Process effectiveness and efficiency are business terms often used interchangeably or in a general combination. Effectiveness refers to your ability to optimize business strengths in the way you operate. Efficiency refers to your ability to optimize your resources and business activities to generate revenue and profits. Organisations simply cannot ignore the terms ‘efficiency’ and ‘effectiveness’ For increasing productivity as well as improving customer service, both of these are essential. Efficiency is doing the things right; effectiveness is doing the right things.
IATF 16949:2016 220.127.116.11 Process effectiveness and efficiency
Top management is required to review the product realization processes and support processes to evaluate and improve their effectiveness and efficiency. The results of this process review activities must be an input to the management review
Clause 18.104.22.168 requires top management to have a method for reviewing all organizational activities that relate to supplying parts to the organization’s customers. IATF 6949 adds a requirement that top management must regularly review the effectiveness and efficiency of the product realization and support processes. In simple English, that requires top management to ask how well the core business is being managed. Financial measures obviously come to mind. but from the quality perspective, measures of parts per million (ppm) nonconforming at the customer, first-run capability (the percent of product produced without repair operations). scrap, employee turnover, and delivery performance to schedule are among the appropriate metrics for measuring core business efficiency. The clause also requires not to ensure that the results of process review activities will now be included in management review. Process review activities need to include evaluation methods and, as a result, implement improvements. The results of these steps would be an input to the management review process. Top management is thus performing a review of the process-specific reviews performed by the process owners.
Top management at each site must review process effectiveness and efficiency . This may include:
- Achievement of continual improvement objectives for identified product realization and support processes
- Optimization of the interaction of these processes
- Verification that these processes operate as an effective and efficient network
- Monitoring cost trends and benchmarking of key processes
Effectiveness is an external measure of performance and indicates how well an Process fulfills the demands of various stakeholders. Simply put, it is “doing the right things.” For example, in educational institutions, effectiveness is measured by teaching students what they need to know. Managers need to make sure that the services or products meet customers’ expectations. When analyzing a company’s processes, effectiveness takes precedence over efficiency. Effectiveness of a process is the measure of how relevant the output is to the desired objective. A truly effective process will make customers happy by providing everything right. That is, the right results at the right place time and cost. Hence, measure process effectiveness from the customers’ goal point of view.
Effectiveness measures the extent to which planned activities (run rate) and planned results (objectives) are achieved? E.g., say you plan to produce and ship 1000 units a day with zero defects. At the end of the week, the production records showed we achieved our planned activity of 1000 units per day, but fell short on our planned result, as we incurred a 2.5% defect rate and only hit a 90% on time delivery rate.
Effectiveness can include discussion of current operations and opportunities for improvement. If your business is currently effective, you are using your core strengths and available resources to best serve the marketplace. A for-profit business with a strong customer service staff is effective if it earns healthy revenue by providing a high-level of sales and service production. An effective manufacturing firm uses its buildings, equipments and workflow to produce quality goods. The activities that make you effective now may not contribute to continued effectiveness. Therefore, it is fair to say that effective companies consistently look for opportunities for growth and development. If an emerging market develops that your company can serve, effectiveness means that you conduct research, recognize the needs and interests of the market, develop products and services to match and promote your brands well to the target customer base. Your company’s effectiveness is somewhat relative to the ability of competitors to produce similar business results with the same resources and opportunities.
Efficiency is an internal measure of performance for process that shows how well the process converts inputs into outputs. The more the ratio of outputs to inputs approaches 100 percent, the better the efficiency of the process will be. In simple terms, it is “doing things right” and comes from proper harnessing of time, cost and efforts. For example, an employee can improve efficiency by developing a daily work schedule, avoiding personal phone calls and preventing distractions. Process efficiency, on the other hand, acts as a vital factor in determining productivity. It is a measurable concept. Essentially it is the ratio of ‘useful output to total input’. Hence it requires resource optimization (mainly cost and time) along with maximum waste reduction. To understand process efficiency we need to measure process time, cost and effort needs.
Efficiency is the relationship between results achieved and resources used. Can we produce more units than planned per hour for the set amount of resources? Or can we use fewer resources than planned to produce the units.? Efficiency can relate to utilization of any resource – machine, labor, material, facilities, utilities, time, etc. Let us look at a simple example. Say one operator A can produce 100 good units per hour with 2% material scrap on a machine. Operator B produces 105 good units with only 1% material scrap per hour on the same machine. Clearly operator B is more efficient in the use of time as well as material, both of which can be measured. Because there are many other resources to be considered, the measurement of efficiency can get fairly complex and requires a multidisciplinary approach involving production, engineering, cost accounting and other disciplines.
