March 29, 2021

What is Operational Efficiency: Best Approaches Revealed

Process Improvement
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Organisations strive to achieve operational efficiency. Even if your team or organisation is meeting its goals (i.e. sales or growth), there’s still likely ways to improve output while reducing inputs. One way to assess your level of operational efficiency is to begin by reviewing internal processes and conduct process improvement. 

The management of operations is rooted in finance activities, processes and analytics. As such, the ability to streamline finance functions will prove to be critical to achieving operational efficiency. 

We will cover everything you need to know about operational efficiency, including its components, operational efficiency metrics, and how to improve operational efficiency.

Coming Up

1. What is Operational Efficiency?

2. 3 Steps to Achieve Operational Efficiency

3. What are the Factors of Operational Efficiency?

4. How to Improve Operational Efficiency

5. How to Measure Operational Efficiency

6. Wrap Up

What is Operational Efficiency?

Operational efficiency is the practice of being able to deliver services and products (outputs) as cost effectively as possible (by minimising inputs). This is doable through the streamlining of processes and elimination of waste, whether the waste be in the form of resources or time. 

To calculate operational efficiency, you may measure profits earned as a function of operating costs. With higher operational efficiency comes higher profits because outputs are maximised as inputs are being minimised.   

In the pursuit of measuring efficiency, it’s important to note that productivity and efficiency are not synonymous. Productivity is a measurement of output (i.e. units per hour). Efficiency is the cost per unit of production. This is how businesses can achieve economies of scale (the ability to decrease costs per unit as the quantity of outputs increases).

3 Steps to Achieve Operational Efficiency

Any organisation with the goal of being operationally efficient can do so by keeping in mind the following to-do’s, or actionable steps. 

Take a look:

  • Benchmarking: Start by creating a benchmark of your team or organisation’s performance. You can do so by comparing your team or organisation against competitors within your industry or your own past performance by way of reviewing key performance indicators (KPIs). 
  • Eliminate waste: In order to know where your organisation has room for improvement, model your processes. This can be done through the creation of flowcharts, either with software or by hand. Once you have a clear view of the way your processes run, you can spot bottlenecks and waste. Through the implementation of automation software, you can create and streamline processes to maximise efficiency. 
  • Manage performance: Keep track of performance by monitoring progress and processes with dashboards and reports. Automation software can collect, process and translate all data into easily understandable reports that aid in better decision-making. 

What are the Factors of Operational Efficiency?

Applying an operational efficiency strategy can be done by categorising and reviewing operations. 

The following four aspects are the most critical for businesses to properly manage if they hope to achieve operational efficiency. 

Resource utilisation:

Organisations rely on both human resources and material inputs to create their services and/or products. By allocating resources optimally, you can eliminate waste and maximise revenue. 

To illustrate, finance teams often use the input of data to create the output of financial statements and/or information that’s needed for decision-making. Without automation, finance processes are generally time-consuming, error-prone and have high opportunity costs. 

By utilising financial automation tools, businesses can optimise their resource allocation, freeing up employees’ time to focus on high level task and achieve operational efficiency. 

Production:

Importantly, any business that operates in manufacturing will need to focus on production to accomplish operational efficiency. With the money and time you invest in creating an output, you’ll look to optimise processes and equipment. 

A surefire way to make this happen is by automating processes. Even if you work in an industry that is not manufacturing, you’re likely carrying out time-consuming processes. By automating processes, you can free up employees’ time, expedite production and reduce costs. 

Inventory management:

Inventory is considered to be an asset on a balance sheet, but it can end up becoming an operational liability (i.e. there’s risk associated with holding onto inventory). Inventory costs money to hold onto and move. 

For operational efficiency to occur, there must be proper management and balance to have enough inventory to meet consumer demand, but not too much to misallocate capital. One way to better manage inventory is to utilise predictive analysis and forecast future demand based on historical data. 

Distribution:

Software analysis can be used to boost efficiency in distribution channels. Consider applying operations research to find the quickest/most cost effective way to move goods from point A to point B and deploying creative solutions to reach levels of efficiency.

How to Improve Operational Efficiency

Organisations and teams have many opportunities when it comes to how to improve operational efficiency. 

From implementing automation solutions to leveraging data, let’s review some of the tried and true ways to make it happen.

Automating to Reduce Manual Processes:

Automation exists in several forms. Businesses can leverage robotic process automation (which is at the heart of many software solutions) to take over manual and tedious processes from humans. In turn, employees can allocate their time to high value tasks, instead of repetitive and data-heavy duties. 

Furthermore, intelligent automation can be applied, which combines robotic process automation with machine learning so that the computer itself can make logical decisions based on the ability to spot patterns and trends. Through automation, you can immediately reduce errors (save time and money), streamline processes, and eliminate key person dependencies.

Managing Employees’ Time:

When you think of a corporate setting, tradition has dictated that employees should be working from 9-5. However, expecting and measuring progress and efficiency based on an employees’ input time, rather than measuring outputs may prove fruitless. Instead, you can utilise technology to better understand when there is demand for any given job duty. It’s often the case that organisations experience workload spikes and down time. 

Allocating human resources according to need can help to reduce costs. The aforementioned deployment of automation solutions will also aid in managing employees’ time better. For example, if your accounting team spends weeks conducting account reconciliation to meet financial close deadlines, then they may miss opportunities to aid in business decisions that can increase revenue. 

By implementing automated reconciliation, the process can take minutes instead of weeks and your team will reduce the possibility of missing deadlines. 

Developing Finance Strategy:

Scaling a business and maintaining operational efficiency relies on having good financial strategy and management in place. Operationally, it all comes down to numbers. So, when you’re seeking new ways to boost the bottom line, you’ll have to consider margins, opportunity and costs, which all call upon having a strong finance strategy in place.

Leveraging Technology:

Technology is dramatically impacting businesses in so many positive ways. But, technology is only as good as the people who use and review it. Implementing lean and scalable infrastructure, standardising data, using RPA, visualising inputs and outputs and integrating systems are a few ways to make the best use of technology. All of this can be accomplished with financial automation software.

How to Measure Operational Efficiency

Operational efficiency can be a moving target. There’s always room for improvement within business processes, but you have to be measuring inputs and outputs to realise this in the first place. 
In order to do so, you’ll want to outline key performance indicators (KPIs) that help you ascertain whether or not you’re meeting your goals. For operational efficiency, these measures tend to be related to quality, value or efficiency. By collecting said data, you can utilise automation software to gauge when you hit the mark or miss the mark by creating operational efficiency reports.

Wrap Up

Operational efficiency is a great goal for any type of organisation to have. It undoubtedly plays a part in increasing profits and reducing waste. In order for finance to strategically accomplish operational efficiency, the use of automation software can prove to be pivotal. 

Data automation tools are helping businesses of all sizes to be able to measure inputs and outputs, automate processes, get deeper and more accurate insights, save employees time moving them away from low value manual tasks to high value tasks and reduce waste throughout. 

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