
3 years ago 8.4% 6.6% 9.3%

This measures the loss of profit that comes from poor manufacturing, and is reported as a percentage. A low percentage is good. * All of the shops combined reported significant reductions in the costs for scrap and rework, to an average of 6.7 percent of sales in the most recent year from an average of 8.4 percent three years ago. The benchmark shops reported costs of 4.6 percent for the most recent year, down from 6.6 percent three years ago, while shops outside of the benchmark group reported that scrap and rework cost them an average of 7.8 percent of sales compared with 9.3 percent of sales three years ago.

9: Shop revenue per man-hour

ALL SHOPS BENCHMARK SHOPS OTHER SHOPS
$60.10 $63.55 $60.00

This measures revenue based as a function of the number of hours that employees are paid to work. The higher this number is, the greater the profit that a shop can expect. * All shops combined reported median revenue per man-hour of $60.10. The benchmark shops reported median revenue per man-hour of $63.55, and the shops outside of the benchmark group reported $60, which is the standard charge that many shops quote as their per-hour fee for work. Shops that are a part of a larger company reported higher revenues per man-hour, at $64.10, while shops that are independent reported the $60 median figure.

10: Total machine uptime

ALL SHOPS BENCHMARK SHOPS OTHER SHOPS
Current year 78.1% 85.0% 73.6%
3 years ago 70.5% 75.6% 66.9%

This measures hours of production as a percentage of the hours during which the plant operates. * In every category, shops reported significant improvements in average machine uptime over three years ago. For 2005, all shops combined reported an average machine uptime of 78.1 percent. Benchmark shops reported an average machine uptime of 85 percent, and shops outside of the benchmark group reported an average machine uptime of 73.6 percent.

11: Machine availability

ALL SHOPS BENCHMARK SHOPS OTHER SHOPS

Current year

78.4% 83.1% 75.4%
3 years ago 75.0% 77.1% 73.6%

This measures the amount of time that a machine is available when it is supposed to be, and is an indication that a shop's tools are ready and able to work when they are needed. * Again, shops reported significant improvements in average machine availability times compared to three years ago. For 2005, all shops combined reported an average machine availability of 75 percent. Benchmark shops reported an average machine availability of 77.1 percent, while shops outside of the benchmark group reported average machine availability of 73.6 percent.

12: Percentage of equipment maintenance that is reactive

ALL SHOPS BENCHMARK SHOPS OTHER SHOPS
Current year 46.6% 43.8% 48.6%
3 years ago 54.1% 52.5% 55.4%

This is an indication of how effective planned maintenance is at a shop. A lower number indicates that less maintenance work is done on a "surprise" basis, and more is done as part of the normal course of business. * All shops together reported that 46.6 percent of their maintenance is reactive. Meanwhile, the benchmark shops reported 43.8 percent of their maintenance is reactive, while shops outside of the benchmark group reported that 48.6 percent of their maintenance is reactive. Three years ago, every category—all shops together, the benchmark shops and the shops outside of the benchmark group—all reported that reactive maintenance represented more than half of the maintenance done on their equipment.

Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish