Universal Journal of Industrial and Business Management 1(4): 137-140, 2013

DOI: 10.13189/ujibm.2013.010402

http://www.hrpub.org

How Are We Doing? Tracking Efficiency, Utilization,

and Productivity
Andrew Smith
Clark H. Byrum School of Business, Marian University, Indianapolis, 46222, Indiana, United States
*Corresponding Author: [email protected]

Copyright 2013 Horizon Research Publishing All rights reserved.

Abstract
Productivity gains lead to competitive
advantages. To achieve success, managers need to know if
they are making the most effective use of resources.
Understanding how well a business is performing compared
to other firms in an industry is vital. Efficiency and
Utilization are two measures that can be used to answer the
question How are we doing? Once you have defined key
variables and established benchmarks, programs like
Microsoft Excel make it easy to set up the necessary
calculations and track performance over time. A spreadsheet
application is demonstrated that illustrates the concepts
discussed. Formulas are included and explained.
Keywords Efficiency, Productivity, Utilization,
Operations Management, Excel, MIS

1. Introduction
In business, knowing how well we are performing and
where we can improve is vital to success. Gains in
productivity can lead to competitive advantages [1]. To
achieve these gains, we need to know if we are making
effective use of resources and getting the most out of what
we have. Efficiency and Utilization are two measures that
business can use to track how we are doing.In this paper
we define these terms, explain why they are important,
discuss Productivity, and then illustrate methods for
calculating all three using Microsoft Excel. Sample
production data will be used to illustrate the features of the
worksheet as well as the charting capabilities of Excel.
While the calculations themselves are not difficult,
choosing exactly which performance measures to use and
collecting the necessary data requires a thorough
understanding of the industry. Once the variables we want to
measure have been identified and the data has been collected,
programs like Excel allow us to easily develop an
application.

2. Materials and Methods

The first measure, Efficiency, is defined as the ratio of

Actual Output to Effective Capacity [2]. To calculate
Efficiency you must determine what the Effective Capacity
of your operation is.For example, does your company
already have a target or benchmark of some kind? Like
total units produced per shift or customers served per hour. It
helps to know what the ultimate Design Capacity of the
system is because you can use that number in calculating
Effective Capacity.
Design Capacity is defined as the maximum output
achieved under ideal conditions but may never be realized
under actual working conditions [2]. Design Capacity
represents 100% of total output and places an upper limit
on what can be produced. Effective Capacity then, under
ordinary conditions, must always be less than Design
Capacity because of machine breakdowns, maintenance,
shortages of materials, scheduling, and quality problems.
Likewise, Actual Output typically never exceeds Effective
Capacity [1].
Utilization is defined as the ratio of Actual Output to
Design Capacity [2] and gives a better picture of how the
operation is making the most of its potential. To calculate
Efficiency and Utilization, there are two basic formulas that
can be used:
Efficiency = Actual Output/Effective Capacity x 100% (1)
Utilization = Actual Output/Design Capacity x 100% (2)
Consider the following example:
A computer repair service center has a Design Capacity of
80 repairs per day. Its Effective Capacity is 64 repairs per
day but Actual Output is only 62 repairs per day.
Efficiency = 62/64 x 100% = 96.875%
Utilization = 62/80 x 100% = 77.5%
There is a big difference between these two numbers. We
often hear much about improving efficiency but when
Effective Capacity is low relative to Design Capacity, simply
relying on Efficiency as an indicator of performance can be a
mistake. In the above example, the manager of the service
center should work to increase Utilization. Some ways to
increase Utilization include correcting quality problems,
keeping equipment in good operating condition, training

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How Are We Doing? Tracking Efficiency, Utilization, and Productivity

employees, and eliminating bottlenecks [1].

