Productivity Vs Efficiency
When discussing the topic of business improvement, terms like ‘productivity’ and ‘efficiency’ are often used interchangeably, however there is a significant difference between the two. Understanding both terms is key to achieving significant business growth, whether it is through focusing on efficiency or productivity improvements.
A common definition of productivity is: ‘the ratio of the output of products and services to the labour hours devoted to the production of that output.’ With this definition, productivity is calculated from comparing the number of products or services produced with the resources used to produce them.
In simplistic terms, productivity is about doing more with the same. More products or services produced with the same amount of resources means the process is more productive.
The definition of efficiency is only subtly different: ‘the number of labour hours required to complete a given task, compared to a standard in that industry or setting.’ Typically, efficiency values are created by comparing the actual time taken to produce a product or service against the time usually required.
Again, simply put, efficiency is about doing the same with less. By reducing the amount of resources required to produce the same number of products or services, a company’s efficiency can be increased.
An easy way to picture and understand the differences between the two terms is to consider the example of a car engine. The engine has been created to produce a certain power output per litre of fuel.
If the power output from the car engine can be increased, without using more fuel, the engine is doing more with the same, therefore the engine is being more productive.
However, if the engine's power output remains the same, but less fuel is used; then the engine is being more efficient – doing the same with less.
What would you like your company to do, produce more power or use less fuel?
Which is best for business?
Different companies may decide to focus on different improvement drives. Depending on the ability of the company to grow and produce more products or services, then focusing on productivity or efficiency will produce the best improvement results. This is explained more clearly in the example below of a typical SME manufacturing company and a basic breakdown of its finances. The example figures have been chosen due to their scalability, to allow larger companies to apply this example too.
Company A has a turnover of £10 million per year, and a material spend at 50% of that turnover. With labour costs at 20% of turnover and all indirect costs such as factory power, lighting, management wages and so on at 25% of turnover. This gives a profit for Company A of £0.5 million, 5% of turnover.
If the company works hard to improve efficiency by just 10%, the results of this improvement drive can be broken down as follows in the table below.
As previously mentioned, efficiency is about doing the same with less. So, this means Company A still produces the same turnover, £10 million, with the same cost of goods. The labour costs have decreased, by 10%, resulting in a £200,000 saving that drops to the bottom line.
Comparing this to a similar improvement drive focused on improving productivity by 10%, rather than efficiency. The figures are shown below along with the previous table for ease of comparison.
If Company A is able to grow sales, then productivity can be improved resulting in increased turnover by 10%. This also increases the cost of goods by 10%, as more products are being produced, more resources will have to be used. Labour costs will remain the same, as is the definition of productivity, and finally, overheads will also remain the same, there is no new factory, no extra shifts, nothing to impact this figure. Calculating the new profit now works out to be £1 million, an increase of £500,000, from the additional products created from the more productive workforce.
An increase of £200,000 to Company A’s bottom line is a good achievement when considering the efficiency improvement example. However, for a similar project focusing on productivity instead, the profit of the company is doubled, for only a small increase of 10% productivity.
Fluere typically delivers productivity improvement of between 10 - 40% to our clients.
It is clear, even from these simplistic examples, that for companies serious about improving, focusing on productivity will have a far greater impact than focusing on efficiency.
Productivity in the workplace
Improving and balancing productivity and efficiency are key tasks for every business. Depending on the sales situation, a company may decide to focus on either productivity or efficiency. This focus may change from time to time depending on market demands and the company’s situation.
Businesses can focus on productivity and efficiency in order to maximise profits. A further factor to consider is the reduction of waste. A careful analysis of your business might reveal that increasing efficiency through the reduction of waste may be a more viable option due to a restriction of sales.
There are several ways to improve productivity and efficiency in the workplace. Fluere’s methodology uses proven tools and techniques to not only analyse and investigate the areas for improvement, but also to implement the processes and procedures that will improve businesses and keep them improved.
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