IMPORTANT KPIS FOR MANUFACTURING INDUSTRY

KPI stands for key performance indicator, a quantifiable measure of performance over time for a specific objective. Setting performance targets can help you deliver the strategic changes that many growing businesses need to make. The top-level objectives of your strategic plan can be implemented through departmental goals, and setting targets based on KPIs is an ideal way of doing this.

A KPI should be simple, straightforward, relevant, actionable, aligned and easy to measure. Business analytics expert Jay Liebowitz says that an effective KPI is one that “prompts decisions, not additional questions.”

 

Some of the important KPIs Used in Manufacturing

1. Throughput – This is probably one of the most fundamental and one of the most important of the KPIs for the manufacturing industry The Throughput KPI measures the production capabilities of a machine, line, or plant; also known as how much they can produce over a specified time.

Throughput = Production Units / Time (Hour or day)

2. Productivity Whether your factory’s actual operating performance (i.e. machinery and working operatives) meets your forecasted volumes

Productivity = Actual Production achieved / Production Target

3. Cycle Time cycle time is the average amount of time it takes to produce a product. The cycle time metric can be used to measure the time it takes to manufacture a completed product, each individual component of the final product, or even go as far as to include delivery to the end user. Thus, cycle time can be used to analyse overall efficiency of a manufacturing process on the macro scale, as well as determine inefficiencies on a micro scale and for identifying potential bottlenecks within the production process

Cycle time = Process End Time-Process Start Time

It can also be defined as following which includes the time between the stages of production, inspection time and queue time, if any.

Lead time= Tp+Tm+Ti+Tq

Tp=Average Production time

Tm=Move time between different stages

Ti=Average Inspection time

Tq=Average queue time

4. Inventory Turnover – This is a measure of how many times inventory is sold over a specific time period and helps indicate resource effectiveness. Low ratio numbers indicate poor sales and excessive inventory, while high ratio numbers represent strong sales or insufficient inventory.

Raw Material Inventory Turnover Ratio = Cost of Raw Material Consumption /Avg. Raw Materials Stock

Finished Goods Inventory Turnover Ratio = Cost of Goods Sold /Avg. Finished Goods Stock

5. Avoided Cost –The avoided cost manufacturing metric is an estimate of how much money you saved by spending money. Seems strange, right? The most common example is how much money is spent on machine maintenance vs. repair cost if a machine were to break down, plus the lost production value associated with the repair downtime.

Avoided Cost = Estimated Repair Cost+ Production Losses-Preventive Maintenance Cost

6. Return on Assets (ROA) – You might be thinking, this seems like it has less to do with manufacturing and more to do with finance. That is because it does. However, financial metrics are just as important as manufacturing metrics. You can’t have a business if you aren’t making money. This metric evaluates how well your business is making use of its assets (money). It is the annual net income divided by total assets..

 

Return on Assets (ROA) = Net Profit / Avg. Capital Employed (Fixed Assets+ Net Current assets)

Lean Manufacturing KPIs

Lean manufacturing is a practice of Japanese origin (name drop: Toyota) whereby companies attempt to minimize the amount of “waste” without sacrificing productivity. “Waste” in this situation doesn’t mean garbage or refuge from the production process. It actually represents any activity that does not add value from a customer’s perspective. Listed below are some of the  examples of lean manufacturing KPIs:

7. Machine Downtime Rate – While this is commonly used as a manufacturing metric to give a general snapshot of how operation is going, it doesn’t paint a full picture. Machine downtime is a combination of both scheduled downtime and unscheduled downtime.

Machine Downtime Rate = Downtime Hours / (Downtime Hours + Operational Hours)

8. Percentage Planned Maintenance – This production metric is used to analyze the ratio of scheduled maintenance against the unscheduled maintenance. This KPI is useful in identifying when more preventative maintenance is required for certain assets.

No. of Planned Maintenance Hours / No of Total Maintenance Hours *100

9. Capacity Utilization – This production KPI measures the amount of capacity being utilized as a function of total capacity available. Ideally, companies want this number to be as high as possible, as it indicates they are making better use of their production capabilities and maximizing return on their assets. This metric can also be used by management when deciding whether to take on new orders or quoting lead time, as it gives a snapshot of available resources.

