These quick links will tell you what we are going to see in this article.
- What is operational efficiency?
- What is operational waste?
- Difference between efficiency and productivity.
- Should you prioritize efficiency over productivity?
- Calculating operational efficiency
- Pitfalls to avoid when measuring efficiency
- Benefits of enhanced efficiency
- Identifying problems with your operations
- How to proceed with operational efficiency planning?
- How to Improve Operational efficiency?
What is Operational Efficiency?
Achieving consistent operational efficiency without denting customer experience, product innovation, and business growth while reducing the cost factor is challenging for most businesses.
One way to enhance efficiency is by identifying errors and better resource allocation. Another method is mapping out your entire operational activities with detailed information on processes, costs, and actions that indicate discrepancies, inefficiency, or wasteful processes.
But is identifying inefficiencies enough?
In our experience, it is not.
However, you can take steps to boost process efficiency, but before that, we think we have to cover the basics in detail.
Let’s get started.
Operational efficiency is an organization’s ability to consistently deliver exceptional products and services with minimum resources. Operational efficiency meaning is the relationship between an organization’s input and output. Achieving enhanced efficiency is possible only when streamlining processes and activities and waste elimination.
To better understand operational efficiency, we must shed a little light on inputs and output in a business process. If your organization can extract more output from a limited input, it suggests that you are running an efficient business.
From a business perspective, efficiency is one of the indicators of operational performance – the higher the efficiency, the lower the costs required to generate the same or higher revenue. It also means planning and allocating the right resources like people, time, machinery, inventory, and money in a manner that serves your business goals and productivity better.
What is Operational Waste?
An operationally efficient organization limits the input while increasing the output from its processes. In effect, it eliminates waste.
According to some reports, a company, on average, loses about 20% of its productive capabilities to something called ‘organizational drag.’ An organizational drag is anything that prevents an employee from doing their work.
The main intention of operational effectiveness is to reduce or cut down the time spent by employees doing non-value-adding tasks. When you reduce the number of non-value-added tasks an employee performs, it is possible to make your organization much more efficient, productive, and competitive.
Waste can be defined as any activity that increases the cost to the company while not adding any value to the customer.
Let’s break down waste into two parts:
- Any activity that is important but doesn’t add value to the end customer and
- Any activity that is unimportant and adds no value to the customer.
You should also note that efficiency and productivity are not the same concepts when chasing efficiency. Although they have underlying similarities, they aren’t the same.
What is the difference between Efficiency and Productivity?
In a leadership article published in Harvard Business Review, Michael Mankins described the relationship between efficiency and productivity in simple terms.
‘Efficiency is about doing the same with less, while productivity means doing more with the same.’
When trying to improve productivity, you are essentially investing the same resources at their current levels to improve productivity.
If you are running a production company, it would mean increasing the output from your machinery. You could undertake repairs or retrain your workers, but the costs invested in these activities are justified as they bring you the required results.
On the other hand, operational efficiency is about delivering the same results with lesser utilization of resources. It means increasing the number of goods produced by the same number of machines.
Productivity is often seen as a measurement of output, such as units produced per machine or hour. Efficiency is the cost required per unit of production.
Should you Prioritize Efficiency over Productivity?
Productivity and efficiency are two sides of the same coin.
Productivity and operational efficiency definitions are not the same, but you cannot focus on one over the other because both take you towards your business goals.
To improve business performance, you should keep efficiency and productivity in mind. When you optimize efficiency, you are essentially removing wasted efforts, errors, resources, and more by accurately mapping out your baseline of operations. However, it becomes much easier to improve productivity when you focus on enhancing efficiency.
What is the Baseline of Operations?
Operational baseline is the entirety of operations, activities, and tasks that collectively make an organization function. You can identify the tasks and processes performed by each department and team independently or interdependently to help reach business goals.
Map out your baseline efficiently with:
- The purpose of the employee, team, and department within the organization.
- The contribution of the team towards achieving business goals.
- The roles and responsibilities of the team.
- Resources available to carry out the duties.
How to calculate operational efficiency for your business?
