Knowing how much product you manufacture is important. But knowing how well you manufacture it may be even more important. The more efficiently you manufacture your products, the more profit you can make. Calculating and tracking your manufacturing efficiency rate helps you identify opportunities to improve your people, processes or products by measuring how well you manufacture now versus how efficient you could be based on established standards.
Choose a Definition for Efficiency
Pick a measurement to evaluate efficiency, like in terms of costs for labor, materials or equipment. The unit you choose will determine the numbers you use. To see if you are making the most of the raw materials you buy, you might choose the cost of supplies per unit. But if would like to see how efficient your employees are, then you would use the labor expenses for each product manufactured. You can do separate calculations for each measurement that interests you.
You must know your investment in each product manufactured to determine how efficiently you are creating each unit. Divide the total output by the total input in terms of the unit you have chosen. For example, you calculate the output per worker-hour required to produce a single product or the supplies used for each unit. If you need 500 pounds of rubber to make a large tractor tire that weighs 400 pounds, your manufacturing productivity would be 0.8 pounds of tire per pound of rubber. If each pound of rubber costs $2, then the dollar amount would be 0.8 pounds of rubber per $2. Thus, each pound of tire would cost $2.50.
Compare Actual Output to Standard
Your actual output is how much you currently manufacture in terms of the unit you have chosen, such as per pound of rubber. Comparing that to a standard output, like an industry benchmark or an internal target based on your historical productivity, shows you whether your performance is better, worse or average. If you know that the standard output for a tire manufacturer in terms of rubber is $2.25 per unit, then you spend more than the industry average to produce a tire. This puts you at a disadvantage because you would have to charge customers more to make the same profit as the average competitor.
Calculate Manufacturing Efficiency
Divide the standard output by your actual output to get your manufacturing efficiency, then express it as a percentage. For example, dividing the standard cost of $2.25 per tire pound by your $2.50 per tire pound results in a manufacturing efficiency of 0.9, or 90 percent. This means you are 10 percent less efficient than your typical competitor.
Measure your manufacturing efficiency regularly, like each month, to see if your performance improves if you hire employees or change your processes.
Jim Molis has more than 20 years of experience writing for and about businesses. He has been a business reporter for the Columbus (Ga.) Ledger-Enquirer, a managing editor of the Atlanta Business Chronicle and an editor of the Jacksonville Business Journal. He also has written for management consultants, professional services firms and numerous publications as a freelancer.