Table of Contents
What is Operational Efficiency?
Operational efficiency refers to an organization’s ability to produce goods and services using the least amount of resources, including time, money, and energy, without compromising on quality. In simple terms, you can think of it as “the ability to do more with less.”
The exact definition of operational efficiency varies depending on the nature of your business and industry.
- In B2B manufacturing, it means optimizing your production processes and and supply chain management to reduce costs, waste, and lead time while increasing output.
- In the service industry, streamlining client delivery, improving communication and collaboration between teams, and automating repetitive tasks are what helps you achieve it.
- SaaS companies reach operational efficiency by constantly improving their products’ performance, functionality, and user experience to deliver more value while reducing development costs and improving scalability.
Ultimately, no matter what type of company you’re running, the underlying goal remains the same: to streamline business processes and eliminate waste in order to maximize productivity and profitability.
- Operational effectiveness
- Operational excellence
- Business efficiency
- Cost efficiency
- Resource optimization
- Streamlined operations
The Goal of Operational Efficiency
Beyond the surface-level goal of improving productivity and profitability, operational efficiency has a specific set of goals and outcomes that businesses strive for.
- Process automation — In today’s businesses, the best way to achieve efficiency is using software to automate repetitive tasks.
- Cost reduction — Reducing operating expenses, optimizing your supply chain, and cutting down on waste all contribute to higher operational efficiency.
- Quality improvements — Although improving product quality might not directly contribute to or detract from operational efficiency, the better your product or service is, the more efficient you can become.
- High customer satisfaction — The ability to deliver a better product faster ultimately means customers are happier with your business.
- Improved employee productivity — Employees are your most valuable (and potentially most costly) resource, so their productivity goes hand-in-hand with business efficiency.
- Better communication and alignment — By streamlining processes and automating tasks, teams can collaborate, share data, and align their goals more effectively.
- Long-term retention and profitability — Over time, you can measure your success at improving efficiency by looking at improvements in customer retention, revenue growth, and profit margins.
All these goals are tied to activities that drive operational efficiency. But each is also an outcome in its own respect.
For instance, you need to improve employee engagement, train and motivate them, and provide the right tools (or else you won’t become more efficient). By the same token, higher productivity is a benefit just the same as it’s an activity.
Factors in Operational Efficiency
The whole point of operational efficiency is to use resources more effectively. This is more than just the direct cost of manufacturing, customer acquisition, or service delivery, though. Any resource that goes into your business should be optimized.
- Employee time
- Capital expenditures
- Raw materials and inventory
- Data and technology
- Energy and utilities
- Sales and marketing expenses
To improve resource utilization, there are a few things you can do. Improving relationships with suppliers, streamlining processes, and using technology to automate tasks are all potential solutions.
Production is closely tied to resource utilization because it has a direct influence on manufacturing or development costs. In many cases, the more efficient your production processes are, the lower your unit cost will be.
Some areas for improvement:
- Product development
- User testing
- Manufacturing processes
- Inventory management
- Supply chain management and logistics
- Quality control and assurance
As you grow your business, it might cost more to produce more at first. Over time, though, refining your processes and automating tasks can help reduce costs while ramping up production. So, operational efficiency from a production standpoint translates to becoming more scalable.
Distibution encompasses your supply chain, logistics, and delivery processes. Inefficient distribution can lead to dramatically higher costs for your business and longer wait times for customers.
Some ways to improve your distribution efficiency include:
- Choosing the best vendors and partners
- Optimizing routes and transportation methods
- Using fewer transportation resources (e.g., gas, shipping containers)
- Controlling inventory levels to reduce backlogs or stock shortages
- Automating order fulfillment processes
You should also look beyond the processes themselves. A big part of distribution efficiency is the operational costs that go into your distribution infrastructure.
Gas, for example, is a significant cost associated with distribution. So, reducing gas consumption by optimizing routes or using more fuel-efficient vehicles can give you significant efficiency gains.
Inventory management and distribution go hand-in-hand, but what goes on on the warehouse floor is a different game entirely. Here, the goal is to eliminate waste and optimize for speed-to-market.
- Automate ordering and reordering once inventory reaches a certain level to prevent stockouts.
- Keep inventory turnover high enough to reduce storage costs.
- Optimize your warehouse layout to minimize picking and packing time.
- Use technology to track inventory levels and allocate resources more effectively.
