Definition of Run Rate:« Back to Glossary Index
Run rate is the bottom-line metric of process performance. It is the most significant indicator of the revenue generating capacity of a business process. Of course, when optimizing a process, changes in other process parameters most be monitored for as well, especially quality loss.
Overview: What is run rate?
The run rate is the average number of units produced by a process over a given period (#units per time). It is the inverse of cycle time, which describes the amount of time required for a process to produce one unit. Run rate is used as a metric of process performance and as an accounting tool to predict future potential by extrapolating the most recent data available.
2 benefits of run rate
Run rate is a complex metric that assesses the people, machines, and time available to perform a process and how each are implemented to maximize the output of a process.
1. Actual performance versus ideal performance
Ideal run rates describe the number of units that could be produced without any downtime, upsets, or breaks in the process. Actual run rates are a measure of the running number of units produced by a process over time. Comparing these two measures will provide an assessment of current productivity and can be used to identify performance losses as soon as they impact revenue.
2. Make projections based on most recent data
Run rates are used to extrapolate data from recent runs over longer periods, typically over a year. This is often preferred over the use of trailing data to estimate future performance benefits related to a process improvement project.
Why are run rates important to understand?
The production rate of a process run is a vital metric in manufacturing and process improvement used for scheduling, purchasing, and cost analysis.
1. To maximize schedule efficiency
Accurate run rates for each step in a process chain can be used to maximize schedule efficiency by synchronizing the start and end times of consecutive steps. By understanding ideal versus actual production rate, you can gauge each step’s performance losses.
2. Coordinate purchasing across multiple domains
By accurately measuring run rates for each step and for each individual process, purchasing sheets can be made that account for individual inputs across the entire company.
3. Account for production costs
Understanding the factors that affect run rates can provide perspective on the costs and inputs of a process. Knowing how efforts to cut process costs and inputs could affect actual production rates facilitates the identification of fruitful cost-cutting measures.
An industry example of run rates
Let’s say that Toyota has an order from the U.S. Forest Service to deliver 1,500 pickup trucks per month for 6 months (target run rate) from the Toyota Motor Manufacturing Indiana facility.
The peak manufacturing capacity of this facility with current employee numbers and machinery is 2,000 units per month (ideal-run rate). Although current manufacturing run rates are at target levels, the defect rate has reached 200 units per month due to more stringent side-collision standards.
With the defect rate of 200 units per month, the actual production rate of this facility is 1,300 units per month, indicating underlying issues in the manufacturing process.
3 best practices when thinking about run rates
Run rates are a complex metric of the health of a process. There are 3 key practices that should be adhered to when analyzing run rates.
1. Account for necessary downtime
When measuring run rates for a process, downtime such as the setup of equipment, changeover of staff, and scheduled maintenance are a necessary part of the process cycle. It is vital to look at the complete process when calculating run rates and avoid setting ideal run rates based solely on the maximum output of equipment.
2. Determine accurate ideal and target run rates
Ideal run rates are key metric that will inform you weather you have the production capacity to meet a target rate based on customer demand. Once you have determined that targeted run rates are feasible based on ideal run rates, use the target rate to assess actual rates and identify inefficiencies.
3. Understand the conditions of measured run rates
When extrapolating future performance from most recent data, it is important to understand any conditions that may limit the accuracy of current data for predicting for future performance.
Frequently Asked Questions (FAQ) about run rates
1. How do I make annual projections based on current quarter data?
Forward projections of performance over a year can be derived from current quarter data by multiplying the current quarter run rates by 4.
2. When are calculated run rates inaccurate metrics?
Run rates can be inaccurate when the conditions of the current data do not accurately reflect the expected conditions over the projected period. Items like one-time sales can inaccurately inflate current-quarter data and reduce the utility of any projections made with it.
3. When are run rates most helpful?
Run rates are excellent predictive tools for assessing future performance based on current data. This can help in determining the potential benefits on an annual basis for a process improvement measure that was implemented only a month ago.
Run rates are useful metrics of performance
Run rates are a quick metric to gauge the health of a business process. Ideal run rates can be used to assess the feasible of meeting a target run rate. Actual run rates can be assessed in terms of the target rate to determine if there are any inefficiencies that need to be addressed to meet current goals. However, keep in mind that anomalies in the most recent data will limit the accuracy of future projections based on that data.« Back to Dictionary Index