Productivity and efficiency

Productivity

• Productivity measures output per unit of input over a period of time.
• The most common measure is labour productivity:

$$\text{labour productivity} = \frac{\text{total output}}{\text{number of employees}}$$

• Total output — units produced in the period.
• Number of employees — can also be measured in hours worked, for a more precise figure.
• Productivity rises when the same staff produce more, or the same output is produced by fewer staff.

Efficiency

• Efficiency measures how well a business turns inputs into outputs with the least waste.
• A business is efficient when it produces its output at the lowest possible cost per unit without sacrificing the required quality.
• Productivity and efficiency are related but not identical:
  • Productivity is a quantity measure — how much comes out per worker.
  • Efficiency is a cost and waste measure — how much is consumed to get it.
• Producing more units per worker by rushing and creating defects raises productivity while lowering efficiency, because the defective units are waste.

How a business raises productivity

• Training — skilled staff work faster and make fewer mistakes.
• Investing in technology — machinery and software do in minutes what took hours.
• Improving motivation — motivated staff work harder and stay longer, so less time is lost to absence and retraining.
• Better layout and process design — cutting the distance materials travel and the time staff wait.
• Specialisation — staff repeating a narrower range of tasks become faster at them.

Why it matters to a large business

• Higher productivity spreads fixed costs over more units, so the unit cost falls.
• A lower unit cost lets the business either:
  • cut its price to win market share, or
  • hold its price and earn a larger profit margin.
• It also protects the business when input costs rise: a more productive business can absorb a wage increase or a freight increase without raising prices as much as a less productive competitor.