Capacity Utilization = Actual Plant Utilization-Process Start Time / Total Productive Capcity

10. First Pass Yield and Final Pass Yield– This is one of the most fundamental production KPIs. It calculates the percentage of products manufactured to specification the first time through the process. This means that they do not require any rework or become scrap. A higher FPY rate is very desirable for any company.

First Pass Yield Rate = Quality Units (without failure) / Total Units Produced

Final Pass Yield Rate = Quality Passed Units (including reprocessed/downgraded)/ Total Units Produced

First pass yield should not include products that were downgraded and sold as something else, this is still considered a failure and would be captured in the final yield.

By measuring both First Pass and Final Yield a site can see how much extra work is being used to sell all the productions.

11. Overall Equipment Effectiveness (OEE) – This key performance indicator is considered the gold standard for measuring manufacturing productivity. The higher your OEE, the more effective your equipment is. 

Overall Equipment Effectiveness (OEE) = Availability * Performance * Quality

OEE = (Good Count × Ideal Cycle Time) / Planned Production Time

Availability = Run Time / Planned Production Time.

Performance = (Ideal Cycle Time × Total Count) / Run Time.

Quality = Good Count / Total Count.

OEE = Availability × Performance × Quality.

12. Overtime Rate – This metric compares the amount of overtime worked by employees to the amount of standard hours. It helps to identify inefficiencies in scheduling and/or staffing..

Overtime Rate = Overtime Hours / Regular Hours *100

13. Employee Turnover – While this metric isn’t manufacturing specific, it is as equally important as the other KPIs in this list. While employee turnover typically has a negative connotation associated with it, not all turnover is bad. Some turnover may be required to remove underperformers and replace them with higher performers. However, having too high of a turnover can lead to lower moral.

Employee Turnover Rate = No. of Employees who left / Avg. No. of  Employees *100

14. Customer Returns (Rejects) –Keeping track of returns is imperative. This metric calculates the percentage of products that customers return because they have received a bad product. Needless to say, a company should strive for the lowest percent possible.

Customer Return Rate=No. of Products Returned/ Total No. of Products Shipped *100

15. Scrap Rate –. It keeps track of the number of products that are deemed scrap due to manufacturing defects that can’t be reworked. It gives companies insight into the ratio of products deemed scrap in a production run, helping identify an inefficient process.

Scrap Rate = No. of Scrap Units / Total No. of Units

16. On-Time Delivery – This is less of a production performance metric, but a very important KPI in the manufacturing sector nonetheless. You can have the most efficient production line in the world, but if you can’t deliver on time, clients are not going to want to work with you. This metric measures the percentage of products delivered on time to clients.

On-Time Delivery = No. of Units Delivered On-Time /No of Units Delivered *100

 

PHARMACEUTICAL FORMULATION INDUSTRY- COSTING, COST CONTROL AND COST MANAGEMENT

 

About the Pharmaceutical Formulation industry

The pharmaceutical formulation industry plays a crucial role in the development and production of various pharmaceutical products such as tablets, capsules, injectable, creams, ointments, and more. This industry is responsible for transforming active pharmaceutical ingredients (APIs) into a final dosage form that is safe, effective, and suitable for administration to patients.

Pharmaceutical formulation transforms the active pharmaceutical ingredients (APIs) to final dosage form that is safe, effective, and suitable for administration to patients. It involves the combination of different excipients (inactive ingredients) with APIs to create a stable, uniform drug product. Excipients help in preserving the stability, enhancing the absorption, modifying the release profile, and improving the overall appearance and acceptability of the final dosage form.

The industry produces a wide range of products to meet various health care needs. Here are some of the categories of pharmaceutical formulation products:

Solid Dosage forms: Tablets, Capsules, Powders, Granules, Pellets

Liquid Dosage forms: Solutions, Suspensions, Syrups, Drops

Parental Dosage forms: Injections, Implants

Inhalation dosage forms and others

This is not an exhaustive list. Within each type of dosage form, there may be variations in formulations, strengths and combination of active ingredients. Each product type has its formulation requirements, manufacturing process and regulatory considerations.

