Study notes

Production efficiency

It is important that a business makes effective use of its assets. The investment in production capacity is often significant. Think about how much it costs to set up a factory; the production line with all its machinery and technology. One way to look at how efficiently a business operates is to look at "productivity".

Productivity measures the relationship between inputs into the production process and the resultant outputs. Productivity can be measured in several ways: e.g.

  • Output per worker or hour of labour
  • Output per hour / day / week
  • Output per machine
  • Unit costs (total costs divided by total output)

The unit cost measure is particularly important. A falling ratio would indicate that efficiency was improving.

Why is achieving high productivity important?

  • Most importantly, a more efficient business will produce lower cost goods than competitors. That means the business can either make a higher profit per unit sold (assuming that the product is sold for the same price as a competitor) or the business can offer customers a lower price than competitors (and still make a good profit/
  • Investing in production assets (e.g. equipment, factory buildings) is expensive – a business needs to maximise the return it makes on these assets

There are various ways in which a business can try to improve its productivity:

  • Training – e.g. on-the-job training that allows an employee to improve skills required to work more productively
  • Improved motivation – more motivated employees tend to produce greater output for the same effort than de-motivated ones
  • More or better capital equipment (this links with the topic of automation)
  • Better quality raw materials (reduces amount of time wasted on rejected products)
  • Improved organisation of production – e.g. less wastage

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