Efficiency refers to the relationship between the amount of input used to produce something and the amount of output that is generated. In other words, it is a measure of how much work or effort is required to produce a given outcome. A process or system is considered to be efficient if it uses a minimum amount of input (such as time, labor, or resources) to produce the maximum possible output. Efficiency is an important concept in economics, as it can help organizations and individuals to maximize the value of their resources and minimize waste. This has several common variations:
Productivity is the amount of value a person creates in an hour of work. The design team increased their productivity to $50,000 per employee per month.
Resource efficiency is the output achieved relative to consumption of a resource such as a gallon of water. This is an important sustainability metric as improving resource efficiency tends to reduce the environmental impact of economic activity. Farmers in the region reduced herbicide consumption by 44% with companion planting techniques.
The resource efficiency of a machine. The new LED light bulb design achieved an overall luminous efficiency of 25%.
The efficiency of a business process. The order fulfillment process was improved to use 27% less packaging materials.
Operational efficiency is the efficiency of the core operational processes of a business. This is measured with management accounting metrics such as inventory turnover, capacity utilization and unit cost. The inventory turnover of the firm improved to 28 days.
Economic efficiency is the amount of value created by the resources of a nation or region.
This has four types:
Allocative Efficiency: Producing the goods that consumers demand. For example, it wouldn’t be efficient to produce trillions of purple widgets that nobody wants.
Productive Efficiency: Producing goods at low cost. For example, producing purple widgets for $0.11 / unit is more efficient than producing them for $11 million / unit.
Distributive Efficiency: Distributing goods to those who need them and/or deserve them.
Externalities: Producing goods without destroying the planet or decreasing quality of life.
Business efficiency is the amount of revenue that you produce from inputs such as labour and capital. For example, revenue per employee is considered an indicator of business efficiency. The firm improved its revenue per employee to $690,000 by launching popular new designs.
Capital efficiency is the amount of value created per dollar of capital. Capital is anything that creates long term value such as a bridge, machine or software code. At the level of a company, this can be measure with return on invested capital. Return on invested capital declined to 19.1% due to quality issues that required production shutdowns and recalls.
Management efficiency is the output achieved by a management team relative to the inputs they control. For executive management, this is the same as capital efficiency. For middle management, this is an indicator of the output created by spending and capital controlled by a management team. For example, the efficiency of a marketing team might be measured by how cheaply they can acquire customers. The marketing team reduced customer acquisition cost by 9% to $5.6.
Efficiency goals are targets that aim to achieve more output for each unit of input. These goals can take many different forms, depending on the context in which they are applied. For example, an efficiency goal in a manufacturing setting might aim to increase the amount of output produced per hour of labor. In a business setting, an efficiency goal might focus on reducing the amount of time or resources required to complete a task or process. Efficiency goals can also be applied at the level of an entire economy, with the aim of increasing overall productivity, reducing waste, and maximizing the use of resources. Regardless of their specific form, efficiency goals are intended to help organizations and individuals to become more efficient and effective in their use of inputs to produce desired outputs.
Process efficiency is the output of a business process relative to the resources it consumes. In practice, this is often measured by throughput if resource consumption is relatively constant. Increase the throughput of the widget production line by 22% to 1700 units/hour by upgrading workstations 13 and 19 that represent bottlenecks.
Resource efficiency is the amount of resources that you use to achieve a unit of output. Reduce water consumption to 800 gallons per ton of tomatoes by using a controller that only activates irrigation systems when soil conditions are dry.
Productivity is the amount of value you create in a unit of time such as a month. Increase productivity to 5,000 lines of code per month.
Reducing wasted time improves productivity. Score leads and prioritize accounts that are most likely to close to improve win rate to 55%.
Machine efficiency is the amount of resources such as electricity consumed by a machine relative to its output or performance. Upgrade solar systems to achieve peak conversion efficiency of 21%.
Economic efficiency is the value that you get from capital. This is influenced by everything from strategy to customer relationships. Close non-performing restaurants and open new locations in prime areas to improve operating margins to 14.3%.
Reducing resource waste improves efficiency. Develop an artificial intelligence that picks the minimum size of box for each order. Goal: reduce cardboard usage by 31%.