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What Is the Meaning of Operational Efficiency?

by Andra Picincu ; Updated December 05, 2018
Above view of happy entrepreneur explaining the business plan to his team on a presentation in the office.

As a business owner, you want to generate revenue and deliver the best possible experience for your customers. At the same time, you're trying to keep the costs low without compromising on product quality. This is what operational efficiency is all about. If you do it right, your organization will become more productive, make higher profits and gain a competitive edge.

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  • Operational efficiency refers to the steps companies can take to streamline their core processes and optimize business performance.

What Is the Meaning of Operational Effectiveness?

Operational efficiency, also known as operational effectiveness or operational productivity, is a metric used by organizations worldwide. It measures the output of a business from each unit of input. "Output" refers to the service or product that is being offered, while "input" is the time, work, people and costs that go into producing goods and services.

This concept encompasses the practices meant to improve a company's processes so it can run efficiently and provide consistent, quality services. It's not just about achieving your goals but streamlining your operations in order to deliver better products at better prices and to reduce unnecessary expenses. By maximizing operational efficacy, you can optimize your costs, automate complex processes and have faster access to information within your organization.

In a recent survey of 400 IT firms, 39 percent of respondents said they were mostly efficient. Just two in 10 companies rated their current operations as very efficient. Approximately 36 percent were somewhere in the middle in terms of efficiency. Nearly half said that running a business is more complex than ever before due to the large amount of data they need to analyze and manage. Some mentioned the challenges of new technologies and ever-increasing customer demands.

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The only way to overcome these hurdles and ensure your organization's success is to prioritize operational effectiveness. This can help you secure a competitive advantage, deliver greater customer value and strengthen your brand. On top of that, you'll spend less time on repetitive tasks and processes.

Depending on your industry and type of business, there are various ways to boost operational efficiency. For example, you could leverage the latest technologies to streamline customer communication. Customer relationship management software, for instance, can help transform challenges into opportunities, leading to more sales, higher revenue and superior customer experience. Furthermore, your HR team and other departments will become more productive and get better results in less time.

With this kind of software, companies can unify their systems in a central hub and manage their day-to-day operations more easily. Programs like Salesforce boast advanced features that will allow your employees to analyze data and turn it into valuable insights, track the customer journey and manage customer relationships and sales more effectively. By having access to better data, you'll be able to deliver highly targeted marketing messages and reach a wider audience while reducing unnecessary expenses.

Operational efficiency is paramount to your success. It can free up your time, automate strenuous tasks and lower your costs. It also simplifies your processes and makes it easier to achieve suitable growth and profitability. Your employees will be more productive, and customer satisfaction will increase. This translates into higher revenue and brand awareness.

How to Measure Efficiency

This concept is based on the output to input ratio. Therefore, it's necessary to consider both aspects when measuring operational efficiency. What metrics you'll use depends on your short- and long-term goals, industry, business size and other aspects. These performance indicators vary from one industry to the next.

Say you have a data center that's large enough to accommodate more customers. The problem is that your facility doesn't have enough electric power to serve a large customer base. One way to improve its efficiency is to install cooling systems and energy-efficient equipment. Next, you may use revenue per kilowatt hour and other metrics to measure operational effectiveness.

Another common metric is revenue per employee. In this case, employee labor is the input. You can measure the productivity of labor based on how much revenue is generated by the average worker.

A car manufacturer with a revenue of $1 million per employee, for instance, is more operationally efficient than a similar company with a revenue of $500,000 per worker. The latter, however, can improve this metric by investing in new equipment, speeding up its design cycle, increasing pricing and so on. An IT company, on the other hand, can measure operational efficiency based on customer satisfaction, business impact, productivity, saved time, customer acquisition cost and more.

Say you're a marketing agency that wants to improve customer acquisition. In this case, you can measure operational efficiency based on the number of customers acquired versus the cost per customer. Simple strategies such as investing in search engine optimization, reducing lead conversion time and better targeting your ads can lower customer acquisition costs. Basically, you'll reach more prospects and convert them into paying customers for less.

Most businesses will divide their operating expenses by revenue to calculate the basic efficiency ratio. This ratio can be applied to your organization as a whole or to specific departments and areas of operation. The key metrics vary among industries and departments. Your sales team, for example, will have different operational efficiency metrics than your HR division.

Make sure your key performance indicators are quantifiable and measurable. Start by measuring the input and then calculate the output. Determine what you want to measure and compare your output to input ratio based on previous results or against your competition. Lower input costs represent an advantage. Between two companies that produce the same output, the one using fewer inputs is more operationally efficient.

