As business professionals, we take some important business concepts for granted. Today, we’ll explore the difference between Productivity and Efficiency, which are often confused with each other and see if I can offer a perspective that I hope will add some clarity or, at the very least, add some value to the conversation and debate. What you don’t want are metrics just for metrics sake – or, even worse, dog poop for metrics. Even more, don’t succumb to analysis paralysis.
Not unlike the Weighted Moving Average calculation and how it can help us understand trends in a time series, productivity and efficiency can help us understand our operation.
Consider the following:
| Quantity | $/Unit | |
| Car X | 4000 | $8,000 |
| Car Y | 6000 | $9,500 |
| Labor Hours for X | 20,000 | $12/Hour |
| Labor Hours for Y | 30,000 | $14/Hour |
Worker Productivity
Part of managing processes is to measure their performance.
This article will discuss 2 basic process measures: Productivity and Efficiency.
For instance,
Simply, productivity is measured like this:
Productivity = Outputs / Inputs
What is the labor productivity in Hours for each car type?
Car X: (4,000 cars / 20,000 Hours) = 0.2 Cars / Hour
Car Y: (6,000 cars / 30,000 Hours) = 0.2 Cars / Hour
How about in labor Productivity in Dollars?
Car X: [(4,000 * $8,000) / (20,000 * $12)] = $133.33 / Car
Car Y: [(6,000 * $9,500) / (30,000 * $14)] = $135.71 / Car
So, based on the data set above, it appears that Productivity by Hours, both Car X and Car Y are the same; but, Productivity by Dollars, Car X is cheaper to make given the labor hours and hourly rate.
How is this practical? Below is a direct citation from the Harbour Report, 1998:
Labor hours needed for stamping, power train, and assembly operations:
| (100% | Nissan | 27.6 hours |
| (168%) | GM | 46.5 hours |
| (126%) | Ford | 34.7 hours |
If GM could operate at Nissan’s level of productivity, they’d save themselves about $4.4 Billion Per Year. Measured another way, GM has about 55,000 more workers than it needs.
Worker Efficiency
Efficiency is measured with the following equation:
Efficiency = [100% * (actual output / standard output)]
Standard Output in the equation above is a number that is arrived at by looking at historical data for the job and by experience. One would hope that that number is not an arbitrary one, but a number that is derived by looking at a historical time series.
Here’s an example:
Shmula’s Bodywork does automotive collision work. An insurance agency, using actuarial data, has determined that the standard time to replace a fender is 2.5 hours (ie, standard output = 0.4 fenders per hour), and is willing to pay Shmula $50 per hour for labor (parts and supplies are billed separately). Shmula pays its workers $35 per hour.
Suppose Shmula’s workers take 4 hours to replace a fender. What is Shmula’s labor hour efficiency? Given Shmula’s labor costs, will Shmula make money on the job?
Using the equation and the data above, we get:
(1 fender / 4 hours) / (1 fender / 2.5 hours) = .625 * 100% = 62.5% efficiency
2.5 hours * $50 = $125 paid by insurance
4 hours * $35 = $140 costsShmula will lose $15 per fender.
Economic Profits are important to Shmula; Given the answer above, how efficient does Shmula need to be to break even?
[($125) / ($35/hour)] = 3.57 hours to Break Even
We know that, Efficiency = 100% * (actual output / standard output). So,
(1 fender / 3.57 hours) / (1 fender / 2.5 hours) = .7003 * 100% = 70.03% efficiency. Shmula will need to improve efficiency to 70% or better to make money.
Often times, I hear people use the phrases “productivity” and “efficiency” carelessly, not completely understanding what they mean. These terms have technical definitions and are very practical for business. Still, given the explanation above, one must excercise good judgement in detemining which processes ought to be measured by Productivity and Efficiency and balance these measures with other items that might be important to the individual, firm, and industry. Some measures might make sense for some activities, but not others.
Related Posts:
Become a Lean Six Sigma professional today!
