Terms like operational efficiency, productivity, and sustainability often get thrown around as things that businesses should aspire to. While they’re related, they refer to different ways of optimizing a company’s supply chain and business model.
Operational efficiency is all about getting the same results with less effort or resources. This might include strategies like workflow automation and process improvement. With the right tools and metrics in place, companies can track their operational efficiency to reduce operating expenses and improve their bottom line.
Let’s take a look at how to measure your company’s operational efficiency, and how to use that information to optimize your business and streamline your workflows.
What Is Operational Efficiency?
In layman's terms, we can think of operational efficiency as getting more reward for the same amount of money, time, labor, or resources. These two sides of the equation are known as your input and your output and determine your efficiency ratio.
You input may include things like:
- Operating costs
- The number of people on a project
- The number of hours spent on the project
Your output can be measured in several ways, such as:
- Profit or revenue
- New customer acquisition
- Product innovation or development
You can determine your efficiency ratio by calculating your output relative to your input. For example, you might determine the efficiency of a project by dividing the revenue it brings in by the number of team members on the project.
You can improve your efficiency ratio in one of two ways: becoming more productive or becoming more efficient. If you focus on productivity, then you’d take steps to increase the amount of revenue that comes in for the same amount of labor.
Operational efficiency, on the other hand, is about keeping your output the same, but reducing the amount of time or effort it takes to bring in the same revenue.
Types of Operational Efficiency
Improving operational efficiency can have benefits in a wide range of industries. For a manufacturing company, it might be as simple as buying more efficient machines that produce the same amount of material in less time and require less input.
For an e-commerce business, it might mean transitioning to a more efficient inventory management system to reduce administrative work.
Banks can also use efficiency ratios to measure their expenses in relation to revenue. An efficiency ratio of 50% or less is considered a sign of good performance.
Your business may find it more useful to measure your labor efficiency, your material yield efficiency, or your overall operational efficiency.
Other types of operational efficiency include:
- Marketing efficiency (i.e., customer acquisition per ad spend)
- Equipment efficiency (such as energy usage or reliability)
- Asset efficiency (i.e., an accommodation’s occupancy rate)
- Business process efficiency (i.e., task completion rate)
Each type of operational efficiency has its own formulas and methodologies to consider. You can use these metrics along with other key performance indicators (KPIs) to locate inefficiencies in your business operations and inform your decision-making.
How to Improve Operational Efficiency
Improving operational efficiency is a multi-step process. Although you might be tempted to simply invest in new equipment or systems, that isn’t always the most cost-effective solution. Sometimes, it can simply be a matter of making better use of the resources you already have and streamlining your existing workflows.
Here are five steps you can take to optimize your company’s operational efficiency.
1. Determine Benchmarks and Baselines
First, you can’t optimize what you don’t measure. The best place to start is by taking stock of where you’re at in relation to industry standards or competitors. This might involve a company-wide audit of your existing practices and procedures.
For example, if you want to improve the efficiency of your customer support team, you might start by tracking your customer satisfaction score or ticket resolution rate.
Wherever it stands now is your baseline. Maybe you want to reduce the amount of time it takes to solve a customer’s problem, or reduce the number of support tickets overall by expanding your self-service knowledge base or customer support portal.
Use this information to set realistic benchmarks based on your current baseline and relevant industry standards.
2. Outline Your Standard Operating Procedures (SOPs)
Next, create a record of your standard operating procedures, or SOPs. This might be the workflow that your employees use to complete repetitive tasks, or the scripts that your sales team follows when interacting with clients.
Without a clear view of how things are currently being done, it can be hard to identify bottlenecks and inefficiencies. You can use dashboards and visualizations to make it easier for stakeholders to see what’s going on in real-time.
Once you have SOPs in place, you can remove or reorder tasks one at a time to see how they impact your overall operational efficiency.
3. Use Continuous Improvement
Another important tool at your disposal is the Kaizen method, which aims to achieve operational excellence through a process of continuous improvement. Rather than setting your benchmarks once and then forgetting about them, using a continuous improvement approach requires you to revisit them consistently over time.
If the changes you’ve made don’t result in lower inputs or improved profit margins, you aren’t locked into them indefinitely. You can revisit your benchmarks, solicit feedback from employees, and roll out another iteration of your SOPs.
Instead of viewing operational efficiency as a linear process, you can think of it as a cycle that repeats on a regular basis or when new information comes to light.
4. Assess Your Resource Utilization
Resource utilization is another key component of operational efficiency. Are you making the best use of what you have on hand? For example, if your team’s billable hours are only a small fraction of their available hours, they may be underutilized.
Other things to consider are computing resources (are you paying for cloud computing resources that you don’t need?) and real estate (are your office expenses proportional to the number of employees who work on-site each day?).
To improve your operational efficiency, you can either offload resources that you don’t need, or put them to use through better operations management.
5. Automate Workflows
Finally, you can use digital technology to automate repetitive tasks and empower your team members to be more productive at work. Not only does this reduce the amount of time and energy required to complete tasks, but it can reduce the likelihood of human error, freeing up your employees to focus on more constructive tasks.
From smart objects that can pre-populate forms with key bits of information, to online tools that make it easy to digitize the customer experience, automation can help you eliminate the busywork and keep up in a fast-paced digital landscape.
Plus, since digital tools don’t require a physical overhaul of your work site, it can be a more cost-effective way to improve efficiency than purchasing new equipment.
Improve Your Company’s Operational Efficiency With Pulpstream
Operational efficiency is about more than just reducing costs and increasing your profit margin. It’s also about expanding your employees’ capabilities at work, and improving customer satisfaction by meeting their needs faster and more consistently.
Pulpstream makes it easy to improve efficiency with our no-code management platform. With Pulpstream, your employees can self-service their own leave of absence requests, while your HR team can streamline their incident and claims management process.
Whether you work in manufacturing, software development, e-commerce, or another industry, Pulpstream can help you automate key steps in your workflow and improve your bottom line. Request a demo today to learn more!