Author: Jim Riley Last updated: Sunday 23 September, 2012
Production & operations: Production efficiency
All businesses should try to operate efficiently. However, this is particularly important for a growing business.
In many markets, a business needs to be at least as efficient as its main competitors in order to be able to compete and survive in the long-term. A more efficient business will produce lower cost goods than competitors and may generate more profit possibly at lower prices
Increasing efficiency will also boost the capacity of a business, assuming there is no change in the number of inputs employed. The capacity of a firm refers to how much a business can produce during a specific period of time.
What do we mean by efficiency?
Where a business has efficient production, it is operating at maximum output at minimum cost per unit of output.
Efficiency is, therefore, a measure of how well the production or transformation process is performing. However, this is not always easy to assess.
There are several ways to measure efficiency
This measures the relationship between inputs into the production process and the resultant outputs. The most commonly used measure is labour productivity, which is measured by output per worker. For example, assume a sofa manufacturer makes 100 sofas a month and employs 25 workers. The labour productivity is 4 sofas per person per month.
There are several other measures of productivity.
Output per hour / day / week
Output per machine
Unit cost (also referred to as cost per unit) divides total costs by the number of units produced. A falling ratio would indicate that efficiency was improving.
A business will have set itself a target stock level of finished goods that it should achieve. This is calculated to satisfy the demand expected by the marketing department plans and based on what the production department thinks they can produce. If the stock level falls below this level then the productive efficiency has reduced since the output per worker has not met the planned requirements.
Non-productive (“idle”) resources
Which resources are not in constant use in the business? Are employees often left with nothing to do? Are machines only used for part of available time? Too many idle resources are a common sign of inefficiency in production.