- Train your warehouse staff to work more efficiently and handle peak seasons.
Businesses normally use ERP software, an order management system, and/or a warehouse management system to streamline their inventory management processes.
For SaaS companies, inventory, distribution, and production don’t apply. But the same principle of operational efficiency does. Developing software more efficiently means you can deliver a product that is better, faster, and cheaper.
- Use agile development principles to improve time-to-market.
- Automate user testing and troubleshooting processes.
- Adopt a continuous integration and delivery (CI/CD) process to streamline your development lifecycle and reduce the likelihood of bugs.
- Implement DevOps processes to align your development and operations teams and reduce time-consuming handoffs between the two groups.
Development efficiency in SaaS also depends on the technology stack you use, how much manual coding is involved, and whether you’re using third-party integrations. It also depends on how complex your product is — enterprise SaaS products will almost always require more development resources and a longer cycle time.
Delivery and Service
The efficiency of your delivery or service processes determines how much time (and money) goes into getting a product or service to your customer. This includes everything from the initial inquiry or order to final fulfillment.
Ways to improve delivery and service include:
- Streamlining communication channels with customers
- Automating documentation and processing
- Reducing lead time and shipping times
- Providing self-service options to customers (e.g., FAQs, chatbots)
- Ensuring timely and accurate product/service delivery
Operational efficiency in this area means customer satisfaction. Smoother operations mean a better experience for your customers, leading to positive word-of-mouth and potential repeat business.
Sales and Marketing
Business leaders don’t usually think of “sales and marketing” at first when they’re looking at their operational efficiency. But sales velocity and marketing ROI are tied to one of your biggest operating costs: customer acquisition.
Effective operations in sales and marketing include:
- Automating lead generation, nurturing, and scoring
- Mapping out the buyer’s journey to identify inefficiencies
- Streamlining the sales process and shortening the sales cycle
- Reducing customer acquisition costs by improving targeting and retargeting efforts
- Automating routine tasks like email campaigns and social media posting
Operational efficiency in sales and marketing leads to higher conversion rates, reduced churn, and increased revenue. By optimizing your processes in these areas, you can maximize your ROI and see a higher return on your marketing and sales investments.
Diagnosing Problems in Operational Efficiency
Since operational efficiency applies to practically every department within your business, finding its most pressing issues is sometimes a real challenge. Companywide operational efficiency is the direct result of a collective effort. So, it’s up to each team to spot and remedy inefficiencies within its own processes.
There are a few key questions you can ask to help diagnose problem areas:
- What processes are taking the longest to complete, and why?
- What tasks or steps involve a lot of backtracking, rework, or manual effort?
- Where are we seeing bottlenecks or delays in our workflow?
- Are there any areas where communication is lacking, leading to errors or misunderstandings?
Start by mapping your existing processes. Then, identify areas where you can reduce manual tasks, streamline handoffs between departments, and automate repetitive or error-prone processes.
Customer and employee feedback are two of the best sources of data when looking for opportunities for process improvement. A high amount of customers complaining about inconsistent or inaccurate product availability info on your website, for instance, could indicate either poor data transfer or a lack of real-time inventory visibility.
For employee feedback, you could conduct surveys or hold meetings to discuss areas of frustration or inefficiency within their roles. These insights can provide valuable information for improving day-to-day operations and increasing their overall engagement at work.
How to Measure Operational Efficiency
There’s no one way to measure operational efficiency. Since operations vary from company to company, it’s somewhat of a subjective metric. Moreover, measuring operational efficiency in one department can mean something totally different to another.
That being said, here are four operationally focused metrics you can use:
Operational Efficiency Metrics
Time and Motion Studies
You can calculate the time it takes for an employee to complete a specific task and compare it to a company benchmark or industry standard.
Let’s say your fulfillment team has a goal of packaging and shipping an order within 24 hours. Then, you can measure the average time it takes for each employee to complete this task compared to that 24-hour benchmark.
If employees are consistently taking longer than 24 hours (on average) to fulfill an order, you’ll either need to give them additional tools (software) to increase their efficiency, invest in training to improve their workflow, increase headcount to support a heavier workload, or reorganize your fulfillment process to streamline it.
You can think of throughput as how much work goes into a system compared to the resulting output. If your company generates an average of 100 orders per day and you have a team of 10 employees dedicated to processing those orders, your throughput would be 10 orders per employee.
