therefore

Efficiency = 95 / 100 = .95 (or 95%)

Referring back to our premises for the requirements of a TAU model/metric, we note that this traditional method of calculating Efficiency is unit- versus profit-based. The reason for this assertion is that the company in question is paid by the pound; not the coil. Therefore, the Efficiency calculation, to be valid for TAU purposes (and this will be absolutely critical when relative Efficiency values are integrated with an ABC system for portfolio analysis) must take into account the capacity of the mill as related to maximum or theoretical design weight. Suppose, for example, the mill was capable of rolling finished coils 6 feet wide and 1 inch thick (gauge) at 1500 linear feet each. Suppose further the 95 coils in question were, in fact, 1500 linear feet each, but because of customer requirements or the alloy involved, each coil was 3 feet wide, and 0.5 inches thick. In this case, Efficiency is properly expressed (for TAU purposes) as:

not 95% ! At this point, managers trained in traditional metrics for Efficiency calculations will point out that perhaps the reduced efficiency was “a good idea”, because the firm gets more money for the narrower, thinner product. This may be true (although, without the application of an integrated TAU and ABC system, the author would assert that such a statement may or may not be true), but in no case does the calculational approach modeled above render such an assertion untrue. It simply reflects the true efficiency of the unit in the context of how the company is paid; that is, by weight, not number of units. The decision to sell and make a product that renders the mill 23.75% rather than 95% efficient may be a good financial decision, but it is irrelevant to the proper calculation of Efficiency for Asset Utilization purposes. The fact is, fewer pounds were produced off the mill during the base period than might have been if wider, thicker coils had been sold and manufactured.