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What Is a Loss of Production?

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  • Written By: Mary McMahon
  • Edited By: Shereen Skola
  • Last Modified Date: 04 September 2016
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    Conjecture Corporation
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Loss of production is a disruption in normal operations that leads to inefficiency. This can increase costs which may be difficult to recoup unless the situation can be rapidly resolved. Companies can use a variety of measures to assess productivity and determine when they are incurring losses. If problems develop, they may have several options for addressing them, such as shifting resources, shutting down an unproductive unit, or auditing to find the source of inefficiency and fix it.

The circumstances leading to disruption are unpredictable, making it hard for companies to adequately plan. For example, a contractor building a house might not be able to work while waiting on delayed supplies. Teams can’t perform their jobs and the project falls behind schedule, but the contractor had no way of knowing that the supplies would be late. This loss of production may create a ripple effect; the plumbers expecting to start work, for example, have to wait for the framing team to finish, and so on.

A variety of projects can be subject to loss of production. Companies base their production numbers on experience and performance in similar cases. Factories, for example, can calculate the resources needed to produce one unit, like a car. They may evaluate this in terms of labor hours or the cost of raw materials, depending on the industry and the preference of the analyst. If it normally takes 30 labor hours to build a car and this changes to 40, this indicates a loss of production.

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Worker inefficiency increases costs associated with production and may lead to delivery delays and subsequent customer dissatisfaction. In bids for contracts, it is common to build in some overage to create room for delays and other issues, but this may not fully compensate for dramatic unexpected problems. Industries relied upon to produce resources, like the oil and gas industry, may generate a sizable economic impact as a result of loss of production, because so many other businesses rely on them. Intervention may be necessary to stabilize prices and help the company recover.

Productivity charts can allow companies to compare between quarters and other reporting periods to determine if they are operating efficiently. A momentary drop followed by a recovery that can be traced to explainable causes may not be a major cause for concern. Significant and repeated drops may be indicators that something is wrong. The company can use an analyst to find out what is happening and make recommendations for the next step.

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