Often confused, annual revenue is not the same as annual sales. Revenue is recorded, or earned, after product is shipped. Sales are orders for a product and can sit in the sales pipeline for a varying duration before revenue is realized. Revenue is a common metric companies use to benchmark their performance year after year and if revenue is increasing the company is growing. Revenue growth without profitability means you're losing more money, faster. Benchmarking revenue growth is effective when measuring your company's year over year progress but is not an accurate measure when looking at other companies in your industry. For this reason, we use revenue in performance ratios to see how well your company compares to others in your industry.

Average Non-Exempt Work Week is the number of hours typically worked by hourly employees each week. We use this information in calculating metrics related to value added per FTE. When using continuous improvement methodologies, machine capacity is freed up. The number of hours worked each week gives us insight into the possible existence of a sales backlog and potential for filling newly freed up machine capacity with revenue generating jobs.

Average hourly rate (excluding overtime) for non-exempt, hourly workers is asked for as a means to calculate the financial impact of decreasing employee turnover. Demographic variability makes this a poor measure to benchmark against.

Average inventory is the average value of inventory throughout a certain time period. A basic calculation for average inventory is:
(Year's Beginning Inventory + Year's Ending Inventory) / 2

For inventory, we're looking for all inventory (raw, WIP, and Finished Goods)

The average number of employees that worked at the location being surveyed during the survey year. If employment counts changed significantly over the year, we emphasize AVERAGE, not YEAR-END counts. We use this information in calculating other employment levels and metrics related to value added per FTE.

The average number of hourly employees are also referred to as Non-Exempt, or those workers that are entitled to overtime beyond 40 hours per week. This along with average hours worked in a week allows us to calculate hourly FTEs and produce value-added metrics based off FTEs.

The average number of salaried employees are also referred to as Exempt, or those workers that are not entitled to overtime beyond 40 hours per week. We calculate this by subtracting Average Number of Hourly Employees from the Average Number of Employees, information you provide on questionnaires. Salaried employees along with hourly (non-exempt) FTEs allows us to produce value-added metrics based off FTEs.

Average Receivables is the average amount of money your customers owe you. This can be calculated by:
(Beginning of the Year Receivables + End of the Receivables) / 2

Having a high receivables ties up cash, decreasing liquidity, and increases risk. Decreasing receivables has a one time cash conversion by converting this asset to cash but can also produce an annual benefit through investment, even if only through an interest bearing bank account.

This metric is displayed on reports to provide visibility into the companies that you are compared against.  Our comparison groups are carefully selected using industry and processes, this is one measurement that proves to be a good indicator of your fit within the selected comparison group.

Benefits as a Percent of Labor Costs

The direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs. COGS appears on the income statement and can be deducted from revenue to calculate a company's gross margin. Also referred to as "cost of sales."

It's important when you are calculating your COGS that you are only thinking of the expenses directly associated with transforming raw materials into the finished product, the product that you sell. The raw materials that go into COGS isn't JUST the materials you purchased over the year. When calculating raw materials (purchased materials), you need to be sure COGS includes the end of the year inventory adjustment. Beginning Inventory + Inventory Purchases – End Inventory = Purchased Materials.

Days Sales in Receivables is calculated by taking your reported accounts receivable and dividing it by your average daily sales. The result of this calculation tells us how many days, on average, your customers’ outstanding invoices are left unpaid. If this number is higher than the terms set on your invoices, cash is being tied up in excess of your terms of service and likely limiting cash available for other working capital or debt service needs.

Days Sales in Inventory is calculated by taking your reported inventory and dividing it by average daily sales. The calculation is in essence a measure of how many days of sales your average inventory levels would sustain if production stopped.

Days Sales in Payables is calculated by taking your reported accounts payable and dividing it by your average daily sales. This number represents the number of days of sales that are owed to your suppliers.

Days Sales in Receivables is calculated by taking your reported accounts receivable and dividing it by your average daily sales. The result of this calculation tells us how many days, on average, your customers’ outstanding invoices are left unpaid. If this number is higher than the terms set on your invoices, cash is being tied up in excess of your terms of service and likely limiting cash available for other working capital or debt service needs.

