How to Calculate KPI in Production

Key performance indicators assist management in measuring and improving quality.
Key performance indicators assist management in measuring and improving quality. (Image: business production dollar image by Nicemonkey from

Critical success factors, or CSFs, affect the achievement of organizational goals and objectives. Key performance indicators, or KPIs, measure organizational performance with respect to each CSF. Key performance indicators can be either financial -- for example, return on investment -- or non-financial -- for example, morale improvement. Three key production KPIs are: average cost of production, which affects profitability; defects per million opportunities, or DPMO, and loss ratio of material per order, both of which are quality measurements.

Get the average production cost. This is equal to the total cost of production divided by the quantity of units produced. Your production decisions are likely to be based on this KPI. If your selling price per unit is less than your average production cost, you are not likely to continue production until market demand improves or the cost of input raw materials drops. For example, if the market price of your product is $5 per unit and your average production cost per unit is $6, then you would be in a loss position. You would have to find ways to bring your cost down by a dollar or more or wait for demand conditions to change before you can break even.

Calculate DPMO. This is a Six Sigma metric used to indicate the number of defects in a process per one million opportunities. Six Sigma is a statistical quality control tool. First, count the number of opportunities in the production process where a defect might occur and multiply it by the number of units of production. Second, count the number of defective units. Divide the number of defective products by the total number of opportunities and multiply the result by one million to get DPMO. For example, if a parts assembly line with 20 known defect opportunities per 20,000-unit production batch produces five defective products, then the DPMO per batch is 12.5: 5 / (20 x 20,000) x 1,000,000.

Find the loss ratio of material per order. It is equal to the lost material divided by the material order quantity, expressed as a percentage. The acceptable range for the loss material ratio is 3 percent to 5 percent. If the ratio is higher, you should reexamine your production process.

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