Operational Efficiency: Definition, Examples, and Strategies
The global market shifts of the past few years have been astonishing to witness. Supply chain interruptions, worker shortages, and rising inflation costs that emerged with the pandemic have forever changed the economic landscape.
But amid what seem to be perpetual shake-ups, there is good news. Far more businesses have quickly adapted to online models and remote work than anyone expected. By pivoting the focus to operational efficiency, these companies survived — and some even thrived — in severe market downturns.
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What is operational efficiency?
Operational efficiency refers to the continual measurement and improvement of business processes to deliver high-quality goods and services at the lowest cost, in the quickest possible time. Put another way, operational efficiency means using resources wisely in order to achieve business objectives with little or no waste in terms of people, effort, or finances.
Achieving operational efficiency requires a business to change its focus from the repeated performance of tasks to attaining measurable improvements in areas like cost savings and revenue. A business’s shift to operational efficiency is structured and intentional, and it represents a long-term, continual commitment to organizational improvement.
Operational efficiency vs. productivity
It’s easy to mistake the concept of operational efficiency for that of productivity. The words “efficiency” and “productivity” are often used interchangeably, and both are critical business performance indicators.
Productivity is, very simply, production (also known as output). How much is being produced, and how quickly? Throughout the 20th century, a business’s productivity rate was considered the most important metric for determining its success. Companies kept a close eye on their production rates — and many still do — to monitor costs, allocate resources, and identify conditions that affect productivity.
Over time, it’s become apparent that productivity measurements don’t provide a full 360-degree view of a business’s operations. They also don’t allow for strategic shifts when market disruptions occur like those of recent years. Here’s where a robust operational efficiency program is more effective. Productivity’s goal is to increase unit production while making no significant changes to a business’s processes.
Efficiency is finding ways to scale back operational process expenses, such as cost, time, and manpower (or input) to produce a fixed amount of units or outputs. A common way to describe operational efficiency is “doing more with less.” Even if productivity skyrockets, a business may not be operating efficiently. The first step to operational efficiency is taking a close look at every operational process and asking questions like:
- How much does it cost to produce each unit?
- Does that process include repetitive, time-consuming tasks on the part of employees?
- Given the supply chain disruptions caused by the pandemic and its after-effects (many of which remain uncorrected), how do we do more with less?
The answers to these and many other questions build the foundation of a business’s operational efficiency plan.
Barriers to operational efficiency
How many times have you questioned an outdated process in an organization only to be told “we’ve always done it that way”? This attitude all but guarantees that updating processes will not only overwhelm a team but doom it to the same outdated, irrelevant processes and inconsistent results. Other times, leaders refuse to invest monetarily in new technology or training because they will not immediately see the resulting revenue increase.
These are just two examples of operational efficiency roadblocks. Other common barriers to operational efficiency include:
Too much manual work
One of the most common sources of inefficiency is the overreliance on manual work. Activities such as composing emails, data entry, capturing information, getting approvals, updating statuses, and sending notifications are examples of work that can be resolved through task automation.
Symptoms of too much manual work include spreadsheet sprawl and endless email threads. Switching back and forth between apps can also be a sign that the process or workflow is too manual and likely dampening operational efficiency.
Learn more about how to automate a manual process.
Ineffective processes and workflows
Bottlenecks, communication and data silos, and process friction have been identified as major contributors to business inefficiency and revenue loss. Bottlenecks create conditions for missed deadlines and (merited) customer dissatisfaction. Silos emerge naturally as companies (and their tech stacks) grow.
Process friction occurs when handoffs between people or systems fail, or when a process requires too much manual input.
Lack of succession or unclear process ownership
When too few employees possess the knowledge or bandwidth to perform a single function, disruptions to the process are common.
When new hires arrive and new teams are created, processes once handled by a few people can grow to involve multiple departments. Without growth planning or workflow transparency, the handing off of processes can be confusing or awkward.
A closely related cause of inefficiency is system segregation. This is the corporate tendency to adopt multiple apps and software systems that don’t intersect. One order, for example, could entail the use of several email chains, CAD drawings, spreadsheets, and an enterprise database.
For that order, it’s possible for hundreds of data points to be redundantly entered into any one of these systems. This creates a daily waste of time and resources and often leads to employee frustration and burnout.
Outdated or ineffective technology
Outdated or lack of automated technology frequently hinders efficiency. (We’ll talk about some crucial efficiency boosters later.)
A loyal, resourceful staff is every organization’s objective, but even the best employees can make mistakes. While some of these mistakes are small and easily fixed, some are not. Inaccuracies and miscalculations due to simple human error can have big consequences for a business’s bottom line.
How to measure operational efficiency
Quantifying operational efficiency is simpler than it sounds. An equation many businesses employ for this measurement is:
Keep the concepts of input and output we discussed earlier in mind. If your business’s total revenue for 2022 was $200,000 (output), and your operating expenses were $100,000 (input), the operational efficiency ratio is 0.5. This means that for every $1 of revenue earned, $0.50 dollars were spent.
Generating more revenue with fewer operating expenses/resources is always the goal. As the operational efficiency rate decreases, actual operational efficiency increases. Below are two examples of how the efficiency rate changes as the amount of input and output vary.
