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Efficiency

 

Efficiency - performing in the most optimal manner. It is about 'doing things right' i.e. doing it in the least time or in a least expensive way. It may be the wrong thing but it could have been done optimally.

 

An application-oriented question on the topic along with responses can be seen below. 

 

Applause for the respondents- R Rajesh, Anup Singh & Jayaram T

Question

Q. 199  What are some examples of most common efficiency metrics that are used in the business world? Which one's may be considered better than the others?

 

Note for website visitors - Two questions are asked every week on this platform. One on Tuesday and the other on Friday.

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4 answers to this question

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The answers this time (given below) are good for the part 1 of the question but there are no attempts for part 2. Some efficiency metrics can be considered better than others if they have less harmful side effects. 

 

Productivity in manufacturing as number of units per month is a commonly used metric but promotes overproduction. Theory of Constraints promotes the use of a metric called Throughput which is calculated as Throughput = Sales - TVC (Totally Variable Costs). This is an efficiency metric which ensures that productivity will be considered valid only if Sales happen. And as evident, lower the variable costs, better will be the throughput. This metric removes some of the harmful side effects of a pure production volume metric. 

 

As no one has provided response to the second part,  there is no winner for this question :(

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There are quite a lot of Metrics that are quite useful cutting across sectors. Some of such metrics  are cycle time(multiple industries use this), response time, resolution time(IT Support), Web response time(Web application), Velocity(Agile Scrum).  For instance, Cycle Time is a critical metric used across industries. In an IT production Support project, 'response time' and 'resolution time' metrics serve as part of the Service Level Agreement  (SLA) between a service provider and it's customer. 

 

But these metrics are not applicable in a development project as the product is either in progress or ready to be deployed in production.

 

Similarly consider the web response time. It is critical metric for a Web based project but not so for a desktop application where the focus could be on ease of use or the response time is expected to be instant (so the metric is not at all a useful metric in this case) .

 

 Take the case of 'Velocity'. In an Agile Scrum world, 'Velocity' is often measured as a key metric, which is used as a measure of work progress in a given iteration(a defined time duration in terms of weeks- in a broader sense), calculated in terms of story points or ideal days/hours . While this serves as a pointer for picking potential work in subsequent iterations, the authority body for Agile Scrum (scrum.org) says that 'Velocity' is an optional metric. That means some organisation can also decide not to use it. Despite it being efficient why it's not used by some organisations. The problem lies in the fact that some organisations start misusing the efficiency of the metric.  For instance, with 'Velocity', people start to compare the velocity of one team with the velocity of another one. There is apple to orange comparison. This defeats the objective of the metric. Also, Velocity can be applicable to an Agile project and not to a project that runs in traditional models such as waterfall.

 

 So  metrics which are considered to be important will not be needed at all times. 

 

Conclusion:

There is no 'fit for one size' metric. Every metric is unique and the efficiency of a metric depends on the environment, context in which the metric is used. What is an efficient metric in one case may not be applicable or efficient for all scenarios.  

 

Therefore, in my opinion, it is improbable to have a metric to be defined as better than another as could be seen from the aforementioned examples

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The meaning of efficiency in different areas mentioned below-

1. Efficiency is fundamentally reducing the amount of wasted resources that are used to produce a given number of goods or services (output).

2. Economic efficiency is the optimization of resources to best serve an economy.

3. Market efficiency is the accuracy with which stock prices reflect all of the available market information.

4. Operational efficiency is the case when stock prices reflect the cost of company operations.

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The goal / objective of any business is Customer satisfaction, Employee Satisfaction & Shareholders returns

In the above 3 goals Shareholders return is a financial goal & other 2 are gaols related to perception caused by the behaviour of organization. Positive behaviour & culture in the organization leads to positive perceptions

 

Some of the most common efficient metrics are

1.    Operating Expense – All the money spent by organization to turn raw materials (Inventory) into throughput. Any expense which does not convert inventory to through put is called a waste.

 

OE = Fixed expenses

2.    Throughput (T)– Rate at which money generated (revenue)by the organization through sales and not through production. Any produced good / service until sold is not called as throughput until sold.

T= Net sales – Total Variable Cost

 

3.    Inventory (I) – Money invested by organization invested in purchasing with the intention of selling.

With the above 3 metrics any organization can calculate their

a.    Profit = Throughput – Operating Expense

b.   Return on Investment = (T-OE)/I

c.    Cashflow = PAT- Change in I

The other metrics which are commonly used to measure department level performance are

1.    Revenue / Employee

2.    Cost / Employee

3.    Customer acquisition cost

4.    Employee Learning & Development

5.    Improvement initiatives

Every metrics used in business is one way are other related to its performance, Metrics are defined for short team & long term goals.

For any business the key efficiency metrics are the ones which indicates the performance of below goals.

1.    Financial performance

2.    Customer Loyalty (NPS)

3.    Employee Satisfaction

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