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
Productivity
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.
Efficiency
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
using its internal components and parts. If the power output from the car engine can be
increased, the engine is doing more with the same, therefore the engine is being more
productive. However, if the engine is stripped back, internal components and parts are
removed, and the power output remains the same; then the engine is being more efficient –
doing the same with less.
W H I C H I S B E S T ?
Considering an example of the impact improving a company’s efficiency or productivity has
on its bottom line can clearly show which metric is best to focus on. The table below shows
a standard manufacturing company and a basic breakdown of its finances.
Company A has a solid turnover of £10 million per year, and a cost of goods at 50% of that
turnover, £5 million. With labour costs at £2 million (20% of turnover) and ‘overheads’
grouping together all miscellaneous costs such as factory power, lighting, management
wages and so on at £2.5 million (25% of turnover). This gives a profit for Company A of £0.5
million, or £500,000 (5% of turnover).
If the company then decides to commit to an efficiency improvement directive, which in this
example provides a small gain of 10% increased efficiency. As shown in the table below, this
results in new financial figures that can be broken down as follows.
As previously mentioned, efficiency is about doing the same with less. So, this means
Company A still produces the same turnover, £10 million, resulting in cost of goods the
same at £5 million. The labour costs have decreased, by 10%, resulting in a cost of £1.8
million to the company. With overheads remaining the same at £2.5 million, this gives
Company A their new profit of £0.7 million, an increase of the £0.2 million saving from the
reduced labour costs.
Comparing this to a similar improvement drive focused on improving productivity rather than
efficiency, again producing a 10% improvement. The figures are shown below, next to the
previous table for ease of comparison.
Now focusing on productivity, which is doing more with the same, Company A’s turnover has
increased by 10% to £11 million. This impacts the cost of goods too, as more products are
being produced, more resources will have to be used. Cost of goods increases by 10% also,
to £5.5 million. Labour costs will remain the same, as is the definition of productivity,
remaining at £2 million. Finally, overheads will also remain the same, there is no new factory,
no extra shifts, nothing that impacts this figure keeping it at £2.5 million. Calculating the new
profit now works out to be £1 million, an increase of £0.5 million, from the additional
products created from the more productive workforce.
An increase of £0.2 million 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.
A previous client to Fluere has seen productivity improvements of over 30% due to small
changes that allow the workforce to be more productive.
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
P R O D U C T I V I T Y I N T H E W O R K P L A C E
Improving and balancing productivity and efficiency are key tasks for every business.
Depending on the product or service being provided, 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 must increase productivity or efficiency or both in order to maximise profits. A
further factor to consider is the reduction of waste. A careful analysis of your business might
reveal that productivity can be increased by the reduction of waste rather than concentrating
on efficiency.
There are several ways to improve productivity and efficiency in the workplace, for
manufacturers and fabricators to professional service companies. 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.
If anything you’ve read about sounds familiar to you, you can email us at sales@fluere.co.uk to
find out what we can do to change your business for the better.
