Manufacturing businesses aim to maximize efficiency through various production methods and performance metrics.
Lean production is a key manufacturing approach pioneered by Toyota that focuses on eliminating waste and improving efficiency. The lean production system involves several core principles including just-in-time inventory, continuous improvement (kaizen), and pull production based on actual customer demand. Key lean manufacturing tools include value stream mapping, 5S workplace organization, and standardized work procedures. While the lean production Toyota model has become globally influential, some disadvantages of lean production include vulnerability to supply chain disruptions and high implementation costs.
Two critical performance measures are capacity utilization and labor productivity. Capacity utilisation refers to how much of a business's maximum production capability is actually being used. The capacity utilisation formula is: (Actual Output ÷ Maximum Possible Output) × 100. Businesses aim to improve their capacity usage through methods like shift work and preventive maintenance. Labour productivity measures output per worker and is calculated as: Output ÷ Number of Workers (or hours worked). Labour productivity by country varies significantly based on factors like technology adoption, worker skills, and capital investment. Both metrics help businesses identify inefficiencies and opportunities for improvement. High capacity utilization typically indicates strong demand and efficient operations, while growing labor productivity suggests improving workforce capabilities and production processes. However, very high capacity utilization can also signal the need for expansion to avoid bottlenecks. The importance of capacity utilisation extends beyond individual firms to indicate overall economic health, with low utilization suggesting economic slowdown. Similarly, labour productivity data is closely watched by economists as a key indicator of living standards and economic growth potential.