Example 1: Reducing expenses
|Operational expenses (input)||$100,000||$75,000||$50,000|
|Total revenue (output)||$200,000||$200,000||$200,000|
|Spend for each dollar of revenue||$0.50||$0.38||$0.25|
Example 2: Increasing revenue
|Operational efficiency ratio||.50||.40||.33|
|Spend for each dollar of revenue||$0.50||$0.40||$0.33|
Operational efficiency doesn’t happen by accident. It takes an investigation into all aspects of a business to find areas where opportunities to increase revenue or decrease expenses can be found. Other measurements related to operational efficiency include:
- Cost metrics. This means the direct vs. indirect cost metric is a good way to identify extraneous costs.
- Inventory. Warehouse overhead is a huge expense for most organizations, especially when a portion of that stock is outdated or expired. Inventory efficiency is a continuous process, ensuring that the right amount of the right supplies are on hand at any given time.
- KPIs (key performance indicators). Organization-specific metrics that reveal daily operations’ performance. A few general KPIs to consistently observe are customer satisfaction, on-time delivery rate, daily sales outstanding, and operating profit margin.
- Productivity metrics. Measurement of employee and/or machine performance. Two key KPIs to monitor in this category are production volume and deadlines met.
Benefits of measuring operational efficiency
Being able to measure and quantify operational efficiency is an essential component of business management. Efficiency measures reveal important insights into the health of a business and make it easier to make changes that can have a positive impact on the bottom line. In addition, measuring operational efficiency provides three key benefits: a better business strategy, informed decision-making, and improved control over business results.
1. Creates a more effective business strategy
Operational efficiency has a direct impact on a business’s ability to meet its strategic goals.
Understanding how efficient (or inefficient) a business is is crucial for projecting expenses and revenues, adjusting resource allocation, and making changes necessary to reduce waste, prevent avoidable costs, and more closely align activities with the budget.
2. Enables data-driven decisions
In order to make strategic decisions with confidence, businesses need to have as much data as possible. Operational efficiency is a key data point that can determine how budgets and resources are allocated.
3. Improves control and avoids surprises
When the measure of operational efficiency is known, businesses are making decisions in the dark. By calculating operational efficiency, forecasting becomes more accurate and leaders have better insight into what is working and what is not working. Measuring operational efficiency also gives managers leverage to more effectively impact outcomes and produce more predictable results.
How to increase operational efficiency
After measuring processes and monitoring KPIs, it’s time to jump in. Let’s look at a few common methods businesses use to increase operational efficiency.
Achieving operational efficiency often requires that teams “get in the weeds” with their processes and workflows in order to understand how they work at a granular level. Process mapping is a method of doing just that. To map a process, teams will need to document all the people, systems, documents, data, and apps that are involved in a process.
Once the flow of the process is mapped, each element of the process can then be evaluated for efficiency. Learn more about process mapping.
Inefficient processes can quickly drag down operational efficiency. These are processes that rely heavily on manual work, spreadsheets, and endless email threads. Inefficient processes often have problems with handoffs (work gets delayed or even lost) and may require additional work to work around data silos or team barriers.
By optimizing these processes, businesses can reduce the process friction, redundancies, and errors that dampen efficiency, no matter which team or department is involved. Learn more about process optimization.
One common source of inefficiencies is repetitive manual work. Today, there are a number of solutions that businesses can use to resolve many of these tasks and activities with automation. One tool businesses are increasingly using to automate their tasks, workflows, and processes is low-code automation.
Low-code automation gives non-technical users an easy-to-use visual interface to automate their tasks. This allows business teams to manage their processes and workflows more efficiently, and it helps conserve IT resources since coding isn’t required to make changes.
Examples of operational efficiency improvement
Many teams deal with an inefficient request management process. This may look like a high volume of requests coming from multiple channels, like email, online forms, Slack, or even informal conversations.
These requests may require complex routing for approvals, and they may rely on data from multiple apps, databases, and systems. Very often, teams resort to spreadsheets to try and manage these requests.
A more efficient system for request management would incorporate a tool that:
- Integrates data among all relevant apps and systems
- Centralizes all incoming requests into a single inbox or database
- Uses standardized forms to eliminate missing or incomplete information
- Automatically routes incoming requests based on rules and conditionals
- Consolidates all requests and information into a single view
- Automates notifications, emails, and status updates
In this example, inefficiencies that arise from duplicate data entry, manually sending status updates and emails, and delays caused by items being routed to the wrong person are eliminated. Teams also benefit from centralized data, which saves time spent on toggling back and forth between apps and systems.
Learn more about request management.
Another example of a process that can be made more efficient is the procure-to-pay process. In this scenario, much of the inefficiency arises from the complexity of the process itself. P2P involves a wide variety of stakeholders (both internal and external), documents (such as RFPs, purchase orders, shipping receipts, and invoices), and often multiple layers of approval.
Standardizing the P2P process is one way procurement teams can improve the efficiency of their process. When purchase requests are submitted in different formats from different teams, it takes additional time to organize and enter the data.
Another important way the P2P process can be made more efficient is by automating each workflow or stage of the P2P process. This eliminates manual tasks and speeds up the flow of information. Finally, integrating finance software and apps with a process management tool can make cross-team collaboration and communication easier.
Learn more about the procure-to-pay process.
Increase your operational efficiency with Pipefy
Operational efficiency is a crucial metric for businesses looking to thrive in today’s competitive and uncertain marketplace. Too often, opportunities to improve operational efficiency are overlooked. Pipefy can change that.
Pipefy helps teams in any department build more efficient processes and workflows. Integrations dissolve data silos and automations reduce manual work. Pipefy is highly adaptable and can be easily modified to apply to any workflow or process to help businesses get the most from their existing tech stacks.
Best of all, Pipefy is a low-code solution that gives business teams the tools they need to stay agile while helping the IT team conserve their resources.