Assume that you have a similar number of website visitors as your main competitor. You're spending about $10,000 per month on paid ads and SEO, while your competitor doesn't spend more than $7,000. Despite having similar results as you, the company in question is more efficient because it uses fewer resources.

By measuring your operational efficiency, you'll be able to determine whether the right amount of resources has been used to deliver a service, product or activity. This concept isn't just about maximizing profit and reducing costs; it also includes the ability to retain customers and maintain quality. Furthermore, it helps identify processes and activities that drain a company's budget.

What Is the Equation for Calculating a Machine's Efficiency?

Depending on your industry, you may want to determine the performance and efficiency of your equipment. If you're a manufacturer, for instance, it's important to know how your machines perform so you can decide whether or not you should purchase a newer unit or improve your existing one. A more efficient machine could save you time and money. You'll be able to produce more goods in a shorter time. Plus, the cost per unit may decrease.

A machine's efficiency can be measured using a simple equation. What you need to do is to divide the machine's energy output by the energy input and multiply the result by 100:

Efficiency = energy output/energy input x 100 percent

With this formula, you'll determine a machine's efficiency expressed as a percentage. The result will always be lower than 100 percent because of the waste generated by machines, such as the energy lost through wasted heat.

Say you have a machine that takes 1,000 joules to run, but its energy output is only 500 joules. If you divide 500 by 1,000 and then multiply the result by 100, you'll get 50 percent, which represents the machine's efficiency.

However, you may use other metrics too. If you have a bottle production system that costs about $20,000 per month including materials, electric power and labor and produces bottles with a total value of $30,000 per month, its efficiency is 150 percent. A newer system that uses less electricity and materials will be more efficient even if it produces the same output. Since we're using a variety of metrics and not just the energy consumed, the result can exceed 100 percent.

How to Improve Operational Excellence

Even though the terms are often used interchangeably, operational efficiency and operational excellence are not one and the same. The latter goes beyond efficiency, emphasizing continuous improvement. It involves continuously managing organizational complexity and fine-tuning your business strategy to stay on top of the competition.

Think of organizational excellence as a key step in your journey to optimal business performance. This concept involves meeting and exceeding customer expectations while improving your organizational culture, day-to-day operations and processes. It also includes the steps needed to mitigate risks, optimize your expenses and drive awareness.

No matter how big or small your business, focus on improving both operational efficiency and excellence. This will set you on the path to success and give you a competitive advantage. Your company will grow and thrive, your employees will be happier and more productive and your customers will return over and over again.

Most organizations that strive for organizational excellence are using the Shingo Model to accomplish their goals. Described as a new way of thinking, this philosophy is based on 10 key principles. Seek perfection, respect every individual, think systematically, assure quality at the source and create value for the customer are just a few to mention.

According to the Shingo Model, every individual has potential and can bring value to an organization. As an employer, it's not enough to have respect for your team. You must also show respect to your partners, employees, suppliers, customers and society. When people feel appreciated, they get involved and put more effort into their work.

For example, you can provide training sessions for your employees and encourage them to develop new skills. Brainstorm ideas and let them know that you're open to any suggestions they may have. Reward their hard work and respect their free time.

Another thing you can do to achieve operational excellence is to continuously improve your processes. Seek long-term solutions rather than temporary fixes and invest in technologies and equipment that can streamline your work.

Prioritize innovation within your organization. Look for new opportunities, experiment with new ideas and take calculated risks. Think systematically and take one step at a time so you can determine what works and what doesn’t work without the fear of failure.

Now that you know the importance of efficiency and excellence for business success, take the steps needed to make your organization thrive. Focus on continuous improvement, emphasize customer satisfaction and show your employees that you care about them and appreciate their efforts.

Provide your team with consistent access to information and invest in new technologies to make work easier. Remember, you cannot deliver world-class customer service and achieve peak performance if your employees lack the resources needed to work efficiently. Use a unified system to share information across departments, encourage innovation and focus on achieving long-term, sustainable growth.

About the Author

Andra Picincu is a digital marketing consultant with over 10 years of experience. She works closely with small businesses and large organizations alike to help them grow and increase brand awareness. She holds a BA in Marketing and International Business and a BA in Psychology. Over the past decade, she has turned her passion for marketing and writing into a successful business with an international audience. Current and former clients include The HOTH, Bisnode Sverige, Nutracelle, CLICK - The Coffee Lover's Protein Drink, InstaCuppa, Marketgoo, GoHarvey, Internet Brands, and more. In her daily life, Ms. Picincu provides digital marketing consulting and copywriting services. Her goal is to help businesses understand and reach their target audience in new, creative ways.

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