If, however, your team received additional training or tools that allow them to process 120 orders per day with the same number of employees, then your throughput has increased. This means that you’re getting more output from the same input (employee resources). In other words, your operational efficiency rate is increasing.
Capacity utilization measures how much of your available resources are being used and how efficiently. You can calculate it by dividing the actual output (e.g., number of orders fulfilled) by the maximum potential output (e.g., total number of orders received).
A high capacity utilization ratio indicates operational efficiency, whereas a low ratio may suggest there’s room for improvement. For example, if your team can fulfill 100 orders per day but is only processing 80, then you have a capacity utilization rate of 80%. This means there’s room for optimization in your processes to reach full potential.
Operational Efficiency Ratio
You can calculate operational efficiency as a ratio by dividing the actual output (net sales) by your operating expenses (OPEX) and cost of goods sold (COGS).
Operational Efficiency = (OPEX + COGS) / Net Sales
Suppose your company wants to calculate operational efficiency for the month of July. Your net sales that month were $50,000. Your COGS was $20,000, and your OPEX was $15,000. The calculation would be:
Operational Efficiency = ($20,000 + $15,000) / $50,000 = 70%
This means that your company’s operational efficiency for the month of July is 70%. To improve this metric, you could find ways to lower your COGS (e.g., negotiating better supplier contracts) and reduce your OPEX (e.g., automating tasks or reducing overhead costs).
10 Ways to Increase Operational Efficiency
1. Optimize product design.
From faster picking and packing processes to lower distribution costs, product design plays a tremendous role in how efficient your operations are.
For instance, a foldable box design can reduce storage space and improve shipping costs. It can also improve shipping/order fulfillment times and reduce distribution costs if more units can fit in a smaller space (since you’ll be able to fit more customer orders on each truck).
2. Streamline your supply chain.
Supply chain efficiency is a determining factor in whether you’ll have materials on hand to produce products and whether you can get those products to market quickly. You can reduce lead times and production costs by developing good relationships with suppliers and optimizing the flow between upstream and downstream partners.
- Limiting your dependency on one supplier
- Being honest and transparent about your needs and expectations
- Planning ahead for potential disruptions in supply chain activity
- Automating reordering and payment processes
- Renegotiating favorable terms for reduced costs
Since relationships with suppliers are so important, there’s also a human element to relationship management. Don’t pressure them to meet unrealistic deadlines or demands, and keep communication transparent.
3. Consolidate tasks.
If possible, try to streamline operations by combining multiple tasks into one job function. For example, if your employees are currently responsible for picking items from storage, packaging the items, and labeling them for shipment, consider having one employee handle picking and labeling while another focuses on packaging.
This way, each person can become an expert in their specific task. When one person can do the same thing over and over, it increases efficiency and reduces the potential for errors.
4. Integrate all your technology.
Your sales, marketing, and supply chain software should all integrate seamlessly together. This includes:
- Customer relationship management (CRM) software
- Enterprise resource planning (ERP) software
- Configure, price, quote (CPQ) software
- Order/inventory management systems
- Warehouse management systems (WMS)
- Retail/POS software
- Billing and invoicing software
- Your website and other sales channels
- Marketing automation tools
When someone places an order on your website, their ability to see up-to-date product information depends on whether your product configurator (CPQ) and website are integrated with your ERP system’s inventory management function. If these are integrated, your website will reflect accurate inventory levels and product bundles/combinations.
When they place an order, your website should handle payment and auto-send the order info to your ERP/inventory management system, which should then update inventory counts. At the same time, your fulfillment team should get an alert that a new order needs processing.
If you have physical retail stores, interconnectedness will enable you to reflect real-time availability with the ability to ship from or pick up in a store. For salespeople, integration between your CPQ software and CRM will provide them with the most up-to-date product and pricing info, discounts, etc., in addition to all their customer information.
5. Apply lean principles.
Lean Manufacturing and Lean Six Sigma methodologies have been around since the 1980s. They’re based on the premise of quality, efficiency, and continuous improvement — all top priorities for manufacturers.
These processes seek to eliminate waste (non-value-added activities) while reducing variation and defects to produce consistent results.
