by Barry Marcus

Created on: April 10, 2010   Last Updated: August 27, 2010

Efficiency means getting the job done using the minimum resources to produce maximum output. Effectiveness in business on the other hand, means doing the right things at the right time to produce what is needed. 

Many managers aim at efficiency, but to maximise profits it is effectiveness that is required. It may seem to make sense for a department to maximise its output and not have staff and equipment standing idle. But simply producing inventory does not necessarily produce the best results for the business as a whole. 

A milling and baking company was making a loss. All its plants were geared towards the efficient production of the products. Every plant operated at full capacity daily to maximising production. The mills produced flour 24 hour per day. The bakeries baked. The mill was producing as much as was possible at the lowest possible cost. The problem was that the levels of inventory became high.

Then the company changed its philosophy and began to follow a new methodology based on Eliyahu Goldratt's Theory of constraints. According to this theory, each business has a single constraint that determines the maximum that can be produced. Every plant feeding that constraint must produce only what is needed when it is needed. 

The managers of the mills were accustomed to running their plants 24 hours a day. Bonuses were paid according to the volumes produced. Suddenly this changed. The mills had to produce what was needed, when needed. Using the new system, the mill had to produce according to a production schedule received each day from the operations control centre. On some days the mill produced more, on other days less. But all of what it produced was now used. There was no inventory any more, no work-in-progress awaiting other inputs. 

The mill manager found the new scheme of things to be counter-intuitive. All of his working life had been geared towards maximising production, ensuring that every machine and every member of staff was being utilised to the full. Spare capacity was not part of the plan. 

Within a few months of using the new approach, the company had turned around its bottom line. After three years of sustained losses, the company recorded a modest profit. 

The mill now produces exactly what is required when it is required. A daily production schedule is produced based on the day’s orders. The bakeries now get what they need when they need it. What is more, if an employee is away or a machine brakes down, spare capacity is available to take up the extra requirements. 

There are many variations of this approach that achieve the same kind of result. Just-in-Time manufacturing and the Kan-ban system work on a similar basis. 

Business owners may feel uncomfortable seeing staff and equipment standing idle. Traditional methods that aim at greater efficiency usually meant that there was little or no spare capacity. Idle employees and machinery were simply a waste of money. With each plant producing as much as it could as efficiently as possible often resulted in a huge build-up of inventory. When production had to be cut, workers were laid off. 

Effectiveness is somewhat different. Spare capacity is a must. There is nothing wrong with idle resources. There is no build-up of inventory and little waste. Production is based on a plan determined by what is required, when it is required. 

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