What Is Operational Efficiency? (With How-to Steps)

By Indeed Editorial Team

Published November 20, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Operational efficiency is essential for improving a company's workflow. This multi-faceted approach shows the relationship between an organization's output and input, enabling it to reduce costs and increase revenue. Learning how to improve operational efficiency can help you measure and monitor a company's key performance indicators (KPIs) to help ensure profitability. In this article, we answer, "What is operational efficiency?", explain the difference between efficiency and productivity, outline the steps for improving operational efficiency, and discuss some critical KPIs to monitor.

What is operational efficiency?

Knowing the answer to "What is operational efficiency?" is beneficial for reducing the time and resources required to run business operations successfully. Operational efficiency focuses on producing the same output using fewer resources. It's the ratio of a company's input of materials and resources to its value of measurable output. Operations may include marketing, production, and inventory management. For example, operational efficiency is when a production line can manufacture the same batch of items with less fuel. Organizations with very efficient operations can reduce unnecessary expenses, such as inventory costs, to improve revenue.

What is the difference between efficiency and productivity?

While many businesses use efficiency and productivity interchangeably, they differ in meaning. Efficiency generally focuses on completing tasks with fewer resources. For example, a company may use the same number of machines to produce more goods. Productivity refers to the ability to increase output while using the same resources. For organizations to improve efficiency, they may reduce their resources and improve performance. This can mean investing in employee training programs. Improving productivity requires that companies appropriately allocate resources to optimize their operations.

Related: Business Process vs. Operational Process: The 5 Differences

How to improve operational efficiency

You can follow these steps to learn how you can improve operational efficiency in a company:

1. Assess the business operations

Improving operational efficiency typically begins with assessing every operation within a business. This can help you identify strategies to make inefficient processes more effective. You may conduct scheduled check-ups and frequent internal audits, including analyzing key performance indicators to assess the business's progress and create an operational structure.

2. Identify and remove bottlenecks

Bottlenecks are steps or functions in a process unnecessary for completing a task. It's important to remove bottlenecks that slow a company's processes. You may use analysis and reporting tools, such as customer relationship management (CRM), to identify and assess them. For example, inventory management software can assess actionable reports and remove bottlenecks in the inventory process to streamline workflow. Reports on product profitability can also help to identify inefficiencies in a process.

3. Improve customer service

Customer service and satisfaction usually determine a service-oriented business's success. Companies can efficiently meet consumers' needs and fulfil orders by improving customer service and streamlining communications. You can also enhance back-end operations, such as vendor relationships, and use a customer service management system to assist customers. This system usually has a user-friendly interface that enables employees to manage and assess customer interactions and data.

It's also important to reduce internal backlogs and work to ensure vendor compliance, as vendors can make the business process more transparent, increasing customer satisfaction. Companies that complete their supply chain processes promptly can also improve customer service. Other ways to ensure quality customer service are seeking customer feedback and leveraging multi-channel servicing. Multi-channel servicing refers to using various contact platforms, such as live chat, e-mail, and phone, to improve the customer experience by offering more communication options.

Related: Why Is Exceptional Customer Service Important? (Plus Tips)

4. Provide continuous training and upskilling opportunities

An organization can improve operational efficiency by training employees. This training may cover areas such as company-specific information, best practices, and safety in the workplace. Employees can enhance their workflow and help guarantee efficiency when they know multiple innovative systems and processes. A company that offers career development resources may become competitive and retain top talents. You can also implement mentorship coaching programs to keep employees updated on the best practices for maintaining efficiency.

Related: Understanding the Importance of Training Employees

5. Facilitate cross-departmental collaboration

When there's collaboration among various departments, a company can improve efficiency significantly. This typically reduces the time employees spend completing tasks. It also allows for innovation, as several individuals with different expertise may work together. To help ensure cross-department collaboration, you may promote accountability and efficient communication across all departments. You can also facilitate collaboration by offering network opportunities, such as career fairs, for employees to share their capabilities.

