Business managers and owners are frequently concerned with two facets of the production process: productivity and efficiency. Manufacturing productivity measures how much of an item the company's processes can create. Manufacturing efficiency measures how effectively the production processes use their available resources. Manufacturing efficiency also shows how effectively the production process can complete orders from customers while using the least amount of inventory and works-in-progress.
Manufacturing productivity shows the ratio between the finished products and the inputs required to make those products. Inputs can be measured in terms of raw materials, labor hours or costs. For instance, if Fictional Motors requires 500 pounds of steel to make a car engine weighing 400 pounds, the manufacturing productivity for the engine in terms of steel used would be 0.8 pounds of engine per pound of steel. If each pound of steel costs $200, then the dollar amount would be 0.8 pounds of engine per $200 worth of steel, so each pound of engine would cost $200/0.8, or $250.
Actual vs. Standard Output
The measurements for manufacturing efficiency require two measures of productivity: the actual output and the standard output. The actual output measures the current state of manufacturing productivity. The standard output measures the productivity over time. These measurements allow managers to examine how the current processes have changed based on historical data. For instance, the current productivity of Fictional Motors is measured at $250 per pound of engine, but the historical data for other companies shows that the standard output should be only $225 per engine.
Calculating Manufacturing Efficiency
Manufacturing efficiency is the ratio between the actual and standard output levels. With Fictional Motors, the actual output is 1 engine-pound/$250, while the standard output is 1 engine-pound/$225. The result is (1/250)/(1/225) = (225/250) = 0.9. Since manufacturing efficiency is measured in percentages, the manufacturing efficiency for Fictional Motors' engine production process is 90 percent (0.9*100).
Uses of Manufacturing Efficiency
Managers can examine the manufacturing efficiency rating to determine the effectiveness of their manufacturing processes. For instance, the managers at Fictional Motors can examine their processes to determine if they should purchase cheaper steel for their engines, or improve their processes to use less steel to make an engine of the same size.
If they change their processes to use only 450 pounds of steel to make a 400-pound engine, the manufacturing productivity changes to 0.9 pounds of engine to one pound of steel. At $200 per pound of steel, each pound of engine would cost $200/0.9, or $222.22. The manufacturing efficiency would be $225/$222.22, or 101 percent. The new process would be slightly more efficient than the standard process.