Deciding what to use as a benchmark is extremely
important as well. In selecting a measure of capacity, it is
necessary to choose one that does not need to be adjusted for
inflation or updated constantly [1]. The dollar value of output,
for example, is often a poor indicator of capacity due to
inflation or price fluctuations. Also, no single measure of
capacity will be appropriate for every situation. Rather the
measure of capacity selected must be specific to the business
[1]. The following table lists examples of potential measures
of capacity taken from various industries:
Table 1. Capacity Measures
Industry

Inputs

Outputs

Auto

Labor hours, machine

hours

Number of cars
produced

Steel

Furnace size

Tons of steel

Oil

Refinery size

Gallons of fuel

Farming

Number of acres

Restaurant

Tables, seating capacity

Theatre

Seats available

Retail

Square feet of floor

space

Multifactor Productivity = 7,040/($1,000+$520+$2,000) =

2 units per dollar

Bushels of grain
Number of meals
served
Number of tickets
sold
Revenue generated

Benchmarking is an important step towards improving

efficiency. Nokia Siemens for example, utilizes a three-step
benchmarking process [3]:
1) Benchmark current operational efficiency against the
most efficient service providers in mature and
emerging markets.
2) Assess the efficiency of work processes to identify
areas for improvement.
3) Develop solutions to raise performance in these areas.
Closely related to the concept of Efficiency and
Utilization is Productivity [1]. Productivity can be calculated
for a single input such as labor or energy, or it may be
calculated for several inputs. The following formula
calculates Productivity for a single input:
Productivity = Output/Input

(3)

Sometimes this measure of Productivity is referred to as

Process Efficiency and is related to how well a given
process achieves organizational strategy [4]. When
Productivity is calculated for several inputs it is called
Multifactor Productivity and indicates how well the
organization is making use of all its resources.
The following formula calculates Multifactor Productivity
for three inputs:
Multifactor Productivity =
Output/(Labor+Materials+Overhead)

improvements are necessary. Productivity measures can also

be used to assess the overall performance of a business,
entire industry, or even a nation. These measures are often
known as aggregate measures. Global competition,
increases in the standard of living, and national pride are
directly tied to aggregate gains in productivity. Especially if
they are accompanied by high growth rates [1].
As an example, using the formula (4) from above, we can
determine the Multifactor Productivity for the following
scenario:
Output: 7,040 units
Labor: $1,000
Materials: $520
Overhead: $2,000

(4)

Productivity measures benefit a business in many ways.

For an individual worker or department, productivity can be
used to track performance over time. This allows managers
to continually monitor a process and decide if any

Multifactor Productivity calculations such as this serve as

a yardstick for the effective use of resources within an
organization. Business decision-makers are especially
concerned with productivity as it relates to competiveness.
Simply stated, if two firms both have the same level of output
but one requires less input because of higher productivity
that one will be able to charge a lower price or earn a greater
profit. To remain competitive in an increasingly competitive
world, business must boost operational efficiency whenever
possible. According to Laurie McCabe, Vice-President for
AMI-Partners: Sooner or later, any company not operating
efficiently will be out of business. McCabe adds that this is
especially important for Small to Medium sized business as
they have more limited resources than large enterprises [5].
It is unfortunately quite easy to overlook the importance of
productivity figures today. In the current economy there are
so many other issues that vie for our attention. But that
doesnt make productivity any less important. By calculating
Efficiency, Utilization, and Productivity for our business we
will have a good idea of where we stand in relation to our
competition, the rest of the nation, or even the world.
Productivity data for all sectors of the US economy may be
found on the Bureau of Labor Statistics web site [6]. Data
from the BLS website may be downloaded in Excel format
which makes it easy to work with. Most data sets contain
historical data going back at least 20-30 years or more.
The following chart (Figure 1) shows the growth in
multifactor productivity for the Manufacturing sector from
1997 to 2011:
The Excel application presented in this paper will track
daily Actual Production compared to Design Capacity and
Effective Capacity. It will also calculate Efficiency and
Utilization for each workday as well as the Percent Change
from the previous day. Hours Worked will serve as one of the
inputs. When considering labor as an input it is important to
realize that people will not always be 100% productive. If a
projects estimates are at all realistic, there should be an
allowance for non-productive time in your calculations.
Many organizations have a standard labor productivity rate

Universal Journal of Industrial and Business Management 1(4): 137-140, 2013

which can vary between 65% and 80%. In addition, as

experienced managers know, labor productivity does not
necessarily increase when more people are allocated to a task.
Metrics on individual worker productivity from previous
projects can be useful when estimating the number of hours
required to complete a given task [7].