The table below shows the different stages of manufacturing and distributing a pharma product and description of major cost components (other than the fixed overheads) incurred at each stage from Active Pharma Ingredient (API) manufacturing and ends with the pharma formulation product reaching the end consumer through a pharmacy.

Importance of cost control in Pharmaceutical Formulation Industry

Costing is crucial in the pharmaceutical formulation industry as it helps companies determine pricing, control costs, plan budgets, ensure regulatory compliance, make informed decisions, and drive continuous improvement. By effectively managing costs, pharmaceutical companies can maintain competitiveness, maximize profitability, and deliver high-quality formulations to the market.

Method of costing

In the pharmaceutical formulation industry, Batch Process costing is commonly used as the products are manufactured in distinct batches. In this method, costs are accumulated and allocated to each specific batch of products. The costs incurred such as raw materials, labour utilities and manufacturing overheads are tracked and assigned to respective batch, It allows better cost control, quality monitoring and traceability for each specific batch. It facilitates compliance with regulatory requirement.

Common Manufacturing Processes in Formulation Industry

• Weighing and dispensing of raw materials, APIs and excipients according to          formulation recipes.
• Blending
• Granulation, drying and milling
• Compression (tablets) or encapsulation (capsules)
• Coating

·         In case of liquid formulation- mixing of liquid ingredients and filling into vials or ampoules

• Sterilization- in case of injectable or ophthalmic products additional steps to ensure sterility
• Packaging and Labelling

Cost centres

In the pharmaceutical formulation industry, cost centres are specific departments, divisions, or areas within an organization where costs are incurred. They are used to track and allocate expenses to better understand the cost structure of the business. Cost centres help in analysing and managing costs more effectively by providing a breakdown of expenses and facilitating budgeting and performance evaluations. Here are some of the indicative cost centres typically found in the pharma formulation industry

The cost centres can be broadly categorized into manufacturing, utilities, environmental health and safety (EHS), quality control and assurance, quality management system, maintenance, research and development, supply chain and procurement, factory overhead, administration overhead, sales and distribution overhead, legal and regulatory affairs, etc. It's important to note that the specific cost centres may vary depending on the organization's structure, size, and specific operations.

 

COST SHEET

An indicative cost sheet based on absorption costing is provided in the table given below:             

Cost sheet is to be prepared for each type of formulation, each type of packing and each size of packing.

Cost control and Cost Management

Cost control helps the formulation manufacturing companies to optimize costs and maximize profitability.

Cost control is possible in the following areas:

•      Raw Material Sourcing
•     Manufacturing Process Optimization
•     Scale of Production
•      Supply Chain Management
•      Outsourcing
•      Quality Control
•      Regulatory Compliance
•       Pricing Strategies
•      Continuous improvement and Cost Tracking
•     Waste management

Along with the cost control measures, the cost management strategies may be implemented without compromising on product quality, patient safely and regulatory compliance. Some of the areas where cost management can be applied are energy efficiency, standardizing formulations, cost benchmarking, IP protection, process automation and digitization. Value engineering and lean manufacturing are some of the important cost management strategies which can be applied in formulation manufacturing industry.

Implementation of cost management strategies and continuous improvement makes the company more competitive and also help the pharmaceutical formulation industry to gain competitive advantage in global markets.

 

 

CMA Manjula Gutti

Cost and Management Accountant

Services Offered: Audit and assurance, Cost Consultant

Email id: manjula_asso.cma@rediffmail.com

Mobile No: +91 9989065215

(Customised Cost sheets and Cost MIS reports/ Dashboard are provided during the implementation of the cost management system. Cost sheets will be designed based on the industry, company and its operations and method of costing adopted.)

 

COST MANAGEMENT -HEALTHCARE INDUSTRY /COST AUDIT-HEALTH SERVICES

 

Healthcare is a wider term. In addition to hospitals, the Healthcare industry comprises of related products and services such as medical devices, clinical trials, outsourcing, telemedicine, medical tourism, health insurance, and medical equipment. The industry is growing at a tremendous pace owing to its strengthening coverage, services and increasing expenditure by public as well as private players.

Several existing and emerging technologies will have a positive impact on the healthcare industry in the future. Artificial intelligence, machine learning, virtual reality and others will become critical tools for healthcare providers and organizations to perform more efficiently.

