In business, the meaning of the term “operational efficiency” can be easily confused. It is often used interchangeably with “efficiency” or “productivity”, for instance.
However, “efficiency” – according to popular management framework ITIL V3 – is a “measure of whether the right amount of resources have been used to deliver a process, service or activity.” If we consider “resources” as input and a “process, service or activity” as output, we have the beginnings of a reliable description.
Operational efficiency is defined as the ratio between input and output within a business. Input typically covers resources used such as labour, money, people and time. Output refers to business gains like revenue and customers, including broader metrics such as customer loyalty, market differentiation, innovation or opportunities, to name a few.
Therefore, as operational efficiency improves, output increases – or holds steady – while input decreases. A truly efficient process is one that delivers products and services with maximum cost efficiency while maintaining high quality standards.
Most businesses are engaged in management of operational efficiency to some degree – whether through allocation of resources, oversight of production and distribution, or administration of inventories.
Measurement of operational efficiency
Any attempt to improve operational efficiency begins with measurement. Many companies focus on the “input” side of the equation most heavily, measuring production costs or man hours first and foremost. However, input indicators, while important, rarely tell the whole story.
Measurement requires performance indicators and methods of tracking to be properly defined for both input and output within the business. It’s important to note, though, that the specific indicators chosen and their importance to the business will vary significantly between, and even within, industries.
Nevertheless, input typically covers categories such as expenditure and human resources used, while output refers to areas such as revenue, customer numbers, growth or customer satisfaction.
Comparison of operational efficiency
If your business means to compare its operational efficiency with others – through a benchmarking process or otherwise – it is important to factor complexity, load and strategy into your definition, measurement and tracking of performance indicators.
This is because two companies, even within the same sector, may require minor or vast differences in approach according to their customer behaviour. One business may have to allocate more input resources to delivering a personal approach to customers, for example, where another utilises a digital ordering system. Difference in strategy is an essential factor to consider, too. Where production cost is a critical indicator for many companies, others measure their success primarily by the loyalty of their customer base.
Failure to measure differences in complexity, load and strategy may lead to incorrect conclusions being drawn from any quantitative results found.
Improvement of operational efficiency
As highlighted above, efficiency isn’t simply a cost-cutting exercise – a fact which too many organisations fail to realise, or are quick to forget, to the detriment of their products or services. On the contrary, an increase in costs can lead to greater operational efficiency in various cases, just as long as output increases correspondingly.
When reviewing operational efficiency with the business, the most common and straightforward approaches are:
- Achieve the same output with less input (same for less)
- Achieve more output with the same input (more for same)
- Achieve much more output with more input (much more for more)
In a “same for less” approach, a business might aim to produce the same volume of goods it does currently, while reducing the amount of personnel (and the associated costs with paying them). This would typically involve the optimisation, centralisation or even automation of one or more working processes.
A “more for same” approach might involve a business reviewing quality assurance procedures – in order to reduce faulty products being produced, in the process reducing associated aftersales costs – while maintaining the same resource allocation. This goal could also be delivered by improving training programs or revising existing quality standards, for instance.
A “much more for more” approach can be illustrated in an example of a production company. A manufacturer which invests in a new factory may be afforded the chance to create more goods of better quality, for instance. The initial investment sum – while significant – may deliver greater results in the long run, if the new and improved products can be sold at a premium. Another example may be provided in a service company increasing its future performance and revenues exclusively through investment in its customer service branch.
Achieving operational efficiency with automation
Automation is a key technique for improving operational efficiency, and an increasingly popular one as business evolves in a digital age. Simply put, technology – when designed and programmed correctly – can perform processes more effectively than can be achieved with manual human control.
Some investment will be required (into tools, software and consultation), as will some strategic thinking about which processes within the business are clear, simple and repeatable enough to be effectively automated. However, the business benefits can be enormous. Tasks can be performed faster, the potential for human error can be reduced, and quality can be increased while costs shrink.
FLOvate specialises in business process management. This is why we created automation software LEAP, which is not only powerful and affordable but easy to use, too. A Low-code Software Platform, LEAP can be tailored to any specification, helping businesses to be more productive, at lower cost.