Operational Efficiency: What it means & How to adopt it
Updated: Aug 17, 2022
Have you ever felt like no matter how productive your team is your profit margins stay the same?
You are not alone in feeling this way!
In this article we will walk you through the basics of operational efficiency and provide some real life examples to better understand how it can impact your business.
What is operational efficiency?
It is the ratio of your business's inputs (the costs of producing your products and services) to outputs (the revenues generated by selling those products and services).
How do I calculate my operational efficiency?
Operational Efficiency = Cost of producing a product or service / The revenue earned from the product or service
What is the difference between productivity and efficiency?
Many leaders confuse productivity with efficiency, but they are very different.
Productivity is simply a measurement of output and the main goal is to understand how many products or services can be created per time interval, with out considering cost or quality. For example, if you were to measure the productivity of a landscaping business, you may consider things like:
How long does it take to cut one lawn?
How many lawns can we cut in one day?
How many customers can we service in one week or one month?
Where efficiency is measured by the cost to produce a satisfactory product or service and the main goal is to understand how costs can be reduced to produce the same product or service. If we use the same example you may consider the following:
How much fuel does it take to cut one lawn?
How many wages are paid per lawn cut?
How long does it take to cut each lawn?
It is easy to see that productivity and efficiency complement each other! Most businesses want to produce more products or services per unit of time but not compromise the quality of the product or service. This balance, when implemented correctly, results in increased operational efficiency for the business.
What are the downsides to operational efficiency?
When considering improving operational efficiency, it is important to understand the risk associated. In some cases, requiring staff to be too efficient can result in mistakes being made and ultimately set a business back from its intended goal.
Do you have data to support the power of operational efficiency?
Yes! Here are some stats to help you understand the potential operational efficiency has!
The average employee is only productive for 2 hours and 53 minutes per day.
41% of employees say their productivity is limited due to stress. Additionally, 80% of employees state that ineffective communication causes workplace stress.
Too much multi tasking can decrease productivity by up to 40%!
Productivity is so crucial to business success, the US Bureau of Labor Statistics tracks productivity across all of the major industry segments and uses that data as a tool to measure the strength of our economy.
Businesses lose $600 billion a year in workplace distractions.
Less than 1/4 of professional service organizations consistently achieve profit margins greater than 40%
How will making decisions based on operational efficiency shape my company?
Measuring, monitoring, and managing your company's operational efficiency will improve the performance of your staff, which will lead to increased production, increased revenue, increased profit... and so much more! Operational efficiency can reduce workplace stress, highlight the strengths of your staff, and open the door to new possibilities for your business.
Where do I start?
Each business is unique, and so are your goals! Depending on the type of business, the goals for the business owner, and many other factors, improving operational efficiency will require a different path to follow. If you are looking for support in improving your operational efficiency, schedule an initial consultation with a Galaxy Consulting Group professional!