Operational efficiency can be calculated as the ratio between the input and output from your organization. The input could mean people, time, effort, resources, and money, while output is the revenue, increase in customers, innovations, business growth, market opportunities, and profits.
There is a simple method to calculate operational efficiency for your business. Operating expenses / Total revenue = operational efficiency
Let’s assume your business has earned a revenue of $150,000 in the past year. To achieve this revenue, you have incurred an operating expense of $ 40,000. Use the formula to calculate your operational efficiency ratio as 0.26.
If in the following year, you generate $250,000 as revenue and incur an operating expense of $25,000, then your operational efficiency ratio would be 0.1.
Your operational efficiency, cost-effectiveness, sustainability, and productivity increase as the rate reduces.
Pitfalls to Avoid when Measuring Operational Efficiency
The first pitfall every business should avoid when measuring efficiency is ignoring the need to enhance efficiency.
Another major pitfall is having too many metrics or benchmarks in place. You won’t gain actionable insights when you don’t clarify what performance indicators impact the outcome. It becomes difficult to determine the most critical outcome you are aiming for from the process.
Insufficient or inaccurate data is also a major pitfall in measuring operational efficiency.
Is your data correct?
Can it be verified?
How good are your data sources?
When process decisions and new approaches are designed based on the data, wrong information could spell disaster to the outcome of the process. On the flip side, care must also be taken not to over-process data collection, analysis, and assimilation. The ‘waste’ of over-processing of data collection and measurement must also be avoided.
What are the benefits of enhancing operational efficiency?
Simple changes to the way your business operates can bring many benefits, such as:
- Reduced costs
- Increased profits and revenue
- Decreased lead-times
- Elimination of errors and non-value-added tasks
- Engaged employees
- Satisfied customers
- Better clarity of your business processes by your employees
- A better understanding of business goals
- Market adaptability
- Capability to meet business challenges
ROI for any business doesn’t stop with increased profits, and it also includes productivity, engagement, innovation, and an eager willingness to work. When an employee works in an unorganized place, the pride in their work, enthusiasm, and eagerness to improve takes a beating. Moreover, in a chaotic organization, employees always look for the right tools, inventory, mentors, and information to proceed with the tasks.
How to Identify Problems with Your Operations?
When businesses seek ways to improve their process efficiency, they are often overwhelmed with the sheer amount of pre-work they must undertake before coming up with a strategy. They are so engaged with their everyday tasks, that they don’t have the time or energy to undertake process mapping or optimize processes.
Operational efficiency meaning in business differs from organization to organization, and without clarity, it becomes challenging to strategize for customized performance improvement. Does your organization suffer from?
- Inefficient resource distribution.
- Employees lack access to the right tools and information necessary to perform tasks.
- Poor planning and scheduling are creating bottlenecks in your production.
- Task redundancy and duplication are causing the process to be ineffective.
- Tasks and roles are not clearly defined, so there is a clogged workflow.
- Decision-making takes too much time as information is lagging and causing time delays.
- The approval process is complicated, ineffective, and centralized.
How to proceed with Operational Efficiency Planning?
How to improve operational efficiency?
Start by identifying and analyzing your existing operations, mapping out workflows, and replacing bottlenecks with process improvement solutions.
Step 1: Understand and Map Current Process Flow
The first step you should take towards strategizing an operationally efficient organization is taking a hard look at your existing structure. There is no point in being polite – look at the good, the bad, and the ugly.
- Start by reviewing your financial condition.
- Use benchmarks to understand your employee productivity ratio against the market and competitors.
- Understand your business goals, vision, mission, values, policies, processes, organizational structure, workflows, challenges, and bottlenecks.
- Identify waste areas in your organization regarding money, time, effort, resource, and space.
- Learn about your organization’s policies, quality control measures, inventory management strategies, and work solutions.
Step 2: Root Cause and Cost Center Analysis
Now make a comprehensive list of all the processes and expenses associated with developing your product. When you use a root cause analysis tool such as Fishbone or Pareto charts, you’ll be able to understand the underlying problem in your organization.