Something to be expected, employee turnover is unpleasant and costly. Direct costs of turnover is estimated to range from 16% to 20% of a person's annual salary due to losses occurring during training, recruiting, and lost work. Other impacts that aren't regularly thought of are the increase in scrap rates, overtime paid to remaining employees to pick up the additional hours, late deliveries, and a host of other undesirable operating side affects.

Per unit energy costs vary significantly with geographic location. Looking at energy costs as a percentage of revenue provides a better indicator of how much energy expenditure goes into generating a dollar of revenue. A higher than average value in this metric would indicate an opportunity to reduce energy expenditures and improve competitiveness.

Energy Costs per Dollar Value-Added

When asking for utility expenditures, we're particularly interested in energy expenditures for electricity, natural gas, fuel oil, etc. These energy expenses tend to constitute the bulk of utility expenses for manufacturers and, typically, these energy expenses are predominantly related to the manufacturing process. There tend to be significant variations in per unit energy costs depending on geographic location. For this reason, we benchmark using utility expenditures as a ratio to better measure the expenses contribution to generating revenue, profit, etc.

Full purchased materials include what you purchased in raw materials plus what you paid other's for manufacturing related services.

Full Time Equivalents (FTEs) is the equivalent number of people employed if all employees worked a 40 hour work week. An FTE of 1.0 means that the person is equivalent to a full-time worker, while an FTE of 0.5 signals that the worker is only half-time. When a hourly worker is working 60 hours a week, this is an equivalent workload of 1.5 FTEs. This is a common method for making workloads comparable across various contexts. We use the FTE in calculating value added metrics to see how much value is added by each person.

This metric is displayed on reports to provide visibility into the companies you are compared against. Our metrics are selected to remove geographic dependencies but we still provide visibility into our comparison groups and this is often an area we're asked about.

Sometimes called "Gross Profit," this metric captures what is left from sales after subtracting manufacturing-related expense. It is the source of funds needed to cover Sales, General and Administration (SG&A) expenses, and for net profit. While higher Gross Profit is always preferable, locations with very little marketing and sales expense -- such as captive suppliers who sell to other branches of their own company-- might be fine with lower rankings on this metric. Companies with significant marketing and sales outlays, such as those making final products under their own brands, must score well on this metric or risk low profits.

This metric is displayed on reports to provide visibility into the companies that you are compared against.  Our comparison groups are carefully selected using industry and processes, this is one measurement that proves to be a good indicator of your fit within the selected comparison group.

This metric is displayed on reports to provide visibility into the companies that you are compared against.  Our comparison groups are carefully selected using industry and processes, this is one measurement that proves to be a good indicator of your fit within the selected comparison group.

Inventory Turns serves as a fundamental measure of lean performance, and ability to convert expense into billings. Companies with high Inventory Turns are able to generate saleable output with little carrying cost, yielding a cost advantage relative to others.  A high Inventory Turns value also often signifies a nimble company – one able to respond quickly to changes in demand.

Low turns may result from excessive raw, finished, or in-process inventory stocks. You should examine your percentile position on each of these to determine the culprit(s). Low raw turns (i.e., high days) usually signal poor demand forecasting or suppliers that are unwilling to deliver small quantities frequently. Low finished goods turns (high days) often result from excessive stockpiling to insure the ability to fill rush orders; where possible, consider instead stocking standard intermediate products but doing final processing or packaging to order. Finally, high work-in-process (WIP) often reflects bottlenecks that result in long waits between processing or packaging steps. Poor routings, bad line balancing, and frequent but unanticipated equipment failures are common culprits. Many companies have attacked high WIP by changing shop layout to cells, and by making inventory costs visible by replacing warehousing with floor stock.

This labor and overhead is the component of COGS that is not purchased materials. We calculate this by taking the COGS and purchased materials you provide in our questionnaires. Used in some metrics, it also serves as a check to verify numbers provided for COGS and purchased materials are accurate.

