Operational Efficiency

Increase performance and effectiveness of business operations

Increase performance and effectiveness of business operations

Provide easy access to real-time data

Allow for more transparent business processes

Improve internal and external customer service

Migrate from a paper processing environment to an analytical environment

All companies should seek to be efficient, but some of us still don’t understand what it means to be productive. Many entrepreneurs confuse efficiency with “achieving targets.” They believe that, if a company manages to fulfill its commitments, in terms of its finances and customers, it makes it competent, but that isn’t true. 

Operational efficiency encompasses several strategies and techniques used to accomplish the fundamental goal of delivering quality goods to customers in the most cost-effective and timely manner. Resource utilization, production, distribution, and inventory management are all common aspects of operational efficiency. The most critical factors vary by the nature of the business — manufacturing, distribution, or retail. Your small business must have exceptional efficiency to compete with larger companies with more significant economies of scale and bargaining power with vendors.

The concept of operational efficiency encompasses the practice of improving all of your processes (all your company’s activities that lead to your final product or service). For example, a supermarket has various internal methods (production, hiring, sales, and communications, for example), and all of these processes help the company achieve a target, which may be in terms of product sales. 

But even if the supermarket is hitting its sales targets, this doesn’t mean that it has achieved operational efficiency. Inadequate stock control can lead to the spoiling of products and losses for the company. If the purchasing department isn’t able to effectively identify the ideal suppliers, the supermarket is missing out on a chance for significant savings. This illustrates the importance of knowing your company well, because the bottom line is that each venture possesses its own reality in terms of its processes.

Examples

Getting the most value from resources and eliminating waste in production and operations are operational efficiency considerations. From a labor perspective, you want to get the most production or sales results possible from your employees. You also wish to own financial investments and the materials used in operations to generate the highest available revenue. Achieving efficiency in your costs of goods sold and overhead values is crucial for building a high-profit margin.

For manufacturing companies, efficient production is a significant element of operational efficiency. Production includes optimizing equipment, product processes, and employee output to produce the highest number of quality products possible with the time and money invested. Manufacturers often invest in lean manufacturing training to identify wasted production steps to cut out any non-revenue-generating activities or work steps. Achieving efficient production helps manufacturers get higher mark-up on sales to distributors and ensures the end customer receives a good value.

Distribution efficiency is vital for manufacturers, wholesalers, and retailers. Many distribution channel partners collaborate in distribution efficiency through supply chain management. Distribution involves software-driven analysis to find the most efficient ways to move goods from manufacturer to wholesaler and from wholesaler to retailer. Dynamic routing and delivery schedules are common aspects of efficient distribution. Some companies get creative in other ways to eliminate waste or inefficiency. Non-competing companies might share truck space, for instance, to avoid less-than-full loads if they move goods on similar routes.

For all distribution channel members, inventory management is critical in operational efficiency. The just-in-time inventory concept has become common in many distribution channels. Product resellers typically only want to produce or hold enough inventory to meet immediate demand. Excess inventory costs money to manage, move, and throw out. Manufacturers, therefore, must exercise caution in producing just enough goods to meet demand. Resellers only want to buy goods they expect to sell shortly. Inventory Management is a delicate balance, though, because you don’t want to run out of products and alienate customers.