For instance, your organization could be suffering from poorly managed inventory management or slow-to-action services.
When you identify costs and expenses, you’ll be in a better position to get to the ‘why’ of each expense.
Once you identify the root cause of each expense, it’ll be easier for you to determine whether that expense is value-addition or not and whether those expenses are inefficiencies hurting your bottom line.
Step 3: Eliminate Issues with Existing Business Process
Once you have identified expenses, take the next step to eliminate issues with the existing processes. Start by developing a model for your business processes. Use flowcharts to map out your workflows.
Once there is clarity about how you want your operations to run, you can spot the places where you encounter bottlenecks, redundancies, and non-value-added tasks.
A process automation solution will come in handy in streamlining your process and enhancing efficiency.
Step 4: Develop a Priority Plan
Start this step by first identifying your top problems or issues that you want to address first. Create a list of solutions that might have the most significant impact on the most pressing issues at hand.
Divide the priority list of solutions into two broad categories:
Short term goals:
These goals should have a lifetime of 4 to 6 weeks for completion. You can assign these short-term, high-impact goals to senior management who can take independent decisions.
Long term goals:
These goals should have a lifetime of 6 to 12 weeks for completion. The changes brought out by these goals should have an enterprise-level change that can impact several departments in your organization. You should involve all the stakeholders and provide them with the authority and information needed to tackle long-term goals.
Step 5: Put in Place KPIs
Key performance indicators drive performance, but these objectives should be realistic and not dramatic. It is good to dream big, but the dreams should be SMART.
Management 101 talks about SMART rules for creating objectives – simple, measurable, achievable, realistic, and time-bound. Design the KPIs communicate them to the employees and provide them clarity about what is expected of them.
Some KPIs used to measure operational efficiencies are:
- Adherence to Quality standards
- Meeting the delivery deadlines
- Maintaining enhanced efficiency
Step 6: Devise Alternate Business Process
Take proactive measures to fix discrepancies once you spot a bottleneck or an inefficient process step. Before you put a plan in place, make sure you completely understand what you intend to gain from the new action method. Set benchmarks and new KPIs that can allow you to analyze the performance of the new approach after implementation.
Completely reimagine the entire process set up and determine how the new approach can meet your required standards. It is good to redesign the process with a completely new approach rather than making incremental changes at each step.
Step 7: Test the New Process
Start the delivery by testing the new process.
Fix a specific deadline to test the new approach
When there is an agreed fixed time for testing the new efficiency process, there are more chances of your team members being collaborative and eager. When there is no conviction on the part of the management, employees might not find the motivation to implement new changes.
Provide team members with clear roles and responsibilities regarding the execution
Assign proper roles and responsibilities to team members. Let them take ownership of the process from the beginning till the end. Ensure every team member understands the process change’s scope, purpose, and desired outcome.
Monitor and track the progress
It is not enough to put a new plan in place without tracking and monitoring its progress. Should any issues crop up with execution, take immediate corrective actions.
Step 8: Analysis and Review
The testing phase is an essential milestone in the success of your process change. Testing is an effective tool to understand whether the new process can bring about desired results and whether you can achieve the target metrics.
If the test process has been largely successful, it is the right time to identify issues and tweak the strategy to bring desired results.
If the test process didn’t bring the desired results, it is time to brainstorm and design alternate plans again. When there is a bottleneck at this stage, you might require more information to restart the process.
How to Improve Operational Efficiency
Improving operational efficiency is not the prerogative of only the management. It takes the coordinated efforts of the management, teams, and employees to bring about an organization-wide change. These best approaches should help you achieve targeted operational efficiency.
A time-tested solution to improving operational efficiency is automation. Automation can help you reduce manual errors, administrative hassles and increase processing speed. Automating repeatable manual jobs will help employees devote more time to strategic planning and innovation.
Redundant manual work adds absolutely no value to the end customer. And weeding out unnecessary steps or work-intensive processes can help employees deliver tasks on time. With automation, a lot of paperwork and administrative haggling of documents also gets reduced considerably. Going over documents is a painstaking process that eats away employee productive time.