Labor Costs (Payroll Plus Benefits) as a Percent of Revenue

This metric is displayed on reports to provide visibility into the companies that you are compared against. Our comparison groups are carefully selected using industry and processes, this is one measurement that proves to be a good indicator of your fit within the selected comparison group.

The number of hours your typical machine or average regular-use machine is running parts is a basis for us to determine what the current equipment utilization is and to calculate what potential financial opportunities exist. (By "regular-use" machines, we mean those in everyday use, and not those used only sporadically, e.g. for tryout.) For processes that are largely hand assembly, considering distinct processing lines or workforce when thinking about "regular-use machine" helps to identify what your current running hours are.

The number of hours your typical machine or average regular-use machine is staffed and available for use is a basis for us to determine what the scheduled production capacity is and to calculate what potential financial opportunities exist. (By "regular-use" machines, we mean those in everyday use, and not those used only sporadically, e.g. for tryout.) For processes that are largely hand assembly, considering distinct processing lines or workforce when determining "regular-use machine staffed and available for use" helps to identify what your potential capacity is.

Non-Factory Labor Costs (Payroll Plus Benefits) as a Percent of Revenue

Premium freight we ask for is the portion of shipping that is not being paid for by your customer. High premium freight is often accompanied by high schedule bumping and lower on-time delivery. We see this trend because premium freight is often used to buy on-time delivery. Any expense related to production that isn't requested by and paid for by your customers decreases your profitability.

Except when delays are clearly due to the actions of your customers, the surest way to lose orders is to under-perform your competitors in on-time delivery.   Late deliveries may be due to many causes, including quoting unrealistic shipment dates, poor scheduling or excessive lot bumping, incapable equipment, or unreliable suppliers.  The first step is usually to determine the root causes of recent late deliveries.  Follow-on actions may include more realistic promised dates, producing in smaller lots but with faster setups, reduced bumping, and equipment capability studies.

Concentrations exist in almost every manufacturer. Concentrations can be with customers, products, technology, geography or industry to name a few. Diversification of a customer base, particularly in small to medium sized manufacturers, is critical to longer-term health and sustainability. Manufacturers with a well diversified customer base will also generally command higher valuations in the marketplace, especially when accompanied by average to above average profitability.

This metric is displayed on reports to provide visibility into the companies that you are compared against.  Our comparison groups are carefully selected using industry and processes, this is one measurement that proves to be a good indicator of your fit within the selected comparison group.

This metric is displayed on reports to provide visibility into the companies that you are compared against. Our comparison groups are carefully selected using industry and processes, this is one measurement that proves to be a good indicator of your fit within the selected comparison group.

This metric is displayed on reports to provide visibility into the companies that you are compared against.  Our comparison groups are carefully selected using industry and processes, this is one measurement that proves to be a good indicator of your fit within the selected comparison group.

This metric is displayed on reports to provide visibility into the companies that you are compared against.  Our comparison groups are carefully selected using industry and processes, this is one measurement that proves to be a good indicator of your fit within the selected comparison group.

The percentage of company sales that are Medical/Heathcare-Related.  This metric provides insight into market saturation for your industry.  If there is a large number of companies in your industry selling to a specific market, growth opportunities may be tough to cultivate.  Knowing how many direct competitors are in a market can help your company develop a growth strategy.  Diversifying the markets you're selling to hedges sales against seasonal or economic variability in demand.

The percentage of company sales that are Military/Defense-Related.  This metric provides insight into market saturation for your industry.  If there is a large number of companies in your industry selling to a specific market, growth opportunities may be tough to cultivate.  Knowing how many direct competitors are in a market can help your company develop a growth strategy.  Diversifying the markets you're selling to hedges sales against seasonal or economic variability in demand.

The percentage of company sales to the Agricultural or Food Processing industries. This metric provides insight into market saturation for your industry. If there is a large number of companies in your industry selling to a specific market, growth opportunities may be tough to cultivate. Knowing how many direct competitors are in a market can help your company develop a growth strategy. Diversifying the markets you're selling to hedges sales against seasonal or economic variability in demand.