Figure 1. Manufacturing Productivity Trends

3. Conclusion

139

The ability to establish performance standards and track

gains or losses over time is far more valuable than a single
days calculation to most managers. Microsoft Excel allows
us to create a worksheet to capture weeks, months, or years
of data. All that is needed to analyze the data is to enter the
formulas. The Excel application presented in this paper
includes calculations for Effective Capacity, Efficiency, and
Utilization (Figure 2). In constructing this model, we are
assuming that we have already established Design Capacity
(Units) and the Maximum Hours/Day the plant is in
operation.
We will also assume for simplicity, that at 100% of Design
Capacity, the plant operates just one shift of 8 hours a day,
seven days a week, and at that level, maximum output is
5275 units per day. Perhaps due to the factors stated earlier,
Actual Hours Worked and Actual Production may be less. In
our fictional scenario, the data for Actual Production in fact
often turns out to be considerably less than Design Capacity
and tends to fluctuate. This is reflected by the generally low
Utilization figures for each day.
Efficiency however appears to score much better,
sometimes even exceeding 100% of Effective Capacity.
However, as we have seen, focusing entirely on Efficiency
can be misleading. In our example, the low Utilization
figures are most certainly a red flag and would need to be
addressed if this were an actual company.

Figure 2. Microsoft Excel Worksheet Example

Universal Journal of Industrial and Business Management 1(4): 137-140, 2013

Recall that Design Capacity was originally set at 5275

units which, according to our definition represent the
uppermost limit of production capability. To increase this
number a major facilities expansion or scheduling additional
shifts would have to occur. It is interesting to observe that in
our example Design Capacity was exceeded on at least one
occasion. This is reflected in the very high Efficiency and
Utilization figures of 102.03% for 1/10/2013.For the first
month, Efficiency averages 98% while Utilization averages
approximately 87%. The low point for Utilization occurs on
1/18/2013 with a figure of 56.42%. Our fictitious company is
actually doing very well: 90% efficiency is considered quite
good. To compare this to something we are all familiar with,
most gasoline powered cars are only about 30% efficient [8]
To create this worksheet, we began by entering Design
Capacity (Units) = in Cell A1, the number 5275 in Cell C1,
Maximum Hours/Day = in Cell A2, and the number 8 in
Cell C2. We then entered the headings in Row 4 as shown in
Figure 2.Starting in Row 5, the Date was entered in Column
A, Actual Production Units were entered in Column B, and
Actual Hours Worked were entered in Column C.
Formatting was applied where appropriate to indicate
percentages and dates. Cell shading and grid lines were
added later to enhance readability.
The formulas used in this worksheet were:
Cell D5, Design Capacity (100%): =$C$1
Cell E5, Effective Capacity (Units):=C5/$C$2*G5
Cell F5, Efficiency:=B5/D5
Cell G5, Utilization: =B5/G5
Once Row 5 was completed, these formulas were copied
down to Row 89. Once the worksheet was complete, the next
step was to create a line chart comparing Actual Production
to Design Capacity and Effective Capacity. This is shown in
Figure 3.Using the same type of graph, one could just as
easily track Efficiency and Utilization. This example covers
the period from January 7 to April 1.

Figure 3. Microsoft Excel Chart

Looking at the chart, Actual Production (Units) and

Effective Capacity (Units) appear to vary quite a bit. Of

141

course for our example we have deliberately entered a wide

range of data to illustrate the calculation and charting
capabilities of Excel. It would be expected that if this were an
actual company, thereal manufacturing data would not be
as volatile. This makes including a chart to track daily
performance even more valuable since any periods of
exceptional performance or under-performance would be
easier to spot than by simply looking at printed reports or
figures.
By modifying the model presented in this paper many
possible variations of this worksheet could be created. For
example, different time periods or number of shifts might be
used. A second chart may be included that tracks Efficiency
and Utilization. Statistical calculations such as Means or
Standard Deviations can also be incorporated. Even a control
chart could be developed based on Actual Production.
Perhaps the biggest advantage of using a program such as
Excel to develop an application like this one is the design
flexibility and calculation power of the software itself [9].
With a basic understanding of Efficiency, Utilization, and
Productivity, combined with a working knowledge of
Microsoft Excel, anyone can quickly develop an application
and know exactly how they are doing.

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