Efficiency generally refers to how well you convert business investments into revenue and profit. One factor in efficiency is cost control. Efficient companies usually only spend money that produces tangible gains in customers, revenue or profit. Paying competitive wages while motivating employees to produce the highest goods or sales contributes to efficiency. Paying only for product developments that lead to enhanced customer perception of value is another element of cost control and efficiency.
Productivity relates the output of goods and services of the company to the inputs of all the resources used in the production of goods and services. In other words, it measures how well a company transforms resources into products. Productivity is the combination of efficiency and effectiveness. This means that a company that only attains efficiency or effectiveness is either partially productive or not productive at all. To be productive, a company needs to be efficient and effective at the same time. Relating efficiency and effectiveness overcomes the shortcomings of using either of them alone. If managers focus on efficiency alone, they may jeopardize the competitiveness of their company. For example, mere focus on efficiency ignores the contribution of the activity to customer value creation. Likewise, exclusive emphasis on effectiveness ignores the cost-effectiveness of the activity. Improving productivity boosts competitiveness by lowering operational costs, using resources better, increasing market share and increasing profits.
Measuring Process effectiveness and efficiency
The starting point involves detailed process mapping and creating the block diagram for the said process after discussing in detail with the operations teams and floor walk through. The block diagram is then fine tuned to mark the boundaries thus freezing the beginning point and the ending point of the chosen process. Further planning involves marking the source of inputs that go into the said process, identifying the input source as well as the output customers at intermediate and final stages of the process. Detailed examination of the data that is received as input, the data or deliverable that is required to be sent as output from the process would have to be done to ensure every possible detail is captured. At this point it becomes necessary to examine the input and output data accuracy, errors, frequency and standardization of the data as well as to record the customer expectations from the process. Once entire process mapping and overview has been completed and defined, the next logical step would be to tabulate the measurements and targets for the overall process.
- Process Effectiveness Measurement
Effectiveness of a process refers to the usefulness of the process output in relation to the expectations and needs of the Customer. The effectiveness of the process lies in being able to provide the desired output as needed by the Customer at the right time, right way and at the right place and more importantly at the right cost too. The process of setting up process effectiveness measurement begins with outlining the complete Customer expectations and needs detail. These expectations would then be converted into measurable targets and expectations. Lastly the data collection and measurement methods would need to be outlined. It helps to elaborate a little more on the process effectiveness measurement and the attributes that are used as measurements. In most cases it is generally seen that the Customer expectations and requirements are not defined clearly with specifications in terms of the delivery format, frequency and so on. In addition, the customer’s expectation of error free service, customer experience and quality of service are not defined or understood well enough and are not quantified. Now is the time to examine the customer expectations in detail and establish the criteria for delivery of the said product or service in line with customer expectations. There are several criteria that are used to measure the process effectiveness specifically in relation to the Customer expectations. Some of the popular and useful criteria used in the product as well as service industry include – Product or Service Presentation, Timeliness of Delivery, Accuracy of Service, Reliability of Service or Product, Product usability, Product serviceability and Customer Service, Responsiveness etc. Once the criteria for measurement has been established and accepted, the next sequential step would be to formalize the measurement criteria and freeze the formats. Measurement criteria here would include usage of QC Inspection, Check Sheets, AQ Sampling formats to be used at the Customer end, Customer Inspection and Installation reports or feedback forms etc. Specific measurement criteria can be setup depending upon the specific business case.
- Process Efficiency
Efficient execution of the process is very important for very many reasons. In most cases the processes are normally found to contain inefficiencies built over a period of time. First and foremost every customer who is buying a Product or a Service expects efficiency of service. Depending upon the nature of business or the service, the process efficiency can be ascertained. Efficiency of service in a restaurant can be measured in terms of time taken from Order to Delivery of Food and in case of an Airline; the check in process efficiency could be of prime importance to gauge service efficiency. Take the case of Sales Order processing; the process efficiency would be of importance when it comes to the calculation of total time taken from the Order to delivery to the end customer. Process efficiency is not only important from the point of view of external customer alone. Internally too, process efficiency has a bearing on the operations cost as well. Internally the process efficiency can be measured using several criteria including but not limited to – Total processing time, Resource utilization per unit of output, Non Value Added Cost, Non Value Added Time, Cost of Quality etc. Measuring the process time at all stages throws up a lot of factors that are aiding or harming the process efficiency and thus provides ample information to be able to work on process control and improvement. Measurement of process time or cycle time will also throw up non value added time as well as activity which can be acted upon for correction. Furthermore, any deficiency in the training or skills of the workers and any delay or inefficiency from the related processes that are supposed to provide the inputs will also show up with the measurement of cycle time of the process. Efficiency of the process has a direct bearing on the Customer expectation and the promise to the Customer as well as to the overall operational cost. Therefore putting in process efficiency measurements in place will help bring out the areas and factors that are needed to be controlled, managed, changed and altered in the process of improving the said process.
