Metric No: 1
Overall Equipment Effectiveness (OEE)
Overall Equipment Effectiveness (OEE) is a metric that evaluates the efficiency and productivity of food manufacturing equipment and processes by measuring three key factors: Availability, Performance, and Quality. The formula for calculating OEE is as follows:
OEE = Availability × Performance × Quality
This factor measures the percentage of scheduled production time that the food manufacturing equipment is operational. It is calculated as the ratio of actual operating time to planned production time:
Availability = (Actual Operating Time) / (Planned Production Time)
Availability is particularly important in food manufacturing, where equipment downtime can lead to product spoilage, increased waste, and reduced output.
This factor measures how efficiently the food manufacturing equipment operates compared to its maximum potential speed. It is calculated as the ratio of the actual production rate to the maximum potential production rate:
Performance = (Actual Production Rate) / (Maximum Potential Production Rate)
In the context of food manufacturing, maintaining optimal performance ensures that food products are produced at a steady rate, meeting customer demand while minimizing production costs.
This factor measures the percentage of good products produced, excluding any defective or non-conforming items that require rework or disposal. It is calculated as the ratio of the number of good products produced to the total products produced:
Quality = (Number of Good Products Produced) / (Total Products Produced)
Quality is especially critical in the food manufacturing industry, where producing high-quality products ensures food safety, reduces waste, and helps maintain a strong brand reputation.
By multiplying these three factors together, you obtain the Overall Equipment Effectiveness percentage, which provides an indication of how well the food manufacturing equipment and processes are utilized during production. An OEE of 100% means that the equipment is operating at its full potential with no downtime, producing at maximum speed, and creating only good-quality food products.
Metric No: 2
The yield rate, also known as process yield or first-pass yield, measures the efficiency of a manufacturing process by comparing the output of good products to the input of raw materials or semi-finished products. The formula for calculating the yield rate is:
Yield Rate = (Number of Good Products Produced) / (Total Input or Raw Materials Used) × 100
In the context of food manufacturing, this formula would look like:
Yield Rate = (Number of Good Food Products Produced) / (Total Raw Materials or Ingredients Used) × 100
By calculating the yield rate, food manufacturers can assess how efficiently they are converting raw materials into finished products, minimize waste, and optimize production processes to improve overall efficiency.
Inventory turnover is a financial metric that measures how efficiently a company manages its inventory by comparing the cost of goods sold (COGS) to the average inventory level during a specific period. The formula for calculating inventory turnover is:
- Cost of Goods Sold (COGS) represents the total cost of manufacturing and delivering goods during the specified period. In the case of food and beverage manufacturers, this includes the cost of raw materials, labor, and other production-related expenses.
- Average Inventory is the average value of inventory held by the company during the specified period. To calculate this, you can use the beginning and ending inventory levels for the period:
A higher inventory turnover rate indicates that a company is effectively managing its inventory, selling and replacing stock quickly, which is particularly important for food and beverage manufacturers to minimize spoilage and maintain product freshness.
Keep in mind that the inventory turnover ratio might vary depending on the industry and the type of products being sold. It's essential to compare inventory turnover rates with industry benchmarks or competitors to have a clear understanding of your company's efficiency in managing inventory.
Metric No: 3
Supplier Lead Time:
This metric represents the average time it takes for a supplier to deliver raw materials, ingredients, or other essential components from the time the order is placed. Monitoring supplier lead times can help food and beverage manufacturers optimize inventory management, maintain continuity of supply, and prevent production delays.
Metric No: 4
Gross Margin per finished good
Gross margin is a financial metric that represents the percentage of total sales revenue remaining after accounting for the cost of goods sold (COGS). To calculate the gross margin for a manufactured food product, use the following formula:
The total amount of money received from selling the food product, which can be calculated as:
COGS ( Cost of Good Sold)
The cost of producing the food product, including raw materials, labor, and other production-related expenses. For a food manufacturing company, COGS can be calculated as:
The Cost of Goods Sold, which relies heavily on inventory item values, fluctuates depending on the inventory valuation method a company employs. Four primary inventory valuation methods uniquely influence COGS, playing a significant role in optimizing net income.
- First In, First Out (FIFO): Items purchased or produced first are sold first, leading to lower Cost of Goods Sold (COGS) and higher net income due to typically lower raw material prices.
- Last In, First Out (LIFO): Prioritizes selling the most recently purchased or manufactured items first, resulting in higher COGS than FIFO and a decrease in net income over time due to rising raw material costs.
- Weighted Average or Average Cost: Considers the average price of all inventory items when valuing sold goods, stabilizing COGS as fluctuations in raw material prices do not introduce cost disparities.
- Specific Identification: Calculates the ending inventory value and COGS accurately by using the exact cost of each individual inventory item, ensuring precise inventory valuation by accounting for the unique cost of each item.
Metric No: 5
Shelf Life Utilization
This metric measures the efficiency of a food manufacturer's production and inventory management in relation to product expiration dates. It helps companies minimize waste, reduce costs associated with spoilage, and maintain product freshness. It is calculated by comparing the remaining shelf life of a product at the time of sale or consumption to its total shelf life.
About the Author
Bjorgvin Gudmundsson is a dedicated Sales Director at Inecta Food ERP, with a passion for optimizing the food supply chain and streamlining food and beverage manufacturing processes. Drawing on his extensive knowledge and industry experience, Bjorgvin is committed to helping businesses grow and thrive by leveraging state-of-the-art ERP solutions.
Ready to elevate your food and beverage manufacturing operations? Connect with Bjorgvin and discover the potential of Inecta Food ERP to unlock greater efficiency, profitability, and sustainability in your business. Transform your company's future and join the many success stories today!