What is Operational Efficiency & How Can You Improve It?

According to a report by McKinsey, even though 79% of companies have cut costs in response to a global economic crisis, only 53% of executives feel that has helped financial stability. 

Although it’s common sense to cut costs, research has proven that approaching operational efficiency with the singular goal of reducing expenses is not enough. The real indicators of improved operational efficiency include resource allocation, a culture of psychological safety, higher billable utilization rates, and many other factors. 

What is Operational Efficiency? 

Operational efficiency is the ratio of a company’s input of resources and materials cost vs the value of measurable output, which determines a system’s overall performance. It’s a measure of how costs incurred produce results during an activity. In this sense, lower costs or higher revenue from inputs equate to greater efficiency. 

Operational efficiency encompasses several techniques and strategies. Businesses improve operational efficiency through business process re-engineering (BPR), cost and quality improvement, and financial analysis leading to decision-making activities like cutting an underperforming product line. 

Factors of Operational Efficiency

Operational efficiency factors include front-office processes such as marketing, production, resource utilization, sales, supply chain, and inventory management. The ultimate goal is to deliver quality goods to consumers or businesses in the most timely and cost-effective manner. 

The most critical factors of operational efficiency vary by the nature of your business. Whether you own a retail, distribution, or manufacturing company will change what is considered “efficient” in operations. Smaller companies must have exceptional efficiency to compete with the bigger ones and retain bargaining power with shared vendors. 

How Do I Improve Operational Efficiency?

The first steps to improving operational efficiency require the ability to identify areas of waste and improvement. Then, a company can focus on making the most of those resources to increase productivity. 

To do so, here are a few ideas to get you started:

Know Your Operation

You need to thoroughly understand where bottlenecks happen in the supply chain and workflows. Evaluate areas that are labor-intensive to determine where traffic may be congested. 

In addition to this first step, conduct more formal audits and metrics analysis. This will determine your top business intelligence tools that are the most useful to evaluate operations. 

Even though routine evaluations can be tedious, these walkthroughs will help to quickly identify any areas of inefficiency. In addition to a scheduled checkup, a company should conduct random internal audits. This includes analyzing metrics and key performance indicators (KPIs) to have a deeper understanding of operations.

Refine Current Processes

Once you understand current operations, it’s time to start identifying processes that can be refined. These are tasks that are at the core of operations. Without a deep dive into what’s driving your day-to-day, it’s impossible to make any improvements to an operational strategy that will be successful. 

The biggest hindrance to operational efficiency is repetitive, non-billable work and lack of structure. These tasks consume too much time that can’t be recovered, and they stand in the way of projects that can be delivered successfully. 

Streamline Processes for Better Decision Making

If your business needs to improve operational efficiency, then chances are you require more consistency in the decision-making process. You may need better tools to control the application and decision process to develop a clearer strategy. 

For more confidence and transparency, consider the following:

• Update policies, procedures, and forms
• Examine staff roles and responsibilities
• Refine initial applications
• Develop a scoring model and sheet
• Modify the auditing process
• Create new key performance indicators (KPI)

To properly streamline processes, you have to remove barriers to success. Perform consistent process analysis to track problems and identify opportunities for growth and improvement. 

You should also have a means of documenting everything. This helps with continuous process improvement. You never want to exercise a “set-it-and-forget-it” mentality. Proper process documentation can be evaluated and updated to improve operational excellence. They can also be used to rebuild new workflows or incorporate automation. 

Process Mapping

Process mapping involves mapping out exactly what a business does. This includes who is responsible for what, which standard jobs should be completed, and how success can be determined. It helps to uncover extremes and determine where to make changes. 

Process mapping is useful for things like:

• Improving workflows
• Process innovation
• Product/service development
• Operational efficiency
• And much more…

When you make a product or deliver a service, you must follow a sequence of steps. The process map is a flowchart diagram that enables a business to draw out each step. m

Once every step is mapped, it can create value in a variety of ways, including:

• Eliminate the need for inputs and outputs
• Improve how you carry out certain steps
• Focus on a step that’s been overlooked
• Remove an entire step from the process
• Rearrange the order of steps
• Enable steps to be completed in new ways (like at a different time or location) 

Even if a company changes nothing, process mapping is a great foundation for other business activities. It supports quality control, training, and consistency. It helps a brand build institutional knowledge, establish resiliency, and plan for business continuity. Process mapping can also contribute to growth and helps you build a saleable franchise with a sound reputation.

