6 Key KPIs for Automotive Industry Operations Executives
It is no secret that the automotive industry is very competitive, requiring any automotive business to make every improvement possible to compete. For example, according to IHS, only about half of new car buyers remain loyal to the brand they already owned, showing just how competitive this industry can be. With that said, an automotive business cannot make improvements in areas where it cannot measure success. This is where the KPI concept comes in.
Ensuring that a business knows exactly what to measure and how to measure it is vital. With so many KPIs to consider, it may seem daunting to have to choose among them. But including the vital yet possibly overlooked KPIs ensures that a business can determine the areas of success and the areas requiring improvement, and to what extent those areas must be improved. Here are six Key Performance Indicators that Logan Consulting sees its automotive clients focus on.
KPI 1: Average Downtime
One of the most critical indicators automotive businesses need to be aware of is downtime. You can calculate this value as the ratio:
Average Downtime = (downtime hours in a time period) ÷ (total time available to produce vehicles in the same time period) x 100.
Any automotive business must, of course, take action to ensure that this time is minimized. Businesses will often hear that downtime is extremely expensive, and this holds especially true in the automotive industry, where it is estimated to be far more costly than in other manufacturing industries. According to an Advanced Technology Services survey, in the automotive industry, downtime costs up to $50,000 per minute, or about $3,000,000 per hour. Across all businesses, the average cost of downtime is about $260,000 per hour, and it is often stated that manufacturers experience about 800 hours of downtime per year.
Therefore, due to downtime being especially costly for automotive manufacturers, these businesses must take special care to track downtime accurately.
KPI 2: Utilization Rate
Also known as capacity utilization, the utilization rate is the amount given by the following calculation:
Utilization rate = (actual level of output) ÷ (maximum level of output) x 100.
In other words, this is a ratio between how many vehicles an automotive company can produce over a period of time and how many vehicles the company could potentially produce in that same period with optimal use of time and labor.
To measure the utilization rate, you need to capture resource capacity data from inventory inflows and outflows, cycle times, and output capacity. Also be sure to collect data regarding actual outputs. This will include gross production numbers, resource use, and total materials input versus output.
The utilization rate is vital for automotive companies because it allows them to see how well they are using their time and labor. According to Corporate Finance Institute, the optimal for most companies is about 85%. (More data on capacity utilization can be found here). However, if the rate falls below the benchmark, the results can be very expensive for a company. This comes as no surprise, based on what we’ve already seen from the especially high downtime costs for automotive companies. For this reason, it is important that utilization rate is measured carefully.
KPI 3: Safety Incidents per Employee
The safety of the workers in any business is always an issue of utmost importance, but in the automotive industry, safety incidents are a common issue that must continually be measured carefully in order to move toward a safer workplace.
The value of this metric is given by the following calculation:
Safety incidents per employee = (number of safety incidents in a time period) ÷ (number of employees working during the time period).
Furthermore, note that the data showing the need for tracking safety incidents in the industry is overwhelming. 2018 data from the Bureau of Labor Statistics shows that injuries in the automotive industry occur at a rate of 6.3 nonfatal injuries and illnesses per 100 full-time workers, while other data has found that 71% of automotive manufacturing workers have had an injury on the job at some point.
The benefits of tracking this KPI are numerous. Having a thorough system in place for measuring safety incidents not only helps to keep workers safe, but it is also a way to detect when equipment is not operating properly, since injuries are often the result of equipment malfunctions. Not only that, but automotive companies can pay a high price for safety incidents. U.S. businesses spend over $60 billion annually on compensation costs due to serious, nonfatal work injuries, and due to the amount of safety incidents within the automotive industry in particular, automotive manufacturers are undoubtedly a significant portion of the $60 billion total.
KPI 4: Throughput
Throughput is a measure of the average number of units being produced over a time period. Hence, it is given by the calculation
Throughput = (units produced) ÷ (time)
For example, an automotive manufacturer builds 60 cars per hour. It is said to be the most important metric for measuring the effectiveness of a production line. Meeting or missing production goals and staying ahead or falling behind the competition both rely upon throughput.
Furthermore, automotive manufacturers can use throughput to gauge if there are weaknesses in the production line. If downtime is high, machines aren’t running at an ideal cycle time, tools and machines aren’t well maintained, or there’s simply an inefficient cycle, it will result in a suboptimal throughput.
KPI 5: Inventory Turns
The inventory turns KPI is calculated by the formula
Inventory Turns = (cost of goods sold) ÷ (average inventory).
For example, if an automotive business has a cost of goods sold of $2,000,000 over the course of a year, and it has an average inventory of $200,000 during that year, then the number of inventory turns is 10.
This KPI determines the number of times inventory is sold in a time period, and it helps to determine if a business has too much inventory when compared to its sales. It also gives an idea of how much time is required to sell the company’s inventory, and it is yet another way for companies to gauge their competitive advantage—or their deficit.
Automotive companies should seek to maintain a high inventory turnover ratio, which means that the company efficiently maintains the inventory and quickly sells it.
KPI 6: EBITDA
EBITDA is one of the best metrics for measuring a company’s cash flow. Calculating EBITDA is straightforward after understanding the meaning of the acronym—since EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, it is calculated by the following formula:
EBITDA = (net income) + (interest) + (taxes) + (depreciation) + (amortization).
Using this KPI, automotive companies can compare profitability between themselves and others in the industry. EBITDA is seen as more of a baseline look at a company’s earnings which can be more useful for comparison purposes because it does not include the effects of financing, tax jurisdiction, or capital structure. In short, EBITDA allows for the comparison of operations without the influence of non-operating decisions, like:
When evaluating operations, the level of debt incurred to purchase the business should not matter, and thus the interest expense should be removed from comparison.
Taxes depend on the location of operations and not the operations themselves, so they should be removed when comparing operations.
This is again a financing versus an operating cost. Depreciation is a non-cash cost, but it is a real cost, so if you’re going to add back depreciation, you should consider deducting expected future capital expenditure, because the equipment being depreciated will need to be replaced. An analyst should keep an eye out for use of equipment leases or cloud software solutions, as these show up as operating expenses. For a fair comparison, the net depreciation/capital expenditure number should reflect reality of ongoing operating costs.
Amortization is similar to depreciation but is specific to real estate. Also, similar to depreciation, an analyst should compare facility lease expenses to amortization to ensure an apples-to-apples comparison of true operating expenses and thus operating performance.
EBITDA is one of several financial operating performance metrics to use when evaluating and/or comparing the operations of an automotive manufacturer. Understanding the components of what the metric includes and excludes is critical in choosing the best metric. Because of the automotive industry’s extensive need for capital and equipment and its global nature from a tax perspective, EBITDA is typically a good measure because it removes these distortions from operational performance comparison.
Investing in new ways to measure the success of a company, as with adapting to all new business processes, can be a challenging process. Logan Consulting has over 25 years of experience in working with companies to find the most efficient solutions for their needs. If you would like to learn more about how we can help transform your business, contact us today.
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