Operational efficiency is the ability of an organization to reduce waste in time, effort and materials as much as possible, while still producing a high-quality service or product. Financially, operational efficiency can be defined as the ratio between the input required to keep the organization going and the output it provides. Input refers to what is put into a business to operate properly, such as costs, employees and time while output refers to what is put out or gained, such as rapid development times, quality, revenue, customer acquisition and customer retention.
Factors of operational efficiency
Operational efficiency is gained through a company by cost-effectively streamlining its base operations while eliminating redundant processes and waste. Generally, this is done by focusing on resource utilization, production, inventory management and distribution.
- Resource utilization is focused around minimizing waste in production and operations areas.
- Production focuses on making the production environment as organized as possible. This includes ensuring that employees and equipment are working as efficiently as they can to increase production.
- Distribution focuses on ensuring efficient handling of the end product, including routing and delivery.
- Inventory management includes producing and managing enough inventory to meet the demand, but with as little excess inventory as possible.
How to increase operational efficiency
Different strategies may be used to accomplish the goals of operational efficiency and can differ from company to company. When asked to improve operational efficiency, a company will usually change inputs and outputs, such as giving less input for the same output, providing more output for the same input, changing the amount of inputs or increasing both input and output.
Organizations should also focus on:
- Monitoring performance by setting up dashboards or internal meetings.
- Identifying and minimizing waste, such as ridding bottlenecks.
- Creating benchmarks, which can give your organization an idea of where they stand versus the competition.
Measuring operational efficiency
Measuring operational efficiency involves keeping track of a company’s inputs and outputs as performance indicators. Typically, these performance indicators relate to efficiency, quality or value. Examples of this include automation accuracy, quality indexes and customer satisfaction. These indicators should be collected and gathered into operational and efficiency reports that show how effectively a company is running and how it handles volume. Any reports should also show metrics such as average turnaround time, which can be used to identify any performance bottlenecks.