What is operational efficiency?

In today’s global economy, businesses ranging from manufacturing companies to transportation providers face increasing pressure from stakeholders to achieve greater operational efficiency. In fact, achieving operational efficiency can be critical in competitive markets as it empowers companies to offer high-quality products and services at lower prices while maintaining or increasing profitability. In one global survey of chief executive officers, 77% said they would pursue operational efficiencies to drive total revenue growth.¹

There are a variety of software tools and platforms—powered by artificial intelligence (AI) and the Internet of Things (IoT)—available to help companies achieve operational efficiency. These include integrated workplace management systems and enterprise resource planning software. Through software solutions, organizations can implement approaches like automation, process mapping and more to optimize the business.

Organizations often use a metric called “the operational efficiency ratio” to measure operational efficiency. They commonly calculate the ratio by adding the company’s operating expenses and cost of goods sold (COGS), and then dividing that sum by the company’s net sales.

Businesses may also choose to assess efficiency through other metrics, such as ratios focused on accounts payable turnover, accounts receivable turnover and inventory turnover.

Companies can gauge how well they’re doing with regard to operational efficiency by tracking their ratios over time and comparing them to industry benchmarks. A lower or declining ratio indicates that a company is improving its operational efficiency performance.

Process improvements and better resource utilization can help companies make progress on key performance indicators (KPIs) and achieve business goals such as:

Businesses can undertake a variety of strategies to improve operational efficiency. While initiatives may vary by industry and company, here are some common ones:

Automation is the performance of tasks using technology, with little to no human input. Automating previously manual processes, such as replacing manual spreadsheet data entry with data capture solutions, can improve efficiency and avoid human errors while freeing team members to perform more high-value, meaningful work.

Through predictive maintenance, organizations can monitor the health of their assets, including infrastructure and machinery, in real-time. This enables them to address problems as they occur as well as forecast future problems, extending asset lifecycles and helping to prevent costly, unplanned equipment downtime and slowdowns.

Process mapping is a method for visually representing workflows. This helps organizations identify areas for improvement, such as time-consuming, inefficient processes, sub-optimal resource allocation, tasks prone to human error and production bottlenecks.

Inventory management entails tracking goods as they move from manufacturing facilities to warehouses to, ultimately, the location where they are sold to consumers. Optimizing inventory management can reduce the amount of time spent and lower costs for keeping goods in storage while ensuring enough goods are available to meet customer demand.

Through business process outsourcing, companies can contract with external providers that specialize in specific functions, such as invoicing and payment processing. Specialist providers often operate more efficiently and be more cost effective in comparison to in-house teams.

Energy management is the proactive and regular monitoring, control and optimization of energy use to limit consumption and decrease energy costs. A 10% decrease in energy consumption is associated with a 1.5% increase in net operating income, according to calculations by the US’s Energy Star program.²

Training and development programs that help employees hone their skills or build new ones can improve their productivity, leading to greater operational efficiency. In addition, increased employee satisfaction resulting from skills training can help bolster employee retention. Reducing employee turnover can also support operational efficiency since hiring and training new employees is typically more expensive than retaining existing ones.

Operational efficiency is sometimes used interchangeably with the term “operational excellence.” However, operational efficiency is generally understood to encompass not only more efficient business operations but also the creation of a culture in which both managers and team members are invested in business outcomes and continuous improvement.

Evolving technology is offering companies various opportunities to improve operational efficiency. Organizations increasingly incorporate the Internet of Things (IoT) in their operations management and predictive maintenance work. Meanwhile, artificial intelligence (AI) powers insights that help businesses optimize inventory management, facility use and more. Software solutions that leverage such technologies to support operational efficiency include:

An IWMS is a software platform that streamlines real estate and facilities management onto a single platform. IWMS solutions can offer visibility into real estate portfolios through built-in dashboards and mobile apps. Research shows that IWMS can improve facility usage efficiency by more than 39% and reduce maintenance costs by over 15%.³

An ERP is a business management software system designed to use automation and integration to manage and streamline a company’s workflows, processes and functions. Such functions include finance, HR, manufacturing, services, procurement, supply chain management, product lifecycle management and project management.

Energy management software uses IoT, connectivity and energy data analytics to provide insights to companies for better decision-making in regard to facility management and energy conservation.

Advanced process mapping tools offer centralized platforms that enable teams to collaborate and gain insights as they work to continuously refine business processes.

Smart order management tools empower businesses to perform real-time inventory and warehouse management, including tracking inventory levels and implementing omnichannel order fulfillment.