6. Introduce technological solutions

Organizations that use current and updated technology generally find it easier to improve operational efficiency. Introducing technological and computer-aided solutions can enable you to enhance a company's daily business operations. Through this, it can organize resource sharing, implement collaboration processes, and automate multiple operations to reduce administrative work and improve the office environment. When choosing technology solutions, you may review their functionality to determine if they meet the company's needs. Acquiring the right technology may mean having higher levels of operational efficiency.

7. Focus on order fulfilment

It's essential a company has the right tools to fulfil its customer orders as demand increases. You may use advanced replenishment software to reduce order errors and achieve maximum efficiency. Replenishment software typically aims to keep inventory flowing through a supply chain. It allows companies to stock, order, and refill items. Access to real-time inventory data can show a company how quickly each of its products is selling, allowing it to enhance order fulfilment.

Related: What Is the Process of Order Filling? (With Steps and Tips)

8. Review and refine business processes

You may review the business processes and evaluate them for documentation. By doing this, you can refine, rebuild, or incorporate new workflows through automation. Automating daily activities and repeatable work can help improve overall operational efficiency. It can save employees time by allowing them to focus on more important tasks, such as order fulfilment and customer service. You may automate multiple administrative tasks, such as planning projects, creating invoices, organizing employee payroll, and sending purchase orders.

Related: Business Process vs. Operational Process: The 5 Differences

9. Create a financial strategy

An efficient financial strategy is essential to improving a company's operations and scaling its business. You may implement best practices, such as establishing a payment collection process and creating an annual budget to maintain a healthy margin. Doing this can enable an organization to track and monitor its spending to generate revenue and increase operational efficiency.

10. Measure the right KPIs

Companies that measure their metrics can easily test the effectiveness of strategies they implement in improving operational performance. You may compare the business's performance against key metrics, such as revenue growth, profit margin, client retention rate, and customer satisfaction. This can help it identify areas for improvement and discover trends or patterns that may lead to success.

11. Promote the work culture

Reviewing and promoting a company's work culture is another way to improve operational efficiency. You can create a culture that encourages honest feedback and mutual respect among employees. You may also enhance employees' workflow by integrating tools that speed tasks and make their duties easier. Here are some other methods that can help promote a positive work culture:

  • encourage employees to take paid leaves

  • ensure individuals feel comfortable about asking questions

  • provide social interaction

  • promote diversity and inclusivity

  • create an employee recognition program

  • ensure transparency

  • set clear departmental goals

What are the crucial KPIs in operational efficiency?

Key performance indicators (KPIs) are quantifiable values that companies often use to evaluate and monitor the efficiency of their daily operations. Here are the essential KPIs in operational efficiency:

Net profit margin

A company's net profit is the amount which remains after deducting expenses. This KPI typically measures a business's performance in generating sales while keeping expenses low. Financial managers can determine a company's financial health with the net profit margin. You may calculate this metric by adding total revenue and deducting expenses.

Related: How to Calculate Net Profit Margin (With Examples)

Customer retention rate

This refers to the rate at which customers remain with a business for a particular time. It allows organizations to track how many customers return to their store after making an initial purchase. Businesses with a high customer retention rate often have loyal and repeat customers who can help increase their profit. With this KPI, you can focus on customer satisfaction to improve operational efficiency.

Inventory turnover ratio

Inventory turnover measures how fast a company sells its product. When businesses evaluate the number of times they sell or replace a product over a particular period, they can make informed decisions on marketing, manufacturing, purchasing, and pricing new items. A low inventory turnover ratio typically means excessive inventory or a weak sales strategy. A high ratio may mean a company has insufficient inventory or a strong sales strategy.

Related: The Importance of Inventory Management (Types and Steps)

Cash flow forecast

Cash flow forecasts can enable businesses to assess their future financial position. Companies that evaluate this metric can avoid cash shortages and make key business decisions on funding, investments, and capital expenditure. This metric can help a company determine the appropriate period to expand its business. An organization with more income than expenses usually has a positive cash flow.

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