Production efficiency looks at how many goods or services your company can produce with its existing resources. Regularly tracking production efficiency can help you quickly spot any issues in manufacturing, such as faulty equipment or bottlenecks. Resolving these quickly can minimise downtime, reduce waste and boost productivity.
“Production efficiency is a measure of how well a business transforms raw materials into salable goods,” says Mike Gee, Director at Premier Forrester, a Yorkshire-based food production and consultancy solutions business. “Understanding, measuring, and then acting on production efficiency should be [routine] for anyone in charge of a manufacturing business.”
How to calculate production efficiency
Production efficiency formula
The production efficiency formula compares two figures. The first - known as your 'actual output rate' - is how many items you are producing in a specific period, usually the most recent week or month.
The second is what's known as your 'standard output rate', which is how many items you are capable of producing in that specific period. In other words, how much your company can produce when its processes are working as efficiently as they can.
Both figures are based on the assumption that the amount of inputs, or resources you're using to produce your goods, have stayed the same.
To calculate your actual output rate, take the number of goods you produced in a specific period, perhaps from the past week or month, and divide this by the number of hours it took to produce them. For your standard output rate, take the average number of goods you typically produce in the same specific period, and divide this by the number of hours it took to produce them.
Production Efficiency = Actual Output Rate / Standard Output Rate x 100
Taking an example, imagine in an average week your business typically manufactures 80 pairs of shoes in 40 hours. But this week, your business only manufactured 60 pairs of shoes in 40 hours. To work out your production efficiency, use the production efficiency formula:
Standard Output Rate: 80 Pairs / 40 Hours = 2 Pairs Per Hour
Actual Output Rate: 60 Pairs / 40 Hours = 1.5 Pairs Per Hour
Using the production efficiency formula:
Production Efficiency: (1.5 / 2) x 100 = 0.75 x 100 = 75%
In this example, the production efficiency of the business for the week is 75%. Using the production efficiency formula regularly will help you to quickly identify if production is falling, so that you can delve deeper into any potential issues.
Production efficiency will rise and fall from month to month. With an American Express® Business Platinum Card, you get payment terms of up to 54 days, which may help with cash flow management¹. Moreover, the Business Platinum Card comes with an annual £150 statement credit redeemable with Dell Technologies, which can be used towards new tech to help improve your production efficiency².
What is the production possibility frontier (PPF) curve?
What the production efficiency formula doesn't consider is how increasing the production of one item can affect the production of another, when the inputs don't change. In other words, the trade-offs you need to account for when deciding which products to manufacture and in what quantity. This is where the Production Possibility Frontier (PPF) curve comes in.
The PPF curve takes two products and looks at how the production of one product is affected by the production of another when the amount of resources used in their manufacture doesn't change. It considers that the manufacture of one product can only be increased if the manufacture of another is lowered because otherwise you will run out of resources.
“The PPF curve is a ‘possibilities’ comparison graph that uses a business's existing resources to forecast possible scenarios,” says Debbie Steel, Director of UK sportswear manufacturer PINKFudge. It is used to decide the optimum product combination for a company to manufacture and sell.
The PPF curve diagram
The PPF curve takes two products and plots possible production volumes for each one within a given period and uses a finite amount of resources. The curve itself represents the maximum possible production available for any given mix of both products.
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In the illustration above, there are four theoretical points of production plotted on or around the PPF curve. Point A shows the most efficient production of one product (Product 1), while at the other end point D shows the most efficient production of an alternative product (Product 2). Point B shows an inefficient midway point with fairly equal production of both products, where the maximum possible production isn't being achieved. Point C, meanwhile, represents an impossible level of production as it exceeds the resources available.
“Anything on the PPF curve would be optimising cost efficiency of the products produced,” says Steel. “Anything above is not possible with the same resources and anything below is not ideal, in other words, it would be less profitable for your business.”
Using the PPF curve to help your business
A PPF curve can help you understand the most cost-effective combination of products to make, says Steel. It becomes even more valuable when you consider the impact of other factors, like profit per unit and sales volumes. Product 1, for example, might have a higher sales price than Product 2 but sell in much lower volumes.
“The PPF curve helps you to calculate, compare, and project profits for these different combinations,” shares Steel. You can use it to better understand which tradeoffs to make to maximise profit. It does however rely on some assumptions, including that resources are fully and efficiently used, and that processes remain constant. It is also limited in that it only provides a snapshot in time.
This means it’s important to regularly update your PPF curve. “In a manufacturing environment, daily review meetings are common to address real-time issues and weekly to monitor and track improvement initiatives,” says Gee.
How to make production more efficient
Identify hidden costs
“Interrogate, identify and strategise to mitigate every hidden cost,” says Steel. Analyse your production data to spot trends and any recurring issues or bottlenecks. For example, waste materials and excess inventory. By pinpointing these inefficiencies, you can implement actions to reduce or eliminate them.
Ask your employees
Gathering ideas from your employees on where and how to improve production efficiency should be top of your list, explains Steel. "I ask my biggest resource first - my employees, and I don't just mean the managers," she says. "Remember Swan Vesta?". Swan Vesta is a Glasgow-based producer of matches, which in the early 1900s saved millions of pounds when a factory worker suggested they only put the sandpaper strike on one side of the matchbox rather than both.
Understand your process parameters
Process parameters are factors that need to be closely monitored and controlled to ensure your manufacturing process runs smoothly and produces high-quality products. In food manufacturing, for example, they could be temperature, humidity and ingredient ratios. Understanding your parameters and the impact they have on the consistency of your processes is crucial, notes Gee. “A stable process is the most efficient, when the process is variable a business loses money,” he notes.
Use the 5 whys cause analysis
Gee suggests using the ‘5 Whys Root Cause Analysis’ to identify underlying production issues. It is a simple process where you start with a clear problem statement and then for each problem ask ‘why’ five times to uncover the deeper causes. For example, if a machine isn’t working probably, the first ‘why’ might reveal a maintenance issue and the second ‘why’ might uncover poor training. The third ‘why’ may find a lack of accessible training materials or poor support from managers.
“Production efficiency is an exercise in how best to generate the most cost-efficient product possible for your business by using existing resources, production rate and quality of goods,” Steel concludes. “At the very least, it will help you identify how and where to strike a good balance.”
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