The percentage of company sales to the Aircraft/Aerospace Industry.  This metric provides insight into market saturation for your industry.  If there is a large number of companies in your industry selling to a specific market, growth opportunities may be tough to cultivate.  Knowing how many direct competitors are in a market can help your company develop a growth strategy.  Diversifying the markets you're selling to hedges sales against seasonal or economic variability in demand.

The percentage of company sales to the Construction Industry.  This metric provides insight into market saturation for your industry.  If there is a large number of companies in your industry selling to a specific market, growth opportunities may be tough to cultivate.  Knowing how many direct competitors are in a market can help your company develop a growth strategy.  Diversifying the markets you're selling to hedges sales against seasonal or economic variability in demand.

The percentage of company sales to the Auto Industry. This metric provides insight into market saturation for your industry. If there is a large number of companies in your industry selling to a specific market, growth opportunities may be tough to cultivate. Knowing how many direct competitors are in a market can help your company develop a growth strategy. Diversifying the markets you're selling to hedges sales against seasonal or economic variability in demand.

The percentage of company sales to the Communications/Electronics Industry. This metric provides insight into market saturation for your industry. If there is a large number of companies in your industry selling to a specific market, growth opportunities may be tough to cultivate. Knowing how many direct competitors are in a market can help your company develop a growth strategy. Diversifying the markets you're selling to hedges sales against seasonal or economic variability in demand.

The percentage of company sales to Consumers, Institutions, Wholesalers, or Retailers.  This metric provides insight into market saturation for your industry.  If there is a large number of companies in your industry selling to a specific market, growth opportunities may be tough to cultivate.  Knowing how many direct competitors are in a market can help your company develop a growth strategy.  Diversifying the markets you're selling to hedges sales against seasonal or economic variability in demand.

Percent of Shop Labor Hours Spent Doing Rework

The percentage of company sales to the Energy-Related Industry.  This metric provides insight into market saturation for your industry.  If there is a large number of companies in your industry selling to a specific market, growth opportunities may be tough to cultivate.  Knowing how many direct competitors are in a market can help your company develop a growth strategy.  Diversifying the markets you're selling to hedges sales against seasonal or economic variability in demand.

This metric is displayed on reports to provide visibility into the companies that you are compared against.  Our comparison groups are carefully selected using industry and processes, this is one measurement that proves to be a good indicator of your fit within the selected comparison group.

When we ask this question, we're interested in only the premium freight that is not paid for by customers.  High premium freight is an indicator that there are scheduling problems and expediting the shipping of materials or products is being used to compensate.  Phrased another way, on-time delivery is being bought.  High premium freight is often accompanied by high schedule bumping, low on-time delivery, high scrap or rework rates, or any number of other negative operating metrics.  At a minimum, paying for premium freight that customers don't pay for reduces profitability.

Generally, the higher this ratio the better. While relative profitability can be impacted by decisions such as owner compensation levels or other discretionary items, the most important company to benchmark this result against is your own. Companies that can generate consistent profitability generally command higher valuations in the marketplace at the time of sale due to their lower risk profile and ability to support a higher level of debt service.

Purchased Material Expenses as a Percent of Revenue

Non-Manufacturing services is what you paid for services such as: accounting, legal, outside payroll, phone, postage, shipping, sales commissions to non-employees, etc. One of many components making up Selling, General, and Administrative (SG&A) expenditures, we use non-manufacturing services purchased when calculating value-add metrics.

Purchased Services as a Percent of Revenue

Sometimes called "Gross Margin," this metric captures what is left from revenue after subtracting manufacturing-related expense. It is the source of funds needed to cover Sales, General and Administration (SG&A) expenses, and for net profit. While higher Gross Margin is always preferable, locations with very little marketing and sales expense -- such as captive suppliers who sell to other branches of their own company-- might be fine with lower rankings on this metric. Companies with significant marketing and sales outlays, such as those making final products under their own brands, must score well on this metric or risk low profits.