An HR and Admin automation system can help streamline the process-intensive HR operations. It can help any business overcome administrative issues by having a well-designed customized workflow system. You can create personalized forms for internal use by having a form builder, such as leave application, activity planning, employee exit process, and travel reimbursement. With such an automation solution, it is possible to streamline the onboarding process, put recruitment process guidelines, and bring all stakeholders into one decision-making place.
A well-planned time management strategy can improve any business’s operational efficiency, regardless of its size. Employees are always hard-pressed for time, mainly because they are engaged in redundant administrative activities that waste their productive time.
When it comes to improving the operational efficiency of employees, it is crucial to get a complete understanding of the day-to-day workings of employees. Once you know what is affecting their performance, it is easier to develop solutions to iron out the difficulties.
For example, when an HR and Admin automation system is in place, it becomes easier and less time-consuming to process a simple leave application or get travel reimbursement. Employees don’t have to send the application or travel reimbursement forms via the traditional methods.
In a conventional working method, there is a great chance of the paper documents being lost in transactions, illegible bills, and lack of information regarding reimbursement threshold. With automation in place, the approvals for leave or reimbursement can be done quickly since all stakeholders (including departmental heads) are in the loop.
Waste elimination is another strategy that can improve operational efficiency. Automating your processes is a great way to implement a waste elimination solution.
Start the automation process by first mapping your workflow, taking time to identify each step, write down the procedure, stakeholders, and process. Make sure you enter even the smallest of details that impact the outcome. Once the final checklist is ready, identify the processes or actions that add value to the result.
With the flowcharts, you’ll have a better understanding of the process, bottlenecks, and activities that do not add value to the outcome of the task. You can then eliminate such waste in terms of money, effort, and time and develop a streamlined, efficient operations strategy.
With a Procurement automation system, you can quickly eliminate unnecessary lead time and excessive back and forth communication. By automating the quotation management system, you can bring in your quotes, discounts you are willing to offer, and other rules related to bidding within a unified platform. Moreover, since the process flow keeps all the stakeholders in the loop, decision-making is faster and more efficient.
Cross-functional collaboration is a necessity to enhance operational efficiency. It is no secret that a lack of departmental collaboration in information sharing can negatively impact the entire organization.
Almost all tasks performed by a department, or a team are dependent on other groups, and without timely sharing of information, every activity becomes a time-consuming chore.
Collaboration between teams is essential for organizations that operate from different locations. And when the information available at one site is critically important for the efficient functioning of the other.
Smooth collaboration between teams is an ongoing process, and it helps in,
- Keeping every stakeholder on the same page.
- Maintaining a shared vision and open communication.
- Enhances inter-team understanding and honest feedback.
- Sharing of experience and process knowledge.
Enhance Easy Data Flow
Data is the key to efficiency in operations, and when this data is dodgy, it becomes a challenge to devise enhancement strategies. Access to quality, verified data is essential for a system to work. However, if you are still using the antiquated system of spreadsheets, you will not be cut out to face the future.
Just think about it for a minute. How much can a spreadsheet offer you in terms of information?
And is the time spent on filling up a spreadsheet or color-coding the information justified?
A spreadsheet can give you information.
- Unfortunately, it cannot automate data processing and sharing.
- It cannot tell you the exact stage of a project.
- It cannot tell you if your employees achieve their performance targets or understand their KPIs.
- It cannot tell you if a project is profitable or not.
When you need quality, real-time and verified information, relying on spreadsheets is not the right decision.
Spreadsheets can help you track the numbers, but they will not help you figure out how they are related. When you need analytics to transform the processes, you need a centralized, automated system.
When you install a Finance workflow automation system, instead of using the traditional spreadsheet method, you will be able to see the stark differences in performance.
Unlike a spreadsheet that doesn’t reflect real-time data, an automation system simultaneously provides real-time information to many stakeholders. For example, when working on vendor payment requests, an automated system will provide accurate real-time checks that all relevant stakeholders can assess. Moreover, compliance and payment rules are built into the system, making the approval process more accessible.