Improve All Forms of Customer Service

When it comes to customer service, even the smallest of details can make a measurable difference. To improve operational efficiency, it’s important to reduce internal backlogs and ensure vendor compliance. This allows for more transparent business processes and leads to a higher rate of customer satisfaction. 

By promoting and improving back-end operations, like vendor relationships and compliance, a business can more efficiently fulfill orders. It helps to address customer concerns promptly, without discrepancies that could affect satisfaction levels.   

Support Your People

It’s important to eliminate administrative load and establish methodologies to prevent you from losing valuable time. However, this will never work without supporting people first. Managing time conservatively and consistently takes effort. Facilitating cross-departmental collaboration is the key to streamlining operational efficiency and improving company culture. 

Business is people-centric, and relationships are important. Put people first. Growing, training, and retaining employees naturally leads to a healthy labor force focused on production. To help keep people on track, establish some baseline performance metrics as a common ground. Then, reward your top people, while discouraging unproductive behavior, and improve retention. 

Comprehensive Staff Training

To exercise operational efficiency, comprehensive staff training is critical. Continuing education on systems and cross-training on processes is the best practice for keeping your people informed. 

This includes things like:

• Posting cheat sheets and scorecards
• Creating incentive programs
• Documenting SQPs
• Establishing a coaching methodology
• Allowing team members to shine
• Posting methodology reports at every workstation

Building Corporate Culture

Every workplace has a unique business culture. Not only does it depend on the service or product you offer, but other things like core values, principles, and primary goals. Establish a workplace that focuses on building team relationships and encourages the development of ongoing trust. 

This goes a long way when it comes to productivity and employee satisfaction. In fact, according to a recent study by MIT, trust from your employees can double the level of production. People never put their best foot forward out of fear. Encouragement and positive steps toward betterment are the most effective ways to motivate others.

Develop a Financial Strategy

Operational efficiency relies on good numbers. A solid financial strategy is key to improving operations and scaling a business. To maintain a consistent and healthy margin, you should always be on the lookout for best practices. 

As competition rises, it will become increasingly difficult to decide on how best to finance the company and provide a means for future growth. Ironing these things out now means a steadier climb to the top. 

Establishing an internal-use activity-based costing management system that links business activities with cost drivers can help your company increase operational efficiency.  

Leverage Top Technology

One of the easiest ways to gain a competitive advantage in any industry is to migrate from a paper processing environment to an analytical one. Businesses must lean into cloud technology. Not only does it offload tons of administrative work, but it also helps measure operational performance and guides your path to efficiency. 

The first step is to assess the power of your legacy systems. Conduct a technology review on each component. Is it delivering the throughput your business needs to run operations efficiently? Familiarize yourself with high-quality offerings in the market for new tech. Consider additional costs and decide if an upgrade is important for growth and sustainability.

Automate Repeatable Work

When it comes to the optimization of workflows, automation proves a successful tool time and again. Any tasks repeated ad nauseum without deriving any real value should be eliminated from your manual workflows. 

This is where process automation comes in handy. Almost every core business process that’s repeatable can be automated. It’s just that simple. Consider tasks like:

• Invoicing
• Project planning
• Payroll
• Quotes
• Purchase orders
• Knowledge sharing
• Financial reporting
• Proposal development

The list goes on.  

Integrating Workflows

Reducing manual processes sometimes requires the integration of workflows. For example, consider a legacy financial system of a municipality that is both paper-intensive and batch-oriented. This requires a more modern solution for the two integrated systems. 

To effectively support the technology and business environment while complying with evolving regulations, change is inevitable. This particular city sought to accomplish five major goals:

• Provide easier access to real-time data
• Increase efficiency and effectiveness of business operations
• Allow for more transparency during business processes
• Improve customer service – both internal and external
• Migrate from paper to a digital environment   

Advanced Integrations

Once you have reduced manual processes and integrated workflows, it’s time to employ an integration solution. System integrators can optimize workflow by sharing functions and data from disparate processes. By eliminating manual consolidation methods, integration saves an amount of time and effort while reducing the risk of human error. 