Rework is a labor only expense to modify a product to get it to conform to customer specifications. Rework can occur before or after a product ships. Rework that occurs after the product ships is typically called Warranty Repairs but is still a defect that requires correction at the manufacturer's expense. Often not thought of, sorting finished goods to prevent defects from reaching the client is rework. Rework is one of the most poorly tracked expenses and because of that is one of the greatest areas of opportunity to improve profitability through preventing the defect during the manufacturing process.

The best measure of your equipment utilization is how many hours your processing lines or systems run in a year.  But once you determine the level of manning appropriate to your order book, you also need to look at how many of those manned, or available, hours your equipment is running.  The goal is to attack the drivers of downtime, including: long or unnecessary changeovers, unreliable supplier delivery, poor housekeeping and materials management, inadequate preventive maintenance, incapable processes, and poor breakdown prediction.

For most manufacturers, the overall cost structure for its investments in people, plant and equipment is relatively fixed. How well a manufacturer can utilize these fixed investments can have a much greater impact on profitability than product pricing. Running Time as a Percent of Total Hours in a Year (or how many hours of all available time (labor or machinery) in a year are you are actually producing product) is a purist’s view of utilization. Lower utilization can be considered an opportunity to grow value-added revenue while adding very little incremental cost.

Interrupting a scheduled job or lot to run a rush, or "hot," job often results in lost equipment run time, additional labor cost, and poor delivery performance. Not only can "bumping" the scheduled job result in at least one extra changeover; it also leads to more idle time and overtime pay for operators, and increased charges for premium freight. Companies that anticipate frequent bumping may build that into their schedules, so even when bumps do not occur, the material or supplies for the next job may not be available even though equipment is. You may need to consider, among other things, building a shop schedule with smaller lots, working to reduce the time required for each setup or changeover, or reserving some of your older equipment specifically for last-minute rush jobs. If your customers really value your quick attention to their rush orders, you may be able to charge a premium for fast turnaround to help offset the costs of bumping.

Material Scrap is waste from errors in the manufacturing process. Scrap decreases profitability directly due to the loss of time and materials but machine capacity is also lost through the necessity to run more product to meet the finished goods requirements. The requirement to run more product to compensate for scrap has a rippling effect on on-time delivery, make the current job, and subsequent jobs late.

Scrap and Rework as a Percent of COGS is a method to standardize this quality measure for benchmarking against other companies. If values in dollars, instead of ratios, were used a small company with a high scrap rate would appear to have less scrap than a company with a large dollar value of scrap but a lower scrap rate. High values in this metric would indicate large opportunities to improve profitability though the identification of root causes into production errors. Reducing scrap rates also frees up capacity on machine so more revenue can be generating using the same Human and Plant resources.

Producing product that cannot be sold at full price is a direct deduction from the bottom line.  Processing errors have many causes, including hard-to-make designs, incapable equipment or tools, poorly trained operators, inadequate in-process inspection, poor material choice, and weak or absent statistical studies of parts or machines.  Root causes of high error rates need to be determined and systematically attacked.

In general, the lower this ratio the better. While selling expenses may behave more as a variable expense in certain companies (e.g. if sales compensation is purely incentive based or if outside reps are utilized), SG&A expenses should be relatively fixed and the ratio of these expenses to value-added revenue should decline over time with growth. SG&A expenses that vary directly with sales growth (or do not fall with sales declines) can be indicative of inefficient sales, accounting or IT processes that are very manual in nature or require continuous investment to support activity on the shop floor.

Shop (Hourly) Worker Payroll (Wages, FICA) as a Percent of Total Payroll

Shop (Hourly) Payroll as a Percent of Revenue

Temporary and Contract Labor Costs as a Percent of Total Labor Costs (Payroll, Benefits and Temps)

Total Scrap is waste from errors in the manufacturing process. Composed of both lost labor, up to the failure, and loss of materials that cannot be salvaged. Scrap decreases profitability directly due to the loss of time and materials but machine capacity is also lost through the necessity to run more product to meet the finished goods requirements. The requirement to run more product to compensate for scrap has a rippling effect on on-time delivery, make the current job, and subsequent jobs late.

