How to Measure and Improve Operational Efficiency?

If you’re in the business world, you’ve probably heard the term “operational efficiency.” Operational efficiency refers to the effectiveness with which a company operates and uses its resources.

From a business perspective, knowing your company’s operational efficiency metrics and trends can help you grow.

So how do you measure operational efficiency and how can you improve it?

What Does Operational Efficiency Mean?

Before we explain operational efficiency metrics and how to improve them, it’s important to clarify what operational efficiency is.

In general, operational efficiency refers to how effectively a company uses its resources to deliver services and products. The fewer “wasted resources” such as labor time, money, and inventory in the production of goods and services, the more efficient the company is.

In this context, it should be noted that the term “waste” refers to activities that increase costs but do not create value. There are two types of “wasteful” activities.

– Those that do not directly create value but are necessary to the business.

– Those activities that do not add value and are not beneficial to the business.

Companies that want to grow and develop naturally look for ways to reduce the waste of resources and energy.

The Question Is How to Measure Operational Efficiency

There is no single, reliable formula for measuring a company’s operational efficiency, but there are a few ways to gather the necessary information.

Operational efficiency can be measured by comparing the ratio of inputs to outputs in a company’s processes. Common mistake companies make when measuring efficiency is to consider only the inputs. For example, they consider the costs or labor hours required to produce a unit of product. However, this does not give a complete picture.

Instead, different productivity indicators should be used for inputs and outputs.

These indicators may vary from sector to sector but are generally as follows.

1. Inputs

  • Operating costs – the ongoing costs of running a business, system or product.
  • Capital expenditures – the funds a company spends to acquire, maintain and improve fixed assets such as buildings, vehicles, equipment, and land.
  • Human resources employed – the number of employees, including partners, and hours worked.

2. Output

  • Revenues
  • Number of customers
  • Quality of products and services
  • Economic growth
  • Customer satisfaction

It is clear that every company is interested in a volume of production that exceeds the costs of production. The lower the input-output ratio, the more efficiently a company can generate revenue (if the quality of its products and services remains high).

In the rest of the indicators, there is a formula for determining the operating efficiency ratio.

(Operating expenses + cost of goods sold) / Net Sales = operating efficiency ratio.

  • Operating costs (OPEX) typically include items such as selling expenses, general and administrative expenses, labor costs, office supplies, and system and equipment maintenance costs.
  • Cost of sales includes direct labor, direct material costs, equipment maintenance and repair costs, rental costs for production equipment, and salaries and wages for production personnel.
  • Gross sales are calculated as follows. Returns, allowances, and rebates are deducted from gross profit.

How Can I Improve My Operational Efficiency?

If your company’s overall operational efficiency results are not as good as you would like, you should consider taking steps to improve operational efficiency.

Where do I start?

A thorough analysis and spring cleaning of your company’s daily processes and procedures will make it better. However, analysis of the company’s organization is essential to improving key performance indicators. In addition, small processes can often be streamlined to make operations more efficient.

Below are some tactics that will help you improve the efficiency of your business operations.

Automate, Automation, Automated

Whether you are a software company or a manufacturing company, some administrative tasks require time and energy. However, this does not mean that all administrative tasks can be eliminated. A business cannot exist without them. However, there are ways to reduce the time and energy spent on routine tasks. This is automation.

Almost any repetitive task in today’s businesses can be automated. There is a wide range of tools and software available, and with a little research, you are sure to find one that fits your needs.

Start with something as simple as automating billing, payroll, email or push notifications and see how you can save everyone time and energy.

Eliminate Bottlenecks

Process bottlenecks are another potential barrier to operational efficiency. This is the point at which a company receives more demand than it can handle at its maximum capacity, resulting in delays and higher-than-expected costs.

The first step to eliminating bottlenecks is to identify them, which is obviously the hardest part.

However, if you notice unexpected phenomena in your company’s workflow, that is the first indication that there is a bottleneck somewhere in the workflow. It could be ineffective collaboration, lack of the right tools, or poor people management. Various techniques can be used to identify bottlenecks, such as the five-pillar method or process mapping.

The Importance of a Healthy Corporate Culture

Analyzing and changing the corporate culture is one way to improve performance.

Overworked employees don’t perform at their best, no matter how hard they work. And this is understandable. People’s energy is limited, both physically and mentally.

Some data shows that burned-out employees can cost a company $3,400 on a $10,000 salary due to lack of engagement. Employee turnover is even higher, ranging from 50% to 200% of an employee’s salary.

What you can do in these situations is revisit your company culture.

– Do you promote employee wellness?

– Do employees get adequate rest and paid time off?

– Does management encourage employees to have a good work-life balance?

A healthy culture has a lot to do with an organization’s productivity.

Invest in Employee Training

In a fast-paced world like ours, best practices evolve quickly and employees don’t always have access to the most effective ways of working. This can have a negative impact on performance.

As a manager, you need to ensure that your staff receives regular training and is familiar with the systems in place in your organization.

Mentoring and coaching programs are also a good investment in employee effectiveness and productivity, especially for new employees. Newcomers may be enthusiastic but lack the necessary knowledge. Therefore, support and coaching can be effective ways to improve their performance.

Find The Right Key Performance Indicators

Being able to track performance is critical when it comes to improving business results. If the objectives are not clear, it can also be difficult to measure them. The solution is to define strategic KPIs (key performance indicators) for each area of the business.

Closing Thoughts

Measuring your company’s operational effectiveness and analyzing the results takes time and effort, but it’s a necessary task for a growing company. However, improving operational efficiency is not just about reducing costs. It’s also about reviewing the way the entire company operates and examining the company’s culture, organizational structure, and policies.

And the impact of effective management goes beyond just saving money. An organized work environment also contributes to improving employee productivity. Employees will be more productive and achieve better results.

From a management perspective, a company that runs smoothly and without constant firefighting can focus on growing the business and implementing innovative strategies.