When a factory operates at maximum capacity without wasting any resources, it is working at production efficiency (also called productive efficiency). At this level, the factory is using its full production capacity and producing the highest amount of each product that it can. If it were to produce more of any given product, that would come at the cost of decreasing the output of another product.
To calculate production efficiency, the values of two variables are needed. The first is “standard output” which refers to the total number of units that can be produced when the system is used at full capacity. The second is “actual output” which is the number of units actually produced.
The production efficiency calculation is:
Production Efficiency = (actual output / standard output) * 100
Of course, the ideal situation is for actual output and standard output to be equal, providing a production efficiency number of 100%. A number below 100% indicates a need for production line efficiency improvement in order to lower costs and increase profit.
Following is an example using the production efficiency formula:
When the assembly line is working at full capacity, Company Y’s plant can produce 15,000 units. Last month, the actual production was 10,000 units.
Using the production efficiency formula:
(10,000 / 15,000) * 100 = 66.67%
Company Y is only operating at 66.67% efficiency, which means the company is wasting resources and not operating at peak efficiency. In fact, they run the risk of reaching productive inefficiency, in which production costs per unit are higher than necessary. This company should focus on how to improve production efficiency in their manufacturing process so that they can increase their production rate and get closer to optimal production efficiency. They should look at different manufacturing metrics in order to determine where there might be bottlenecks and other addressable inefficiencies in their production process.
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