Integrations also help to replace physical documentation, reduce paper waste, and improve communication through virtual data sharing. Advanced integration software streamlines operational efficiency by:

• Enhancing customer and client service
• Providing access to data in real-time
• Creating transparent internal processes
• Evolving from paper to digital

Order Fulfillment

Keep your focus on order fulfillment. This is especially critical if you run a small business that’s rapidly expanding. Without an organized system in place, how can you efficiently increase order volume or SKU types? You must give your operation the proper tools to meet the challenge before it arises. 

This means being prepared for all types of order fulfillment and maintenance, from system design evaluation to golden zone slotting. Advanced replenishment software can also help to create a business environment conducive to heightened efficiency and productivity. 

An Eye on Analytics

Set benchmarks for your base metrics, as well as against your peers. Network with the competition to gain industry insights and learn strategies that others have successfully deployed. Consider engaging with your vendors and suppliers. This gives them opportunities to add value to operations and be a part of your business development. 

Eliminate Bottlenecks

Applying reporting and analysis tools to internal operations allows businesses to easily track bottlenecks that are causing processes to lag. 

Operational efficiency in manufacturing companies can be improved by identifying production bottlenecks at specific points.  

For example, process maps collaborate information from line and bar graphs to show the percentage makeup of a system and frequency of occurrence. 

This will illustrate what functions within an operation contribute the most to successful completion and which ones damper outcomes. This ultimately allows management to implement effective alterations. 

Assessing Functionality

When using technology like advanced software for operational efficiency, you should ensure the solution undergoes routine evaluations. Reviewing the functionality of your services on a consistent basis helps to determine if it does, in fact, benefit your business and to what degree. This can quickly expose unnecessary expenses that bruise profit margins. 

Raise the Bar 

Even after improvements have been made, you should never settle for the status quo. Always strive to incrementally improve results and raise the productivity level of staff. 

After all updates to your system have been made, new standards should be put in place to promote productivity and efficiency. However, it’s still smart to incrementally increase expectations to improve workflow rather than taking extreme measures. Actions like that tend to overwhelm employees and do more harm than good.

Build Stakeholder Connections

Cross-examine operations with your peers. Building solid relationships among customers and vendors allows a business to compare operational performance against others within your industry. By doing this, companies can learn new insights and strategies that peers have found impactful. 

How to Measure Operational Efficiency

Efficiency can be measured by comparing your operation’s inputs and outputs. Inputs are found on your financial statement and can be recorded as stocktakes. This includes money spent on expenses like staff, raw materials, power, and time. This is referred to as operational expenditure or OPEX. Long-term equipment and assets are called capital expenditure a.k.a. CAPEX. 

Outputs include the amount of product or service you produce and other attributes, like product quality and customer service. 

Why is Operational Efficiency Important?

A company’s operations include everything it does to create products and/or services. When operations aren’t efficient, it’s a huge waste of time and money. Operational efficiency is important because it’s cost-effective and reduces waste while maintaining quality and value. 

A boost in operational efficiency makes a business more productive. 

It can help:

• Increase output (making more output from the same input)
• Reduce costs (making the same output from less input)
• Grow business (making a lot more output from very little input)

Most importantly, when your business runs efficiently, it frees up time to spend elsewhere. This can be anything from improving the business to being with family. It can also help a company meet customer demand faster. For example, the quicker a deli makes quality sandwiches to order, the more customers they can serve. 

In Conclusion

Improving operational efficiency to reach operational excellence is never a one-and-done initiative. It requires a combined effort that calls for optimizing processes, financials, people, and technology, and cost-cutting. There is no universal answer that makes for a scalable business model or turns your business into a profit-making machine overnight with an enviable bottom line. 

Eventually, the financial viability of your offerings is highly dependent on the balance of elements in your system and is the result of continuous improvement efforts. Embracing change at all levels is the best way to strike a balance. Incremental, not radical, changes are the answer to steadily improving your system and scaling strongly for growth.