The relationship between efficiency, effectiveness and productivity

Q: What is the relationship between efficiency, effectiveness and productivity and what is the path that can be followed to bring about ‘improvement’?

Efficiency is determined by the amount of time, money, and energy – i.e. resources – that are necessary to obtain certain results. In order to meet our daily production quota, we commit a specific machine that uses up energy, make operators and maintenance personnel available, and provide raw materials. For example, if we are able to meet our daily production with less energy and fewer operators, we have operated more efficiently.

Effectiveness is determined by comparing what a process or installation can produce with what they actually produce; therefore, effectiveness does not tell anything about the efficiency – the amount of resources that have to be committed to obtain that output. If we are successful in manufacturing more good product in the same time period, effectiveness will increase. A valuable discussion could be whether ‘good product’ should be seen as ‘Good product with customer demand’ to prevent over-production.

Productivity is determined by looking at the production obtained (effectiveness) versus the invested effort in order to achieve the result (efficiency); in other words, if we can achieve more with less effort, productivity increases.

Goldrath (‘The Goal’) defines productivity as: ‘the extent in which a company generates money’. The goal of a production company is therefore not to reduce expenses but to generate as much money as possible!

How much productivity improvement is possible?

Most striking when looking at the traditional approach to improvement, is that focus is often exclusively on efficiency; the famous cheese slicer continuous to slice production further and further.

How much room for improvement is still left at the input (efficiency) side? 10%? 20%? And does it still make sense to try to reduce another operator or engineer, or to put pressure on the buyers to negotiate even more competitive prices?

As is often the case, that question can not directly be answered. If the supplier can give us a better price because we help him with managing his production process better or – as we see in the automotive-industry – we force the supplier to go through basic improvement processes, such as Lean Manufacturing or TPM, not only the price will decrease, but the quality and the reliability in delivery will increase as well. That is good news for both parties.

However, by managing solely by keeping the cost price down, you run a large risk of saving pennies per product but losing many euros or dollars due to stoppages, quality losses, etc.; in other words, ‘penny wise, pound foolish’. Many production teams can give you striking examples of that.

Increasing Output

We strangely look less often at the output side – the effectiveness – of the equipment. Apparently, the output is more or less considered to be ‘as it is’. However, every line manager knows that the installation will spontaneously start to run better simply by standing beside it and giving it attention. When you check the logbooks, there are days that, on occasion, the installation produced spectacular amounts of good output.

It happened to go well that day…

Ask the team how that happened and you will hear a precise run-down of all elements that went right that day. The raw materials arrived on time and were of the correct quality, the installation kept on running and was set correctly, the right people were present, it was not too warm, etc., etc. This is often regarded as a fluke and nobody is wondering how you could create a similar situation a second time. That is strange actually, for if it can happen once, why should it not be possible to happen again. And if it can happen a second time, why not always? Usually, a whole series of ”Yes, but’s” will follow…

Suppose you would write down those “Yes, but’s” and turn them into a list of action items. What would that give us? To be able to answer that question, we will have to dive a little deeper into the world of Effectiveness.

Our machines run non-stop!

What determines the effectiveness of an installation? First of all we must address the question of whether it does or does not run. Roughly there can be three reasons why an installation is not running:

  • The installation quit; it broke down.
  • The installation could be running technically speaking, but is waiting for something; materials, an operator, filling, to be set-up, etc.
  • The installation could be running, but is not planned in because there is more capacity than demand.

Of course, the ideal machine would never break down and would never have to wait for anything; therefore, it would be running all the time as long as there is demand for the product.

Our machines run at top speed!

Subsequently, the effectiveness is determined by the speed at which the installation is running. This is always a tricky topic, for what is the maximum speed? The speed at which it is at the verge of breaking down? Or the speed at which the quality of the output reaches the bottom limit of its spec? This will guarantee a lively discussion. It is useful to see that it is often simply unknown what the maximum speed is, while the maximum speed that people come up with is usually based on various assumptions (which, in turn, you could turn into an interesting list of action points!). An example of such assumption is: “If I ran the machine any faster and the material got jammed, we would suffer major damage”. Why does it get jammed? Is that always the case? When not? What must happen to prevent it from jamming again? Why does damage occur when it gets jammed? What do you have to do in order to…. etc.

We have ‘zero defects’!

If the actual speed is determined versus the theoretical speed, the next effectiveness determining factor can be looked at: Does the realized output meet the set quality standards? It can be quite an eye opener, if you ask ten different people on the shop floor to indicate very clearly when a product does or does not meet the specs, you will receive ten different answers. It becomes even worse when it turns out that the one who produces the product, the operator, cannot determine, or cannot unequivocally determine this. Also here lie many opportunities to solve all “Yes but’s” and to ensure that the person who makes the product is also able to determine whether he is manufacturing a good product, so that he can keep the quality within pre-set specifications.

Are we ‘ideal’?

Thus, if there is demand, an ideal and effective machine is always running at maximum speed without producing any out-of-spec products. We can assume this to be 100% effective. We know that 100% effectiveness is impossible over a longer period of time; after all, installations must sometimes be maintained and converted. The guideline is that 85% is a realistic “World Class” value for “traditional” machines. That implies that the installation, for example, produces 99% of the products “First Time Right within Specs”, operates at a speed of 95% of the theoretical maximum speed, and is actually running 90% of the operating time (99% quality x 95% speed x 90% running time = 85% effectiveness).

In a three-shift system it means that the installation runs for 90% x 24 hrs = 21:36 hrs at 95% speed with 99% quality. Consequently, there will be 03:24 hrs available for maintenance, conversion, and other possible waiting times. Incidentally, the 85% mentioned is a rather conservative figure; nowadays we see in the automotive-industry equipment that runs over 90%.

The analysis of hundreds of installations for various processes shows that, as rule of thumb, an average installation in an average (non-TPM) company runs at an effectiveness rate between 35 and 45%. Of course, there are always cases that stick out; for example, values in the pharmaceutical industry may lie considerably lower and there are also cases that show considerably higher values.

If it turns out that an installation has an effectiveness of 40%, while people always thought that there were limited options left for potential improvements, it is extremely good news: this means that twice as much good product can be manufactured (your effectiveness rate would be 80%!) at the present cost level. Or, you manufacture the same product with one shift instead of two.

Yes, but then the costs will rise!

It is often assumed that achieving such improvements will necessitate an enormous increase in costs for, for instance, maintenance. That is sometimes partly true, for example, when it concerns overdue maintenance and you are then actually paying off a loan, because a fundamental design flaw has to be solved (and, therefore, you can also see this as paying off a postponed cost item). However, by activating the knowledge that is present on the shop floor in the right way, 80% of the improvements can often be implemented without any capital expenditures and at minimal costs.

It is not so hard to imagine that an installation, which halts on a regular basis for various reasons, or whose process is not stable enough to operate at high speed without any losses in quality, automatically requires more resources at the input side as well! Reversely, it may be that lowering the efficiency (for instance, by spending a little bit more money and time on preventive maintenance) will bring about a strong increase in effectiveness, which – bottom line – creates a higher net productivity. Such considerations can only be made if, in addition to efficiency, particular attention is paid to losses in effectiveness as well.

In all cases, it is necessary to take decisions concerning actions leading to improvement on the basis of facts and figures describing the entire productivity picture.

World Class Manufacturing does not accept any losses at all. That is what management must focus on and management must have the will to go further than mere window dressing and scratching the surface. Unfortunately, that is often even harder than just opening the wallet. Companies that do take this route, discover over and over again: There still lies a nearly unlimited potential for improvement for those who learn to see it and seize it!

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