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Efficiency Introduction A business should constantly be trying to improve its efficiency. In many markets, a business needs to be at least as efficient as its main competitors in order to be able to compete and survive in the long-term. A more efficient business will produce lower cost goods than competitors and may generate more profit possibly at lower prices. Increasing efficiency will boost the capacity of a business, assuming there is no change in the number of inputs employed. The capacity of a firm refers to how much a business can produce during a specific period of time. Efficiency Where a business has efficient production, it is operating at maximum output at minimum cost per unit of output. Efficiency is, therefore, a measure of how well the production or transformation process is performing. However, this is not always easy to assess. There are several ways to measure efficiency Productivity This measures the relationship between inputs into the production process and the resultant outputs. The most commonly used measure is labour productivity, which is measured by output per worker. For example, assume a sofa manufacturer makes 100 sofas a month and employs 25 workers. The labour productivity is 4 sofas per person per month. There are several other measures of productivity. Output per hour / day / week Output per machine Unit costs Unit cost (also referred to as cost per unit) divides total costs by the number of units produced. A falling ratio would indicate that efficiency was improving. Unit costs = Total Costs / Units of output Stock levels A business will have set itself a target stock level of finished goods that it should achieve. This is calculated to satisfy the demand expected by the marketing department plans and based on what the production department thinks they can produce. If the stock level falls below this level then the productive efficiency has reduced since the output per worker has not met the planned requirements. Non-productive (“idle”) resources Which resources are not in constant use in the business? Are employees often left with nothing to do? Are machines only used for part of available time? Too many idle resources are a common sign of inefficiency in production. Poor quality There are many measures of poor quality – any of which could indicate a problem with efficiency: Customer complaints Rejected finished goods identified by the quality control department Customer returns of defective goods Strategies to Improve Efficiency There are several ways a business can try to improve efficiency levels. Train the workforce Training the workforce in order to give them more skills or knowledge is clearly a cost to firms. They will often have to pay experts to train employees and will also lose the productive time of employees whilst they are training. However this increase in cost should be more than offset in the long term by improvements in the workers productivity levels. This is because training should enable workers to work more quickly and more accurately (produce better quality products). Improve motivation A better-motivated workforce will work harder and take pride in their work. This should increase the speed of production and also improve the quality of products that are being produced. There are many different financial (e.g. bonuses) and non-financial ways (e.g. empowerment) for businesses to motivate their workers. More capital equipment Investment into new, higher technological machinery can have a number of advantages. Longer hours can be worked Increased speed of production (machine can perform repetitive and complicated tasks more quickly) Increased accuracy and therefore less wastage Use better quality raw materials This can reduce the amount of time wasted on rejected or defective products. A business should ensure they find the supplier who can supply the best quality resources, but at a competitive price and also with reliable delivery. Conclusion Improvements in efficiency are not that easy to obtain. For instance managers may find workers resistant to changes such as introducing new machinery or new working practices. This is because workers fear that changes will lead to redundancies. It can also take a long time for any new strategies to feed through into the form of increased efficiency. In addition, there can be a conflict between productivity and quality. Increasing productivity by its nature implies increasing the speed of production, and if managers are not careful this can mean that workers focus solely on quantity and not the quality of their work. |