What Is Production Efficiency?

By Indeed Editorial Team

Published June 15, 2021

Production efficiency allows companies to use their current resources effectively to achieve maximum outcomes. By reducing waste, businesses can produce goods at a lower cost while still maintaining the same level of quality. Improving your organization's production efficiency can help you lower production costs and discover the actual amount of resources needed to produce your products. In this article, we explore production efficiency, provide steps for how to calculate it and offer tips for improving your production efficiency.

What is production efficiency?

Production efficiency, or productive efficiency, is the condition when a system no longer produces additional goods without interfering with the production of another product. Companies experience this when their production occurs on a production possibility frontier (PPF). It's the production of goods and services at the lowest cost possible, combining the optimal amount of labor and capital.

Often, businesses measure their production efficiency to determine their overall equipment effectiveness (OEE) to determine how much production time is productive. Ideal OEE scores are 100, meaning the company has a perfect production line that produces products quickly.

Related: Business Efficiency: What It Is and How To Improve It

Why is production efficiency important?

Production efficiency is important to help manufacturing and production companies determine the maximum capacity, or output, they can achieve with their current assets. It helps them determine if they are being the most efficient with their resources available so they can determine if they have areas for improvement. Some benefits of calculating your organization's production efficiency include:

  • Discovering the amount of resources needed for production

  • Eliminating production waste

  • Reducing energy used to create products or services

  • Lowering production costs

What's the difference between efficiency and productivity?

While people often use efficiency and productivity interchangeably, they vary in what they measure. Productivity focuses on measuring the bulk output in a unit amount of time, such as hours, or the quantity. However, efficiency looks at the cost per unit of production, or quality of using the resources to produce an outcome. Another difference between the two is that efficiency considers underlying costs, whereas productivity doesn't. For instance, Ted may produce 80 toy cars and Liam may produce 50 toy cars, but if Ted's toy cars break and cost the company double money for production, Liam's production may be more efficient but less productive.

Related: How To Measure Productivity and Increase Efficiency in the Workplace

How to calculate production efficiency

The formula for calculating production efficiency is:

[Actual output rate] / [Standard output rate] x 100% = Production efficiency

Follow these steps when calculating your production efficiency:

1. Determine your company's standard output rate

To calculate your company's production efficiency, first find your standard output rate. A standard output rate is the average rate of performance from a trained worker or amount of work they can produce per unit of time. You can find this by using historical data. For example, a factory assembling computer keyboards may produce an average of 100 computer keyboards in 8 hours. Their standard output rate would be 12.5 computer keyboards per hour.

100 computer keyboards / 8 hours = 12.5 computer keyboards/hour

2. Find your actual output rate

Next, find your company's actual output rate, or the productivity that employees actually achieve. This may be higher or lower than your standard output rate, depending on how productive your employees are. You can determine your actual output rate by dividing the unit of time from the number of products. So for our scenario above, if an employee actually produces 100 computer keyboards in 10 hours, their actual output rate would be 10 computer keyboards per hour.

100 computer keyboards / 10 hours = 10 computer keyboards/hour

3. Divide your actual output rate by your standard output rate

After finding both rates, divide the actual output rate by the standard output rate. This helps you compare your actual output rate to the standard output rate. For our example, we would divide 10 by 12.5 to get a sum of 0.8.

10 computer keyboards/hour / 12.5 computer keyboards/hour = 0.8

4. Multiply your sum by 100%

Once you divide your actual output rate by your standard output rate, multiply the amount by 100%. This gives you the percentage for your production efficiency. For our company producing computer keyboards, they would multiply 0.8 by 100% to get a production efficiency of 80%. This means that the computer keyboard factory is working behind their maximum capacity and is not producing as many computer keyboards as they could be.

0.8 x 100% = 80%

Tips for improving production efficiency

Here are some tips to help you improve your production efficiency:

Measure performance

Set a way to measure performance to help monitor your production efficiency. Once way to do this is by setting a key performance indicator (KPI), which is a performance measurement. For example, a manufacturing company may set a KPI to produce 1,000 items by the end of each month. Having a metric to determine success can help you determine what areas your company could improve in.

Related: A Complete Guide To Key Performance Indicators (KPIs)

Improve training

To ensure all your employees are efficient in their work, consider improving your training. Learning particularly skills for creating your product and service can help mitigate potential risks in the production. Also, educate your team when adding new technologies or processes so they have a sufficient understanding.

Update your technology

Another way to improve your production efficiency is to consider updating your company's technology. While technology may have upfront costs, it can end up saving your company time and money in the future. Maintaining up-to-date technologies can help ensure you keep both your employees and customers happy since it enhances the overall workflow.

Organize the workspace

Create a workspace that is easy to navigate and has effective storage for items. Having an organized work environment can help employees eliminate unnecessary movements between one location and another. Consider storing materials near production so they are easy to grab.

Related: Top 11 Tips for Work Organization and Productivity

Identify and eliminate areas of wastefulness

Examine how your company uses its resources to find if there are any areas of wastefulness. This may include materials as well as human labor. For instance, if employees performing the same task take multiple approaches, consider focusing on creating a universal workflow to save the company work hours. Another way to eliminate wastefulness is by reusing manufacturing materials.

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