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.
Production Efficiency in Economics
What is the production efficiency formula?
The production efficiency formula is a simple formula that you can use to calculate your production efficiency based on your companys data. The production efficiency formula is:
Production efficiency = (actual output rate / standard output rate) x 100
The formula means that production efficiency equals the actual output rate divided by the standard output rate times 100%. To use the production efficiency formula, you need to know two important factors:
What is production efficiency?
Production efficiency is the point where production reaches full capacity. At this point, youre using all of your resources, and you cant produce more products without giving up the production of another product. This means that this point is the most efficient level of production, and it can allow you to produce goods at the lowest cost for your business. Therefore, production efficiency is important to understand so that you can make the best possible decisions for your company.
You can visualize production efficiency by using a production possibility frontier (PPF). A PPF is a curve on a graph that shows the different combinations of production outputs when you produce two goods from the same resources. Analyzing a PPF can help you find the point where production efficiency is highest.
How to use the production efficiency formula
Here are three simple steps that you can follow to calculate production efficiency using the production efficiency formula:
1. Find your actual output rate
The first step to using the production efficiency formula is finding your actual output rate. You can calculate your actual output rate by dividing your unit of time per the number of products produced. For example, if you run a small business that produces 24 handmade necklaces in eight hours, your actual output rate is three handmade necklaces per hour.
24 handmade necklaces / 8 hours = 3 handmade necklaces per hour
2. Find your standard output rate
The next step to using the production efficiency formula is finding your standard output rate. You can calculate your standard output rate by finding the amount of work that an average worker can produce per unit of time. You can determine this value by reviewing your businesss historical data. Using the same example, if your business can produce an average of 16 high-quality handmade necklaces in eight hours, your standard output rate is two handmade necklaces per hour.
16 handmade necklaces / 8 hours = 2 handmade necklaces per hour
3. Apply the production efficiency formula
Once you know your actual output rate and your standard output rate, you can apply the production efficiency formula. Plug your values into the formula to solve for production efficiency. First, divide your actual output rate by your standard output rate. Then, multiply the resulting amount by 100%. The resulting amount represents production efficiency.
Therefore, if your average output rate is three necklaces per hour and your standard output rate is two necklaces per hour, your production efficiency is 150%. This means that your handmade necklace business is working at a high level of efficiency.
(3 handmade necklaces / 2 handmade necklaces) x 100 = production efficiency
(3 / 2) x 100 = 150%
Who uses the production efficiency formula?
People in many careers can use the production efficiency formula, especially people who work in economics or manufacturing. Business owners can also use the production efficiency formula to help them figure out how to operate at full capacity and maximum efficiency. This can help them make the best production decisions for their businesses and increase their businesses success, including:
Tips for improving production efficiency
Here are a few tips you can use to help you improve your businesss production efficiency:
Change how you allocate your production resources
One tip for improving your production efficiency is changing how your business allocates its production resources. You can do this by changing the materials that you use to produce goods, reducing production waste, changing how you package your products and taking other actions.
Measure your performance
Another tip for improving your production efficiency is measuring your businesss performance. You can create key performance indicators (KPIs) and other metrics to help you measure your businesss performance. Periodically measuring your performance can help you identify the specific areas or processes that your business can improve in order to increase production efficiency.
Streamline your workflows
Streamlining your workflows is another way you can improve your businesss production efficiency. You can streamline your businesss workflows by keeping your workspace organized, as this can make it easier for employees to lower their operation time. You can also streamline your workflows by standardizing frequent processes. Standardizing processes can help employees quickly complete processes and yield intended results. You can start standardizing processes by creating process guidelines that explain the important steps and objectives of each process.
What is an example of production efficiency?
- Individual operator Efficiency% = (Total minutes produced*100/Total minutes worked)
- Line Efficiency% = (Total minutes produced *100) / (Total hours worked * 60)
- Machine productivity is measured as production per machine per shift day.
How do you calculate production efficiency?