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Are you running at optimum capacity?

Article provided by FedGroup

Every business owner knows that there are aspects of the business that could probably be run a bit slicker, but with so many things competing for your attention, it is sometimes difficult to sit back and look little aspects of the business that you may be able to improve. But with the economy under pressure, one cannot afford not to run a tight ship anymore. Now, more than ever, productive efficiency should be a leading concern.

Put simply, productive efficiency is the number of units that can be produced from a set number of inputs. Therefore, the more units a company can produce from the same number of inputs, the more efficient it is.

There are many elements that determine productive efficiency, such as employee efficiency, the efficiency of machinery, the cost of input material, etc. All of these elements determine the cost of producing a product and the productive business owner should always be looking for ways to cut these costs without affecting the quality of the product. Whenever one of these costs is higher than it could be, it affects the ability of the product to compete in the marketplace and the company is almost literally leaving money on its workshop’s floors.

But improving efficiency is not just as simple as identifying areas of improvement. Sometimes the cost of taking such action is more than the positive effect it has on efficiency. On the other hand, some of the measures may only reap rewards a year or more down the line, but if they improve productivity, they are worth it.

A good example of this is training. Many business owners are wary of training because it takes employees out of production for a short period, while the person providing the training also needs to be paid. However, if it means that workers can produce the same item quicker and of a higher quality in future, then it would almost always be money and time well spent. Remote training may also be an option when employees cannot do their jobs or cannot do it to their full ability because of the lockdown measures.

Productive efficiency in terms of raw materials can be approached from a number of angles. While cost is the prime consideration, quality also comes into it. If a supplier is unreliable in terms of delivery dates or the number of damaged or broken raw materials, this too has an influence on productivity. A slightly more expensive but more reliable supplier may actually fare better in the productive efficiency calculation.

Needless to say, machinery plays a major part in the productive efficiency of any business. Machinery can bring with it a number of advantages, such as increased accuracy, the ability to work overnight, and increased production speed. However, it is vitally important to match the size and abilities of the machinery with the requirements of the business. If the machinery is able to do more than the business needs, it could be that a cheaper alternative is available. Existing machinery should also be checked for efficiency. If machines stand idle for long periods, it should be asked whether production cannot be increased, or if cheaper alternative machinery is not available.

An oversight when productivity is assessed in a business is to overlook all aspects of the business that are not directly related to production. This includes inefficient use of time, such as including staff members in meetings where they are not required or able to make an input, to using too much paper when electronic communication would work just as well. As always, the mantra should be that every cost incurred in the business should contribute directly or indirectly to the profits of the business.

Soft approaches such as motivation should also not be ignored. The old adage that a happy workforce is a productive workforce has not entered our vocabulary for nothing. The company needs to ensure that all employees know and understand the company culture, and what each of their individual inputs contributes towards the bigger picture.

Of course, the situation of each business is different and it should adapt its production strategy accordingly. If a business chooses to set itself apart on the basis of quality, it stands to reason that the input costs for higher quality products would be higher. The end product costs more than the competitors’ to produce, but it serves a certain niche in the market. To cut costs by using cheaper inputs would be suicide for the brand identity. As with all measures in the business, productivity interventions should be informed by company culture and identity.

Sidebar:

X-inefficiency

According to economic theory, companies tend to operate at near to or full productive efficiency to maximise their profits. However, companies do always strive to achieve this in practice because of factors such as lack of competition or a booming economy. The difference between expected efficiency and actual efficiency is termed x-inefficiency.

Companies should be wary of x-inefficiency for a number of reasons. Beyond the obvious drain it has on profits, it may also rob the business of a competitive advantage. For instance, if a certain company is the only one to import products into the country, it has a monopoly and is therefore able to charge a premium for this service. However, if this premium is too high, it removes the competitive advantage and with it the barriers for competitors to enter the market. This could destroy the niche you have created and jeopardise the future of the business.

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