Reviewed by Aug 27, 2020| Updated on
Production efficiency refers to a level of production at which additional quantities cannot be produced without sacrificing the production of another product. It is the level at which the maximum production capacity has been reached. The additional quantities can be produced only if the product sacrificed also uses the same resources.
Understanding Production Efficiency
An organisation that reached production efficiency considers the possibility of having a production possibility frontier where variations of two products can be produced which use the same resources for manufacturing.
The factors that are considered include cost return efficiency and capacity utilisation to reach production efficiency levels. The aim is to utilise all resources at the maximum level of production capacity to attain production efficiencies.
An organisation functioning at peak or maximum production levels cannot produce any additional quantities without affecting or cutting down the production of another product using the same set of resources.
An example of products using the same resources is pressure cookers and electric cookers. The products produced and products sacrificed will have the same level of average cost.
Operational production managers must keep a tab on the maximum production levels to ensure maximum utilisation of resources, maintaining the quality of the goods without having to touch the maximum levels of production. They must also keep in mind the production of other products with the same resources.
The production possibility frontier constitutes a vital economic concept while studying and analysing the production efficiency for a product. The chart of production possibility frontier will enable maximum production of two products with a given set of resources.
Production efficiency can be measured by dividing the output rate by the standard output rate to know the maximum quantity that can be produced. The result is multiplied by 100 to know the efficiency in percentage terms.
Productivity is also measured through the number of units that can be produced in an hour. The concept of production efficiency is generally applied in the manufacturing industry.