How to Measure Production Efficiency & improve your Business

In a manufacturing business, efficiency in production is a key driver of profitability.  Maximising the output produced from the resources at hand can improve margins, in a business climate where resource in almost every industry is being stretched to capacity, optimising efficiency is essential for success. 

Given the many manufacturing operations globally, and the unique environment each one operates in, there is no golden rule to making the best use of the resources you have, but below are 3 fundamental metrics that can be applied to assess the efficiency of your operation, and the factors that influence these.

Labour productivity

A straightforward yet valuable KPI, labour costs are a significant cost of production.  Although this is most relevant to labour-intensive operations, no manufacturing is entirely free of human involvement, so any human participation in production should be analysed. 

Labour productivity(units per worker)= Output per periodNumber of workers

Key influences on workforce productivity are:

• Use of machinery - could automation reduce the costs per unit?
• Skills, ability and motivation of the workforce - what could be done to stimulate individual efficiency?
• Production organisation - can unnecessary movement be eliminated, or processes streamlined?

Capacity Utilisation

A measure of the degree to which a business is making use of its potential maximum output.  A direct measurement of efficiency, but it does require an accurate idea of maximum potential capacity, and this can be difficult to determine. 

In a standard, make-to-stock operation this could be calculated by finding the limiting factor - the resource that runs out first, man hours, machine hours or raw materials - and working out the maximum production based on the availability of that resource.

Once you know the maximum potential capacity, Capacity Utilisation is a straightforward calculation:

Capacity Utlisation (%)= Actual level of outputMaximum potential output

Influencing the capacity utilisation really comes down to management - well organised and systemised use of resources, a good supply infrastructure and elimination of down time are all key factors.

Yield

Yield - the proportion of 'good' units produced - is often thought of as a measure of quality but is also contributes directly to efficiency.  More finished items from a set number of inputs = better efficiency!

Traditional Yield is measured as the proportion of 'good' finished items out of a process compared to the amount of inputs. 

For example, enough raw materials for 100 widgets entered a production process, but due to machine errors, only 92 widgets were produced. 

92100=92% Yield

However, this doesn't take into account, that of the 92 completed widgets, 43 had to be re-processed before meeting the standard required.  Therefore, First-Time Yield provides a more accurate measure of efficiency, by calculating the proportion of finished widgets that were right first time. 

First Time Yield shows a very different, and more realistic picture!

49100=49% Yield

Identifying the trends in and causes for changes in Yield helps to point up the specific aspects of production that cause inefficiencies.  These could include:

• Raw material - would buying better save money overall by reducing waste?
• Machines - investing in the right machine can have a significant impact on the quality, speed and efficiency of operations
• Staff - training and motivating staff to operate efficiently in the production cycle

These metrics will provide an objective measure of efficiency and analysing the results should give a good starting point for measures to enhance efficiency.

Ultimately, efficiency in production directly impacts GP, so an accurate and appropriate calculation of costs per unit should be monitored, although this should be considered in the light of external changes, such as market-wide cost increases, capital expenditure and changes in direct overheads.

For more information or to discuss how we can help you measure your productivity, contact us or call 02476673160

Please note: This article is provided for information only and was correct as at time of writing (03/02/22). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance.  No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.