The bottom line is often emphasized when talking about how to keep a business solvent. But focusing only on money disregards the processes that contribute to profits. Operational efficiency is another way to look at work when you’re delivering a service or product, particularly popular in manufacturing.
What is operational efficiency and how can you measure it to take advantage of its benefits? Let’s start with the definition and explore how to improve operational efficiency in addition to ways that using project management software can help manufacturers.
What Is Operational Efficiency?
Operational efficiency is a metric used to measure the ratio between the input that’s necessary to keep the company going and the output it provides. Input includes your operational strategy, operational costs, employees and time, and output is what’s gained such as rapid development times, quality, revenue, customer acquisition and retention.
Companies use this metric to reduce wasted time, effort and/or materials. This is executed by streamlining operations to work more cost-effectively. Redundant processes are eliminated as is any waste found in the processes. To achieve these goals, companies look at resource utilization, production, inventory management and distribution.
Resource utilization seeks to reduce waste in production and operations. Organizing production and making sure both your employees and the equipment they’re using are working efficiently is another way to increase production. Regarding distribution, efficiently handling end products such as routing and delivery can make a big difference. Inventory management strives to produce and manage inventory to meet demand but not exceed it to avoid costly warehousing.
Operational efficiency improves with project management software. ProjectManager is online project management software that streamlines processes with automated workflows. By setting up triggers that automatically create actions, you’re eliminating wasted time and freeing your employees to focus on more important tasks. To ensure that you meet quality expectations, task approvals can be set. Only authorized people can change the status of work to make sure nothing shoddy passes through your production. Get started with ProjectManager today for free.
How to Measure Operational Efficiency
When it comes to measuring operational efficiency, the formula is simple. As simple as it might be to measure, it’s not an easy task. But it’s worth the effort. Operational efficiency is a great performance indicator, and the more operational efficiency you have, the lower your costs to make the same amount of money.
As noted, automation is a great tool to increase a company’s operational efficiency. It’s a way to avoid wasting valuable resources, but reducing waste and increasing efficiencies will positively impact a company’s bottom line. Whether you’re in a big company or a smaller one, there’s always room to increase operational efficiency. First, you have to know how to measure it.
Operational Efficiency Formula
As noted, the formula for operational efficiency is straightforward. You simply add the operating expenses in the company and then divide that sum by your total revenue.
Operating Expenses / Total Revenue = Operational Efficiency
Taking a hypothetical company, let’s call it Acme Widgets. Say its operating expenses are $100,000 and the company generated annual revenue of $1 million. In this operational efficiency example, the operational efficiency is 0.1.
Operational Efficiency Ratio
The operational efficiency ratio is the same as taking our operational example above and turning it into a percentage. This can be quickly calculated by dividing operating expenses by the total review and then multiplying that sum by 100.
Operating Expenses / Total Revenue x 100 = Operational Efficiency Ratio
For our operational efficiency example, the operational efficiency ratio would be 10 or 10 percent. This operational efficiency example shows how you can make the same or more revenue in a more cost-effective way by reducing your operational efficiency rate. Numbers don’t lie. It’s clear that the lower your operational efficiency rate, the higher your company’s operational efficiency and sustainability.
How to Improve Operational Efficiency
It makes sense that operational efficiency should be top of mind, especially for executives. It’s a more controllable way to deliver profits but as we said, it’s easier said than done. The equation is simple, but getting your operational efficiency down is more complicated than basic mathematics.
There are different strategies to achieve operational efficiency. These aren’t perfect for every company, but there are some that are more universal than others. However a company chooses to move forward with its operational efficiency strategy, it often requires less input for the same output, more output for the same input, changing the number of outputs or increasing outputs and inputs.
1. Understand Your Operation
The most important start to any operational efficiency strategy is knowing your operation. You can’t improve what you don’t know. Begin by researching every aspect of your operation and evaluating the different areas of your business. Use performance metrics analysis and audits to further your understanding of operations and where there is waste and room to improve.
2. Share Information with Employees
Operational efficiency is boosted by sharing critical information with your employees. By keeping everyone on the same page, you’re improving efficiency but also flexibility. As the market changes or competitors cut into your profit, you can be more nimble and quickly respond to these market forces. That only happens when everyone is working on current and accurate data. Streamline communication both externally with customers but also internally between departments.
3. Emphasize Employee Training
Naturally, training is important to make sure your workforce is up to speed with the latest technology in your market. Keeping your employees well-trained on processes and systems means that they’ll work these processes and systems better. You can coach or mentor employees in order to make sure they’re always updated on best practices for operational efficiency.
There’s also a business philosophy of continuous improvement, which never is content with the status quo and is constantly striving to reduce waste. This should be embraced by your company. That means always being on the lookout for improvements across the company, small and large. A little change can have a big impact on quality, cost and production times.
4. Refine Your Processes
Another thing to do is to review and refine your processes, which is the heart of operational efficiency. This is why automation is so important; it can streamline repeatable tasks, including administrative duties that are time-consuming but can be easily automated (think invoices, quotes, proposal development and reporting). As mentioned, you’ll want to review your work to ensure you’re improving.
5. Factor in Your Financial Strategy
Of course, the financial strategy must be part of operational efficiency. You can audit cost centers, list all expenses associated with producing your product, and do a root cause analysis. To maintain a good and consistent margin for your company, invest in shorter-term projects (less administrative work, less planning and lower financial commitment). Avoid low-margin work as best you can.
Related: 6 Free Project Report Templates
Regardless of the production, finance, administration, sales, etc., you want to always be measuring performance. That means monitoring and tracking as many project metrics as you can to get a full picture of how you’re doing and where you can do better. If you can do this automatically and in real time, the better. But any type of performance measurement is going to go a long way in helping you achieve operational efficiency.
ProjectManager & Operational Efficiency
Being able to leverage technology is going to help you collect more accurate data, which in turn helps you improve your operational efficiency. ProjectManager is project management software that delivers real-time data for more insightful decisions when seeking operational efficiency. We have the tools to streamline your communications and help you better monitor and track performance, all in real time.
Connect Everyone in Real Time
Manufacturing involves coordinating different departments in your company with suppliers and outside vendors. Our online software means everyone is connected no matter where or when they work. We have unlimited file storage that makes our tool your central hub for invoices, quotes and more. These files allow for sharing, comments and reflect updates to the production schedule. Any updates made to tasks instantly trigger email notifications and in-app alerts so you don’t have to search through emails. Everything you need is in the tool.
You can’t improve if you don’t know where you are, but you also need to collect current data. Our real-time dashboards automatically collect and calculate live data and display metrics in easy-to-read graphs and charts. This high-level view allows you to find waste and apply improvements where needed. Unlike inferior dashboards, ours requires no setup. There are also customizable reports to pull more details when you need to take a closer look at the time, cost, tasks and more. Reports can be generated with a click and easily shared with executives.
Not everyone in the company is going to use the same tools which is why we have multiple project views. What’s the point of connecting departments if they can’t work how they want? Best of all, our automated workflows are available on every project view, which improves your operational efficiency from the get-go. No matter what goods or services you provide, we can help you do it more efficiently and differentiate yourself from the competition.
Related Operations Management Content
- Operational Planning: How to Make an Operations Plan
- Operational Strategy: A Quick Guide
- Operations Management: Key Functions, Roles and Skills
- Using Operational Excellence to Be More Productive
ProjectManager is award-winning software that helps improve efficiencies through better collaboration and real-time monitoring and tracking of performance. We have features that help you plan, manage resources and more. Join teams from NASA, Siemens and Nestle who use our software to gain operational efficiency. Get started with ProjectManager today for free.