What Is Production Efficiency and How to Calculate It

By Indeed Editorial Team

Published 12 October 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Many businesses recognise the importance of being cost effective. To achieve this, they might utilise a variety of metrics, such as production efficiency, to determine whether they can further improve their resource allocation and cost-reduction initiatives. Knowing how to properly apply this metric and its results can help the organisation you work for maximise its output without incurring more costs. In this article, we define production efficiency, show you how to calculate it and discuss some tips that can help you improve the productive efficiency of your workplace.

What is production efficiency?

Production efficiency, or productive efficiency, is a metric that represents how well businesses utilise their resources to produce goods or provide services. To perform this calculation, you compare the actual output rate to the standard output rate. Here are the definitions for these two terminologies:

  • Actual output rate: This rate describes the real volume of work a business can produce, and you can calculate this by dividing the total output by the unit of time taken.

  • Standard output rate: In contrast, the standard output rate expresses the potential output that could occur, and typically, businesses review their historical data to determine this value.

Businesses can use the information gained from this calculation to adjust their workflows and resource allocation to operate at the lowest unit cost possible. This metric is thus particularly useful for companies that want to maximise their outputs with the resources they already have. Here's the formula used to calculate this metric:

Production efficiency = (actual output rate / standard output rate) x 100%

Related: What Is the Total Cost Formula? (Plus How to Calculate It)

How to calculate productive efficiency

Follow these steps to learn how to calculate a company's productive efficiency:

1. Determine the actual output rate

First, calculate the actual output rate by dividing the number of products produced by the unit of time to produce them. For example, if a boutique gift card maker produces 32 gift cards in eight hours, their actual output rate is four gift cards per hour. Here's what the calculation looks like:

Actual output rate = total output / unit of time

Actual output rate = 32 gift cards / 8 hours

Actual output rate = 4 gift cards per hour

Related: How to Calculate Inventory Carrying Cost (With Examples)

2. Find the standard output rate

Next, establish the standard output rate of the business. Following the previous example, the boutique gift card maker consults their historical data to establish the amount of work an average employer can complete in a certain amount of time. If they determine that the average employee can produce 24 high-quality gift cards in eight hours, their standard output rate is three. Here's what this calculation looks like:

Standard output rate = average output / unit of time

Standard output rate = 24 gift cards / 8 hours

Standard output rate = 3 gift cards per hour

Related: What Is the Receivables Turnover Ratio? (Plus Examples)

3. Apply the productive efficiency formula

Once you attain the actual output rate and standard output rate, substitute these values into the productive efficiency formula. To do this, divide the actual output rate by the standard output rate, then multiply the result by 100%. The figure you attain from this calculation represents your productive efficiency. In the case of the boutique gift card maker, this is what their calculation might look like:

Productive efficiency = (actual output rate / standard output rate) x 100%

Productive efficiency = (4 / 3) x 100%

Productive efficiency ≈ 133%

Tips to increase productive efficiency

Here are some tips that can help you improve the productive efficiency of a company:

Streamline workflows

A workflow is a series of steps necessary to complete a task. In the workplace, an employee might have several workflows for different responsibilities. Start by examining the workflows of the organisation you work for at various levels. For example, you might assess your team's workflow by reviewing their individual skill sets and determining which steps are unnecessary. Many organisations represent their workflows visually, which can help you better understand all the steps involved.

Provide employee training

Organisations prioritising their employees' productivity tend to view their development as a continual process. Providing regular employee training is a great way to upgrade their skills and improve their efficiency. Employers can also use these training sessions to apply new methodologies and technology. Here are some of the different employee training programmes you could create to boost the productive efficiency of a company:

  • Technical training: This type of training improves the practical skills that employees regularly use. For example, a warehouse operator might benefit from receiving technical training that upgrades their knowledge of various order-picking tools and machines.

  • Soft skills training: Soft skills training focuses on helping employees develop their interpersonal proficiencies, which often relate to situational awareness. For example, conducting workshops on two-way communication can enable employees to work faster and achieve greater results by mitigating potential misunderstandings.

  • Safety training: This type of training involves briefing employees on various safety and health policies and protocols, which can reduce the costs that a company incurs in the long term. For example, equipping employees with knowledge on what to do in case of a fire can be essential if they're working with flammable materials.

  • Customer service training: Employees who work directly with customers can benefit from this kind of training, which aims to increase overall customer satisfaction. For example, a company that regularly receives phone calls from customers requiring assistance with its products can conduct training to equip its employees with the competencies to provide effective advice.

Related: What Is Employee Training and Development? (Plus Benefits and Types)

Improve organisational skills

A well-organised business can work systematically to accomplish tasks. Additionally, honing these skills can help you manage large workloads and the stress they can cause. Here are some organisational skills that can benefit an organisation's productive efficiency:

  • Time management: Time management involves being conscious about how you use your time. Often, this relates to prioritising urgent tasks and minimising time spent on unnecessary activities.

  • Tidiness: Being tidy can put you in the right state of mind to excel in your role. Some simple acts of tidiness include decluttering your workspace and organising any business-related records or databases.

  • Planning: Planning requires you to prioritise tasks and take note of deadlines. For example, thoroughly planning a project from start to finish can ensure that you're ready for any obstacles and able to deliver.

  • Delegation: This is the process of distributing the workload of a project to team members. Considering each member's skill set and ensuring they understand what the company requires of them can allow you to achieve more in less time.

  • Stress management: Many professionals employ various stress management techniques to help them perform better, especially if their work environments are intense or they have high workloads. These techniques include taking deep breaths, doing some simple exercises and scheduling regular work breaks.

  • Attention to detail: Cultivating attention to detail can allow employees to accomplish tasks on the first attempt and produce high-quality work. Techniques for developing this skill include playing games that improve your memory, learning to concentrate for longer periods and working more mindfully.

Related: What Are Organisation Skills and How Can You Develop Them?

Use preventive maintenance processes

Preventive maintenance involves proactively monitoring assets to prevent unexpected problems that could affect productivity. Some examples of adjustments that professionals can make during such processes include:

  • cleaning

  • lubrication

  • repairs

  • part replacement

You can choose to perform these adjustments on a weekly or monthly basis. Alternatively, you could decide when to schedule maintenance based on the equipment usage rate. This approach to resource maintenance can help companies extend the lifespan of their assets and anticipate future repairs. This increases their savings and reduces the possibility of unexpected failures. Additionally, preventive maintenance can reduce the risk of employee injury due to malfunctioning equipment.

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