With the evolution of new techniques, using advanced technologies and spending on research, healthcare is no more a system of patient care only. Earlier hospitals were more focused on managing revenues rather than cost. The yardstick of operational efficiency was bed occupancy. But in modern scenario, with the emerging insurance sector and competitive pricing has kept a control over the revenue side whereas modern technique of treatment has shifted the focus away from bed occupancy. 

The healthcare industry is left far behind other industries in adopting cost management systems because of the characteristics of the hospital industry like quantum of services rendered along with the complexities involved in each service, cross department services, the permutations and combinations of services provided to a patient, changing technologies and hence the obsolescence of the medical equipment which makes it difficult to arrive at the cost of resource as well as service.

                                                            Various levels of costing

Hospitals have various specialties/ medical departments and each specialty provides different types of services.

The type of services and number of services provided to a patient again depends on the patient diagnosis and clinical complications. The process involved, cost of resources and material may vary from patient to patient for the same procedure.

For example, for the two patients having angioplasty, the cost may differ based on the clinical complications - type of stunt used, number of stunts planted, procedure done by very experienced and skilled doctor or by a doctor having less experience- based on the complexity of the angioplasty procedure done for a particular patient.

Nowadays, due to the changes in the insurance benefits, the patients are comparing hospital prices which is putting pressure on the hospitals to set the prices at levels that reflect the costs of providing care. If these changes materialize, cost accounting information will become a much more important part of hospital management than it has been in the past.

What is Cost Management

Cost Management is the process of managing and controlling monetary resources while running a business. It is also defined as the process of planning and controlling the budget of a business. Having a good cost management system helps the organization to estimate and allocate its budget and thus reduces the budget overruns with accurate forecasting of the expenditure. It also ensures having effective cost control measures.

The objective of the cost management process is not only to reduce costs but to reduce costs only to that extent where the quality of the product or service is not hampered.

Healthcare organizations that carefully and strategically reduce spending can avoid negatively impact their ability to deliver an excellent patient experience. 

Resource allocation, cost estimation, cost budgeting and cost control are the major functions of the cost management process.

Cost Management Process

·         Evaluate hospital- and department-specific data.

·         Determine optimal resource allocation to achieve quality and cost goals.

·         Develop a strategic management action plan for change and process improvement.

·         Provide routine concise feedback on goal attainment, which leads to sustainability. 

Cost Management accounting methods

1.      Activity Based Costing

Activity based costing takes a rational approach to product and service costing, since it begins with an effort to identify the fundamental activities and resources involved in producing an output. The indirect expenses are then allocated to the activities using cost drivers that are carefully selected to reflect the use of each particular resource pool. This methodology has been found to produce accurate and rational financial management information, and to provide information that helps managers make accurate product mix decisions, product price calculations, and consumer profitability analysis.

However, ABC is not without its drawbacks. Identifying the appropriate cost drivers, an essential step in the ABC process, requires significant managerial time and financial investment. Moreover, significant investments are required to maintain an ABC system as the organization’s processes change

2.     Performance-focussed Activity Based Costing (PFABC) 

PFABC is an intensive costing process that requires several steps to properly allocate indirect expenses. PFABC is similar to ABC in that it requires the identification of major cost activities. With PFABC, the actual resources for each activity can be assessed in a variety of ways, including interviews, surveys, or based on actual utilization of time, materials or other resources. The extra processes in the PFABC approach make PFABC more difficult to establish but enable PFABC to offer a richer and more detailed examination of the organization’s activities. It is a powerful planning and performance evaluation tool, as it can identify variances, such as rate, efficiency, and volume variances. It is the one costing mechanism that is used to examine the efficiency and effectiveness of an organization.

3.      Ratio of Cost to Charges (RCC)

RCC is a costing method specific to the health care industry. Hospitals uses traditional costing methods to allocate overhead costs to clinical departments and thereby estimate the full cost of each revenue-producing department. These estimates are paired with information about the total charges for all services provided by a clinical department to compute a department-level ratio of cost to charges (RCC). The RCC, when multiplied by the hospital’s charge for a specific service, can be used to estimate the cost of providing an individual. Service cost estimates made using this method are of questionable accuracy.

