Abstract Background Potato is one of the major staple crops in the Eastern and Central Africa sub-region. Its importance continues to rise due to increased urbanization and demand for potato is projected. This increase will definitely come with its share of challenges that need to be addressed. This study was aimed to measure the level of technical efficiency, yield loss due to inefficiency and identify the factors that influence the efficiency levels of potato producers’ in Chilga District. Primary data were collected from 150 farmers selected using multistage sampling procedure and analyzed using descriptive statistics, a parametric stochastic frontier production function models. Results The results of the study indicated that the minimum, maximum and average yields of potato production in the sample households were 1000, 36,000 and 13,108 kg/ha, respectively. The stochastic frontier and Cobb–Douglas functional form with a one-step approach was employed to analyze efficiency and factors affecting efficiency in potato production. The mean technical efficiency (TE) was found to be 46%, and about 17,782.43 kg of potato output per hectare was lost due to inefficiency factors implying there is a room for improvement in technical efficiency by 54% with the present technology. The Stochastic Production Frontier (SPF) result revealed that DAP at 5% and Oxen, MDE and seed at 1% probability level significantly influencing potato production. The socio-economic variables that exercised important role for variations in technical efficiency positively were age and improved seed and nevertheless distance to market was found to increase inefficiency significantly among farm household. Conclusions There is considerable difference in the efficiency level among plots. Hence if inputs are used to their maximum potential, there will be considerable gain from improvement in technical efficiency. The estimated SPF model together with the inefficiency parameters shows that age and improved seed variety were influenced by inefficiency negatively whereas distance to market increased the level of technical inefficiency.