Productivity vs. Efficiency
I am constantly surprised by the confusion in
the business world between Productivity and Efficiency. So let us take those
concepts and explore them.
Productivity[1]: it is simply how much output we produce with a given input. It is
regarded as a stimulus response model that an input causes an output. For
purposes of simplicity we can say that it is output/input. It is a relationship
between resources that come into an organization during a given period of time
and outputs generated with those resources. Productivity answers a very simple
question: by putting 1 USD of investment in, how many dollars came out?
There could be
several ways to measure it. For example: # of customers served per employee, $
sales revenue per sq-ft of store area, etc. One of the most common measures is
the ROI (Return on Investment): this measures for every USD of investment how many
dollars were returned. The goal is to do more with less, and getting the job
done with a smaller budget. Consider the impact on a country level. GDP x
capita measures how much output every inhabitant produces on a macroeconomic
level. This has absolutely nothing to do with efficiency, or with a company’s
situation.
There are many
measures that impact productivity: labor productivity, capital/equipment
productivity, raw material productivity. Let us take another example. The
process Outputs would be the number of bottles produced and sold, whereas
Inputs are Labor, Equipment, Raw materials. Let us say that:
Week1: 1000
bottles produced and sold at 20 USD each gives an output of = USD 20,000.
Week2: 1000
bottles produced and sold at 15 USD each gives an output of = USD 15,000.
Output has
decreased by 25%; Input has remained the same. Productivity has decreased by
25%.
Efficiency[2]: efficiency is performing in the best possible manner with the
least resources, time and efforts. It is about doing things in the right manner,
focusing on the processes it is defined as the extent to which time is well
used for the intended task. It is a measurable concept, and can be measured in
units of: time, effort and cost. It is very easy actually to visualize
efficiency. How many sit-ups can you do per minute? How many pages can you read
an hour? But most importantly it should be used for work reasons. For example,
how many tickets or issues is your team resolving per month? How about
individual performances?
Managers should
never lose sight of efficiency metrics. But most importantly, never confuse
productivity with efficiency. While efficiency focused on producing in a fast
manner, productivity focuses on the generation of the value itself. What is
efficiency without value added? The input transformed into output, and the
relationship between the two, will give you the productivity. But if that input
can be produced in an efficient manner, your productivity will actually
increase as well. To boost productivity, increase output but also work more
efficiently to reduce input.
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