4.     Relative Value Units (RVUs)

RVU is an approach to weigh the intensity of the each healthcare service (CDM). The approach uses the weights defined in RVU for Physicians and for the Hospital. RVUs define the value of a service or procedure relative to all services and procedures. This measure of value is based on the extent of physician work, clinical and nonclinical resources, and expertise required to deliver the healthcare service to patients. 

Comparison of costing methods used in healthcare sector

Other cost management techniques suggested are Target Costing, Benchmarking and Balanced scorecard.

Supply Chain management in Healthcare Industry

Healthcare supply chain management is a collection of processes, teams, and the transportation of medicines and other supplies, medical tools, medical equipment and other products required by healthcare professionals to execute their jobs. 

• Reduce operational costs with better processes and automation: Efficient logistics enable medical enterprises to compete more effectively in the marketplace. Helps in managing pricing fluctuations, reducing the negative impact when deliveries are delayed or avoiding unanticipated shortages and better inventory controls.
• Gives a competitive advantage
• Improve the three C’s: communication, collaboration, and coordination between vendors, suppliers, transportation firms, and shipping organizations
• Increased transparency: Logistics partners should improve transparency by coordinating live tracking updates and establishing open communication channels to increase customer service.
• Aids in demand forecasting : Using healthcare supply chain analytics to estimate demand correctly, improve stock planning and management, and respond more quickly to changing market conditions by combining supply chain and clinical data.

 The following are some areas that hospitals can examine to improve cost management.              

1.       Outsourcing and Standardizing Service Contracts

·         Food /Canteen Service Contracts

·         Clinical Engineering contracts

·         Environmental service contracts

Outsourcing and standardizing services through a single vendor wherever possible to lower operating costs and also boost patient satisfaction.

2.       Examining Patient Flow

Creating a standardized way for how patients move around within a hospital can reduce costs and improve the quality of care these patients receive. Optimizing patient flow helps to: 

·         Decrease delays and wait times 

·         Improve room turnaround times 

·         Ensure maximum occupancy for every hospital bed 

This reduces the bottlenecks, helps the patient flow moving and thus reducing the overall costs while bolstering the patient satisfaction

3.       Healthcare staff

Cost management in healthcare does not mean reducing the head count.

 It means

·     retaining skilled and efficient staff and thereby reducing employee turnover, retaining great associate and consultant doctors

·         conducting staff training and development workshops

·         recognizing and providing incentives for good performance

·         optimize scheduling

which contributes to long term cost reduction.

4.       Preventing re-admission

CONCLUSION

 

Challenges faced by the health care sector are the complexities due to huge number of services, various specialities, inter-dependencies, other ancillary profit centers, lack of accurate data, identifying the activities and its related data.

The solution is to implement a good cloud based integrated ERP with inventory management, fixed assets, cost management and business intelligence modules along with the operations and finance/accounting, HR modules. More focus to be given on outcome-based reporting and evaluation to be done monthly/ quarterly to take necessary action.

Even if the costing management systems have been implemented in the hospitals, the accounting experts say that “…there is an almost complete lack of understanding of how much it costs to deliver patient care…Instead of focusing on the costs of treating individual patients with specific medical conditions over their full cycle of care, providers aggregate and analyze costs at the specialty or service department level.” 

Adherence to Companies (Cost Records and Audit) Rules, 2014 & Amendment thereto and maintenance of cost records as prescribed in Form CRA 1 of the Rules to the extent applicable will enable the healthcare service provider to arrive at costs at different levels including patient level and use it for further analysis. 

COST RECORDS AND COST AUDIT

Any company engaged in “Health services, namely functioning as or running hospitals, diagnostic centers, clinical centers or test laboratories” are required to maintain cost records and having an overall turnover from all its products and services or Rupees Thirty-Five crores or more during the immediately preceding financial year needs to maintain prescribed cost records in accordance with Form CRA 1 of the Rules to the extent applicable. A company need to get cost records audited in accordance with these rules if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is Rupees 100 crore or more. 

Customized Cost sheets (different levels) and Cost MIS reports/ Dashboard provided during the implementation of the cost management system.

 

CMA Manjula Gutti

Cost and Management Accountant

Email id: manjula_asso.cma@rediffmail.com

Mobile No: +91 9989065215

 

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