Ratio of Administrative to Production Employees

Heeding staffing metrics -- such as administrative-to-production employee ratios -- enables a company's leadership to set up suitable safeguards to monitor the way employees perform tasks and pinpoint segments where employee turnover is high. By doing so, senior executives hear the feedback of workers of all stripes, subjecting complaints from middle-level management and rank-and-file personnel to the same scrutiny.

Definition

A company's administrative-to-production employee ratio equals the average number of personnel working in administrative functions divided by the average number of workers toiling in manufacturing processes -- whether they be factories, back-up production plants or maintenance services. For example, if the business has 1,000 people in its administrative manpower and 2,000 workers in production-related functions, its administrative-to-production employee ratio equals 50 percent, or 1,000 divided by 2,000 times 100. This number gives management an idea of how many people work in a particular segment, and ultimately may guide things like resource allocation, planning, financial management and profit administration. Administrative functions deal with running a business, whereas manufacturing work streams pertain to the production of goods.

Significance

As a key staffing ratio, the administrative-to-production employee ratio helps a company understand where its operational success -- and demise, for that matter -- might lie. If the business has a high ratio -- meaning it has more people in offices than in factories -- department heads must ponder whether the metric is good news and whether it aligns with top leadership's long-term profitability management tactics. To clarify that thought, they may calculate income per headcount in administrative and production processes, figuring out whether a factory worker costs the company more money than an employee sitting in an office cubicle.

Sensitivity Analysis

A company's top brass may use the administrative-to-production employee ratio to analyze various operational scenarios, determining how the business would fare under each scenario. For example, senior executives may ponder how profitable the organization would be -- and whether it would be profitable at all -- if its administrative-to-production employee ratio went from 50 percent to 25 percent or from 30 percent to 60 percent. In the former scenario, business analysts may sense that the company wants to focus on production activities, which is why it's shedding personnel costs in administrative functions. In the latter strategical construct, analysts may posit that the business wants to shift competitive grounds, close a few factories and invest in non-production operations, like those in which it would provide services, not make products.

Financial Considerations

For a company, staffing ratios have budgetary consequences because employee expenses are operating costs. Consequently, management attempts to maintain an average administrative-to-production employee ratio that aligns with operating objectives and doesn't break the organization's bank.

References

About the Author

Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.