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What Is Production Efficiency?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 02 July 2014
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Production efficiency is a term used to describe the state or level at which a business is producing the greatest number of units while utilizing the least amount of resources possible. The idea is to achieve a balance between use and production without decreasing the quality of the products that are manufactured. As it relates to an economy in general, production efficiency focuses on whether or not that economy is making the most prudent use of the resources available, or if making some changes would make it possible to derive more benefit from the consumption of those resources.

In a business setting, evaluating production efficiency typically involves assessing each phase of the production process. The assessment begins with the acquisition of raw materials and continues through the consumption of those materials as new products are assembled and completed. This involves obtaining the highest quality materials at the best possible prices, then keeping the amount of waste generated during the production to a minimum. This in turn makes it easier to manage the long-run average total cost associated with the production process, and keep the efficiency of the manufacturing effort as high as possible.

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True production efficiency is achieved when the process can no longer produce any additional units without generating some type of loss in some other aspect of the business operation. For example, if a company produces yo-yos and boomerangs, increasing production time on the yo-yos may mean curtailing the production of boomerangs. While this may aid in producing more yo-yos and generating more returns from that activity, producing fewer boomerangs creates a loss in efficiency that the business must absorb. Assuming that both products are equally successful, the end result is that diverting resources does not enhance the company’s revenue at all, and may even have a small negative effect.

The same general concept can be found in balancing the production of different goods and services within a particular economy. If expansion in one area leads to the need to sacrifice production of goods considered equally important to the well being of that economy, the rate of production efficiency is decreased. If these activities continue and the balance between production and the consumption of resources is further undermined, the economy as a whole may suffer. Once the trend begins, it may take some time to compensate and restore the economic balance that is a central characteristic of true production efficiency.

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GlassAxe
Post 4

What is the process for product development? I have a really great idea, but I do not know how to go about developing my product. I do not want someone to steal my idea, but at the same time I need help in making my idea a reality.

My product could be a big hit, so I need to plan for efficient production. I also need to figure out how to protect my intellectual property, source materials for my product, and create a retail outlet for my product. Can anyone give me any ideas on where to begin?

parmnparsley
Post 3

@comparables- My recollection of college economics is very hazy right now, but a lot of what you are describing has to do with the idea of comparative advantage. The productive efficiency of a good varies from place to place. Country A may produce bells more efficiently while country B can produce whistles more efficiently. This is why it is more efficient for some countries to produce a certain good than another country (or businesses located in those countries).

That being said, there are a number of flaws and inaccuracies in this age-old economic theory. The comparative advantage theory assumes that the resources needed for creating a good in one country is equal to that in another country. This theory also does not take into account the side effects and externalities from the production of a good. Finally, comparative advantage and this idea of free trade really only works when there are no protectionist policies in place that favor one industry over another...think subsidies.

Comparables
Post 2

I guess I do not understand how production efficiency works because it seems like so many businesses do things in the least efficient ways (at least in my opinion). The manufacturing process of so many companies makes little sense to me. How is it so cheap to design a product in one country, ship the resources for that product from multiple points around the globe, and then ship that product back to the original country?

I would assume it would be easier and safer for a company to produce its products within their own country instead of shipping pieces of a product around the globe. I can think of so many variables that would make this an inefficient way to produce a good; the cost of energy, tariffs and taxes, theft of intellectual property, unstable business environments in developing countries, and the list goes on.

istria
Post 1

Does energy efficiency play into the production efficiency formula? If so, why do so many companies use such energy intensive practices when there are alternatives that are more efficient? It seems like there is a disconnect somewhere in industry between waste generation and production efficiency. It seems like doing things like reprocessing waste or installing renewable energy would help to increase production efficiency.

For example, would it not make more sense to combine a vegetable farm with a cattle ranch so as to reduce resource consumption and waste streams? Cattle farms produce manure as waste, while vegetable farms acquire fertilizer as a resource. Cattle farms could locate near a vegetable farm to create a market for its waste, or even generate electricity creating fuel resources from the waste. Vegetable farms could find a cheaper alternative to increasingly costly fossil fuel based fertilizers. Does anyone think this makes sense?

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