Specific techniques used in lean manufacturing include:
- Just-in-Time (JIT) delivery — Keeping just the right amount of inventory on hand, and pulling new materials as they’re needed for production
- Kaizen — Continuous improvement in the workplace through small, incremental positive changes
- Poka-Yoke — Error-proofing processes (or making errors extremely obvious) to reduce or eliminate defects
- 5S Methodology — a systematic approach to workplace organization (Sort, Set in Order, Shine, Standardize, Sustain)
- Heijunka — Production leveling to reduce bottlenecks in the production process
These are some of the best operational efficiency strategies because they also help you achieve other business goals, like improving product quality, optimizing inventory counts, and reducing costs.
6. Train your employees.
Proper training reduces the likelihood of errors and injuries, improves employee productivity and engagement, speeds up ramp times, and reduces turnover. By investing time and resources into employee training, you can increase operational efficiency, decrease costs, and improve overall performance.
Here are a few examples of training:
- Hands-on training for new hires, including basic safety protocols and best practices
- Ongoing education on new software and processes
- Cross-training, so employees can handle multiple tasks effectively
- Continual reinforcement of safety procedures and good housekeeping habits
Training is particularly important if you’ve made changes to your supply chain management systems or technology. As you introduce new processes to improve operational efficiency, the effectiveness of their implementation depends almost entirely on whether your employees actually know how to apply them.
7. Establish clear communication channels.
This applies to your internal and external communication.
- Internally, use an integrated communication platform (like Slack) and a project management tool to maintain transparency between departments. Integrate these tools into the rest of your workflow.
- With your suppliers and distributors, establish a clear communication protocol that outlines expectations and responsibilities. And, automate reordering, order tracking, and payment processes.
- For customer communication, give the option to contact you through multiple channels (phone, email, live chat) and set up automated responses for frequently asked questions.
Effective communication reduces the potential for misunderstandings and errors while improving collaboration and decision-making. It also helps build stronger relationships with your employees, partners, and customers.
8. Consider outsourcing non-core activities.
Unless you’re a massive company like Amazon, you probably don’t have the infrastructure to handle everything in-house (especially as you scale). The good news is, you don’t need to.
Outsourcing certain tasks (like accounting, IT support, or logistics) frees up your resources to focus on core activities and strategic initiatives that drive growth. It also enables you to take advantage of specialized expertise without incurring the costs of hiring full-time employees.
- Using a 3PL (third-party logistics provider) for warehousing and fulfillment, so you don’t have to invest in your own warehouse space and employees
- Hiring a bookkeeping service instead of managing your books yourself
- Partnering with an external marketing agency to handle campaigns and content creation
Deciding what tasks to outsource depends on your unique business needs, but the key is to focus on your strengths and let others handle areas where you may not have as much expertise. This will ultimately improve operational efficiency and allow for more growth opportunities.
9. Tie operational efficiency to tangible business goals.
The idea behind operational efficiency is that the more streamlined and effective your processes, the better your overall business outcomes. Although there are specific metrics you can use to measure it, it’s best to focus on other KPIs with increased efficiency as the end goal.
- Sales cycle time and lead velocity
- Production cycles
- Order fulfillment time
- Employee productivity and engagement
Looking at operational efficiency ratios and percentages is helpful, but it doesn’t give you much context. You have to look at specific business activities that contribute to operational efficiency to get a sense of the bigger picture.
10. Identify risks ahead of time.
Depending on the nature of your business, you might not be able to anticipate every single risk right away, but you can get pretty close. There are a few places to look when evaluating your company’s overall risk profile:
- Global market trends
- Political climate
- Natural disasters
- Geopolitical conflict
- Changes in technology
- Trends in consumer behavior
Carefully consider what type of product you deliver, where you source it from, and how dependent you are on one particular resource.
People Also Ask
What is an example of operating efficiency?
Suppose you have a manufacturing company that produces custom furniture. Your current fulfillment time is two weeks, but reviews and customer feedback tell you reducing it to a week and a half would significantly improve your customer satisfaction and lead to more repeat business.
You implement a new production line and reorganize the warehouse layout with the goal of reducing fulfillment time by 4 days. You track the new production and fulfillment process for a few months by measuring the production cycles and order fulfillment time.
After four months, you see a consistent decrease in both metrics, meaning your operational efficiency has improved.
What is the difference between operational efficiency and effectiveness?
While the two terms sound similar, “efficiency” refers to your company’s ability to produce an intended result with the least amount of wasted time, effort, and resources. “Effectiveness” only refers to your capacity to achieve a better result. You could, hypothetically, achieve an effective (i.e., better) result without doing so efficiently (i.e., using more resources than necessary).