Total Scrap and Rework is the summation of the scrap and rework values provided when you filled out a questionnaire.

Total Scrap is waste from errors in the manufacturing process. Composed of both lost labor, up to the failure, and loss of materials that cannot be salvaged. Scrap decreases profitability directly due to the loss of time and materials but machine capacity is also lost through the necessity to run more product to meet the finished goods requirements. The requirement to run more product to compensate for scrap has a rippling effect on on-time delivery, make the current job, and subsequent jobs late.

Rework is a labor only expense to modify a product to get it to conform to customer specifications. Rework can occur before or after a product ships. Rework that occurs after the product ships is typically called Warranty Repairs but is still a defect that requires correction at the manufacturer's expense. Often not thought of, sorting finished goods to prevent defects from reaching the client is rework. Rework is one of the most poorly tracked expenses and because of that is one of the greatest areas of opportunity to improve profitability through preventing the defect during the manufacturing process.

This metric is displayed on reports to provide visibility into the companies that you are compared against.  Our comparison groups are carefully selected using industry and processes, this is one measurement that proves to be a good indicator of your fit within the selected comparison group.

Value-Add is revenue less the expenses paid to others for a company to transform a raw material into a finished good. Put a different way, value add is the work a company does (using internal resources) to transform materials into a finished good. A value-add ratio is common to see when benchmarking performance against yourself or others.

Value-added as a percent of revenue is one indicator of how much additional processing (engineering, fabrication, conversion, etc.) a manufacturer applies to the materials they purchase. On the spectrum, a distributor or light manufacturer would have a relatively low measure (say 25%), while a precision machine shop fabricating very small parts may have a very high measure (say 75%). While value-added as a percent of revenue is not a direct indicator of profitability, it is one of the single most critical (and predictive) measures when evaluating the potential impact on profitability of new business or lost business.

While manufacturers often look at gross margins to evaluate relative profitability on a customer or product basis, the best way to measure what you are actually being paid across various product lines is to look at value-added per direct hour (labor or machinery) applied. This measure indicates the amount that customers are paying you each hour for the service of converting raw material into a finished product. Often this metric operates in a fairly narrow range within an industry (e.g. injection molding or precision machining). A wider variation from the comparison group could indicate differences in asset utilization, operating effectiveness, or significant indirect resources (e.g. engineering) that are components of value-added revenue.

Finding and developing a skilled labor force is a challenge for most manufacturers. How well a manufacturer leverages its labor base to increase production is key to both customer responsiveness and overall profitability. While it is easy to assume that the higher performance is due to increased automation, it is not necessarily the case. Other factors, such as wage rates and process effectiveness can impact this measure.

Companies that perform well in this measure are approaching their equipment purchases and the utilization of equipment differently than those companies with lower scores. For example, a company that chooses to operate existing equipment on 2 shifts rather than adding more equipment on 1 shift will tend to score better on this measure. While the goal is to always increase leverage on key production inputs, some companies will use new equipment to leverage additional production capacity within the same square footage or to leverage scarce skilled labor resources. If that is the case, average performance in this measurement should be accompanied by above average performance in value-added per dollar in labor cost or per square foot of production.

People are the most valuable resource in any manufacturer. With the current skilled workforce shortage, the ability to leverage human capital more effectively is critical to long-term success and indicative of flexible and scalable operations. Because different manufacturers require different levels of indirect support in their operations (i.e. engineering, procurement, etc.), measuring value-added per full-time equivalent is a better way to measure overall productivity of labor across a peer group.

In a high-wage economy, the only way to stay globally competitive over the long term is to keep improving on this fundamental measure of labor productivity.

Facilities tend to be the most inflexible of all production resources, meaning the ability to flex facility costs with changes in demand is very low. A company’s ability to leverage more output within the same square footage will generally have a very positive impact on profitability and over time, indicate increased flexibility in production. Reducing inventories and converting the "liberated" space into production space is one example of a way to improve on this measure.