Start your learning journey with Lean Six Sigma White Belt at NO COST
Mark Graban says
What about quality?
Andres Naranjo says
I agree on these having standard definitions that people try to recreate. Nothing like a gorup trying to reinvent the wheel.
Based on my experience however, I would say that productivity and efficiency are measures of an overall operation that comprises a set of processes.
Specific business processes, at strategic, core or supporting level are best measured around their time, cost, and quality drivers. Their “measure types” need to be around result measures (that show a completed cycle) or activity measures, which are linked to a specific activity within the process.
There are also extended process dimensions beyond time, cost, quality; which include data, compliance, risk, ownership, benefits. These might need to be measured as well.
Great blog btw.
hector says
I think your post is quite wrong as productivity is just another name for efficiency: pls read some definitions or wikipedia for example.
the particular RATIO OF ACCOMPLISHMENT you mention (“actual output / standard output”) has nothing to do with efficiency. It is actually closer to EFFICACY: which is “accomplishment” ie WHAT IS ACHIEVED; vs efficiency : HOW it is achieved: how many resources are being used for the given result(ie productivity). Nevertheless besides of the name given to your ratios, your reasoning seems good
nospam says
I’m not sure these terms have ever really been defined in the context of business. I’ve googled everywhere for the difference, because I figured there should be a difference. The problem is that your post contradicts at least 4 other blogs on the internet trying to explain the difference. Just google for ‘productivity v.s. efficiency’ and see how everyone is saying something different.
So given the fact that no one seems to know, I have no reason to trust what you say. Wikipedia is not a valid cite for something controversial like this. Go to google books and find a definition; now that would be acceptable.
If you can find a proper citation from a business text or process management I would be grateful and I would be happy to propagate that knowledge. As it stands now however, I see no reason to believe your definition over anyone else’s
Paul says
Hi,
I like your article, but I’ll throw forward a slight variation. I’d be grateful for any comment.
The formula for efficiency and and productivity look very much the same. Basically it is output/input.
However, my interpretation is that efficiency relates output to a given mix of inputs whereas I see productivity as relating output to the cost of a mix of inputs.
For example, if Fred and Joe perform the same task in the same manner and achieve the same quality of output, but Fred produces 20% more output than Joe then Fred could be said to 20% more efficient that of Joe.
However, if Fred and Joe use different types of machines to perform the same task then the mix of resources is not the same and one must divide the output by the cost of the resources used. For example, let’s say that for every $100 of resources consumed (including labour cost) that Joe produces 10% more output than Fred then it could be said that Joe is 10% more productive than Fred. One could even compare the productivity of two people who perform different tasks by dividing the dollar value of their output by the dollar value of the resources consumed (incl their labour cost).
That is, efficiency relates to the amount of output created by a given mix of resources whereas productivity is measured by the value of output relative to the value of the resources consumed.
Gman says
Look at it this way:
Productivity is rate per hour of what ever it is you are doing.
Let’s say you lay tiles and you have 2 guys and the most productive lays 25 per hour and your least lays 20 per hour.
The most productive lays 25 per hour.
Now, let’s say that the standard time to lay a tile should be 30 per hour.
The productivity for your best guy is still 25 per hour, but his efficiency compared to the standard is 25 divided by 30 is 83.33%
Your most productive worker, may not be really efficient based on standard time.
Usually productivity is expressed as a rate of something (time, Unit, etc) and efficiency as a percentage based on a standard.
Baddog says
Please refer to the APICS dictionary for the definition of both Efficiency and Productivity. This is what I believe to be the standard terminology and definitions that businesses should be operating by.
Germaine says
Therapists in a nursing home setting are paid by the hour, but work by the minute. To achieve 90% PRODUCTIVITY, figure for 8hr there are 480min. To achieve 90% the worker has 45 min of ‘fluff’. Now the corporation changes PRODUCTIVITY to EFFICIENCY of 3.90, workers find it hard to achieve this bench mark. There is ‘no’ formula to measure ones time, minutes by. That I do not understand!