What Is the Meaning of Operational Efficiency?

by Subha Varadan - Updated September 26, 2017
Operational efficiency reduces wasted costs without affecting quality.

Today's competitive business environment requires companies to introduce quality products at lower prices in order to capture market share. Globally, businesses have become more integrated, with supply chains crossing multiple nations. Inefficiency in these chains and outdated processes that drain internal resources affect the ability of a company to be competitive and profitable. Operational efficiency is a critical systemwide initiative that can keep a company in business or close it down.

Overview of Operational Efficiency

Operational efficiency minimizes waste and maximizes resource capabilities in order to deliver quality products and services to customers. It identifies wasteful processes and resources that drain the organization’s profits and can also design new work processes that improve quality and productivity. For example, the just-in-time efficiency model reduces inventory to the bare minimum, allowing the delivery of stock just when it is needed for a process. This eliminates traditional inventory holding costs.

Increase Profit Margins

Improving operational efficiency has a direct impact on a company’s profit margins. Assuming that the overall quality of a product or service is standard, businesses have to either increase prices, sell more or lower production costs to boost profit margins. Raising the selling price and increasing market share may be inhibited by increased global competition. Using efficiency measures to lower costs, such as internal wastage, may be a viable option, however.

Video of the Day

Brought to you by Techwalla
Brought to you by Techwalla

Avoid Duplication of Efforts

Organizational structure and internal processes affect operational efficiency; company culture and employee morale may also play a part. Companies that have very rigid hierarchical structures may be more inefficient due to duplication of efforts, for example. Several government structures suffer from this kind of problem. The communication in such organizations tends to suffer, leading to disparate teams or departments working to achieve their own objectives rather than those of the whole organization. This can lead to a systematic buildup of wasted resources at every level.

Build Efficient Supply Chains

The supply chain network of an individual company also affects its operational efficiency. This network involves suppliers, distributors and consumers of the company’s products and services. If links in the network do not work effectively, then operational efficiency may suffer. For example if a supplier is unreliable, then the company has to deal with the cost of missed opportunities, lack of quality and unsatisfied customers. Therefore, improving operational efficiency should also involve improving the supply or value chain.

Measuring Operational Efficiency

Companies use several techniques to measure and gauge their operational efficiency. Qualitative approaches include benchmarking operations to industry standards and comparing and evaluating performance to competitive companies. Quantitative analysis techniques include analyzing operations, financial statements and the cost of goods. Consumer surveys are also a good source of statistical data on operational efficiency.

Operational Efficiency Processes

Improving efficiency is a systemwide effort that involves adopting flexible organization structures that allow for a network flow of information on a horizontal basis. Involving other stakeholders, such as suppliers, distributors and customers, can also help improve the efficiency of the supply chain. Companies that adopt established efficiency processes, such as Six Sigma and total quality management techniques, can use benchmarking and employee training to help improve their operational efficiency.

About the Author

Subha Varadan has a bachelor's degree in architecture from India and an M.B.A in finance and supply chain management from California State University East Bay (CSUEB). Varadan won the "Outstanding Graduate Achievement Award " for her M.B.A. She has primarily written on financial topics for Demand Studios from 2008 and has been published on eHow.

Photo Credits

  • north america statistics image by michele goglio from Fotolia.com
Cite this Article A tool to create a citation to reference this article Cite this Article