Some metrics used for calculating Process efficiency and effectiveness are
- Improving Customer Experience & Responsiveness
- On-Time Delivery to Commit – This metric is the percentage of time that manufacturing delivers a completed product on the schedule that was committed to customers.
- Manufacturing Cycle Time – Measures the speed or time it takes for manufacturing to produce a given product from the time the order is released to production, to finished goods.
- Time to Make Changeovers – Measures the speed or time it takes to switch a manufacturing line or plant from making one product over to making a different product.
- Improving Quality
- Yield – Indicates a percentage of products that are manufactured correctly and to specifications the first time through the manufacturing process without scrap or rework.
- Customer Rejects/ Return Material Authorizations/ Returns – A measure of how many times customers reject products or request returns of products based on receipt of a bad or out of specification product.
- Supplier’s Quality Incoming – A measure of the percentage of good quality materials coming into the manufacturing process from a given supplier.
- Improving Efficiency
- Throughput – Measures how much product is being produced on a machine, line, unit, or plant over a specified period of time.
- Capacity Utilization – Indicates how much of the total manufacturing output capacity is being utilized at a given point in time.
- Overall Equipment Effectiveness (OEE) – This multi-dimensional metric is a multiplier of Availability x Performance x Quality, and it can be used to indicate the overall effectiveness of a piece of production equipment, or an entire production line.
- Schedule or Production Attainment – A measure of what percentage of time a target level of production is attained within a specified schedule of time.
- Reducing Inventory
- WIP Inventory/Turns – A commonly used ratio calculation to measure the efficient use of inventory materials. It is calculated by dividing the cost of goods sold by the average inventory used to produce those goods.
- Ensuring Compliance
- Reportable Health and Safety Incidents – A measure of the number of health and safety incidents that were either actual incidents or near misses that were recorded as occurring over a period of time.
- Reportable Environmental Incidents – A measure of the number of health and safety incidents that were recorded as occurring over a period of time.
- Number of Non-Compliance Events / Year – A measure of the number of times a plant or facility operated outside the guidelines of normal regulatory compliance rules over a one-year period. These non-compliances need to be fully documented as to the specific non-compliance time, reasons, and resolutions.
- Reducing Maintenance
- Percentage Planned vs. Emergency Maintenance Work Orders – This ratio metric is an indicator of how often scheduled maintenance takes place, versus more disruptive/un-planned maintenance.
- Downtime in Proportion to Operating Time – This ratio of downtime to operating time is a direct indicator of asset availability for production.
- Increasing Flexibility & Innovation
- Rate of New Product Introduction – Indicates how rapidly new products can be introduced to the marketplace and typically includes a combination of design, development and manufacturing ramp up times.
- Engineering Change Order Cycle Time – A measure of how rapidly design changes or modifications to existing products can be implemented all the way through documentation processes and volume production.
- Reducing Costs & Increasing Profitability
- Total Manufacturing Cost per Unit Excluding Materials – This is a measure of all potentially controllable manufacturing costs that go into the production of a given manufactured unit, item or volume.
- Manufacturing Cost as a Percentage of Revenue – A ratio of total manufacturing costs to the overall revenues produced by a manufacturing plant or business unit.
- Net Operating Profit – Measures the financial profitability for all investors/shareholders/debt holders, either before or after taxes, for a manufacturing plant or business unit.
- Productivity in Revenue per Employee – This is a measure of how much revenue is generated by a plant, business unit or company, divided by the number of employees.
- Average Unit Contribution Margin – This metric is calculated as a ratio of the profit margin that is generated by a manufacturing plant or business unit, divided into a given unit or volume of production.
- Return on Assets/Return on Net Assets – A measure of financial performance calculated by dividing the net income from a manufacturing plant or business unit by the value of fixed assets and working capital deployed.
- Energy Cost per Unit – A measure of the cost of energy (electricity, steam, oil, gas, etc.) required to produce a specific unit or volume of production.
- Cash-to-Cash Cycle Time – This metric is the duration between the purchase of a manufacturing plant or business unit’s inventory, and the collection of payments/accounts receivable for the sale of products that utilize that inventory – typically measured in days.
- EBITDA – This metric acronym stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a calculation of a business unit or company’s earnings, prior to having any interest payments, tax, depreciation, and amortization subtracted for any final accounting of income and expenses. EBITDA is typically used as top-level indication of the current operational profitability of a business.
- Customer Fill Rate/On-Time delivery/Perfect Order Percentage – This metric is the percentage of times that customers receive the entirety of their ordered manufactured goods, to the correct specifications, and delivered at the expected time.
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