Economics/Business

What is operational efficiency/importance/How to calculate/tips to increase

The new coronavirus pandemic is responsible for a general wave of uncertainties, both in the health area and in the corporate environment. Companies have implemented new ways of working, for example, remotely, in an attempt to stop the contagion. Faced with this scenario, it is necessary to reorganize and improve the good old concept of “doing more with less”. This is where the need to implement operational efficiency comes in.

The home office is the alternative to avoid mass layoffs. However, shutdowns are taking place and experts estimate around 20 million unemployed in Brazil due to the pandemic .

Still, even if dismissals are not the best solution to face the crisis, many managers choose to resign, believing it to be a form of savings. When, in fact, the ideal is to review processes and reduce costs, without cutting people.

In this article, we will understand the concept of operational efficiency and its importance within companies. In addition, we will talk about the difference between strategy and operational efficiency and we will know methods to calculate the indices and make them satisfactory. Finally, we present some practical tips and steps that can be implemented to achieve the goals.

What is operational efficiency?

When we turn to the dictionary to understand the meaning of efficiency, we find words like productivity, performance and yield. Still, there are others that are related, such as benefit, usefulness, utility.

According to Michaelis Online , it is about “the ability to produce an effect; to do a job well or perform a job properly.” That’s in the dictionary, but in the corporate world, how do we define efficiency?

In the context of organizations, efficiency is linked to the idea of ​​improving processes so that the company achieves its purposes. But to achieve it, managers seek to reduce operating costs.

And operating costs do not only refer to the money used to produce goods or services, but also to the equipment and materials used, the people involved in the processes and the workforce.

Therefore, operational efficiency represents the ability of a company to provide services or products with maximum economy, without harming the quality of what was produced. After all, the most important thing is to be able to extract sustainable results as time passes, right?

In short, it is spending less and selling more, without affecting the quality of the product or service. Still, more economical processes that result in items with proven quality result in operational efficiency for the company.

How important

Applying operational efficiency in an organization means producing more and with quality using fewer resources and controlling waste. But how important is this for the company?

Implementing operational efficiency in the organization results in knowing the business itself. In addition, it can be the limit between a company’s loss and profit, so it is very important to know how to apply it properly.

If a company’s processes run correctly, it runs like clockwork. However, the opposite represents an increase in costs, low productivity, reduced quality in products and services, in addition to lower-than-expected results.

Thus, when an organization invests in operational efficiency, it can identify problems and seek agile solutions, which generate results with the best cost-benefit.

How to measure operational efficiency?

To calculate operational efficiency, it is necessary to divide production (revenue, sales, incoming leads, etc.) by input (resources, hours worked, personnel, etc.).

Always remember that efficiency is about producing the same result with fewer resources.

Each manager must take into account the output and input variables that match the company. These variables are determined through performance indicators.

Operational efficiency and business performance is not just about producing more with the same resources. It is being able to identify in which areas there are “waste” that can be easily eliminated to increase efficiency.

The manager should focus on making the most of these metrics to go beyond cutting costs, but finding a strategy to understand how the organization operates.

How to calculate the operational efficiency index?

Calculating the operational efficiency index in a company is quite simple and does not require much mathematical knowledge. Just know the cost of the inputs (input) and what the return of the outputs (output).

In other words, the inputs represent the costs, the people involved in the processes, the time spent and the work applied. Outputs are the products and/or services offered by the company.

Operational efficiency is achieved when we achieve the ideal balance between these two factors. Therefore, the formula is simple: the ratio of inputs to outputs results in the company’s operational efficiency.

It is worth remembering that the inputs and outputs will be specific, according to each company and the complexity of the business.

Difference between productivity x efficiency

Many people consider productivity and efficiency to be synonymous, but they are actually two different concepts.

Operational efficiency means delivering the same quality in less time. Productivity means producing more.

To improve the productivity of your IT team, you need to invest in infrastructure and resources to improve team performance. In an IT team, improving productivity is about improving the performance of IT technicians. If it were a retail store, improving productivity would be increasing sales.

Operational efficiency is related to maintaining quality of service, with fewer resources. In the case of an IT team, it would be keeping a reduced team, but capable of producing more.

What is the difference between strategy and operational efficiency?

To understand the difference between strategy and operational efficiency, it is necessary to bring in the contribution of Professor Michael Porter. Doctor in Economics and professor at Harvard, Porter helped numerous organizations and was a consultant to several governments.

According to the theorist, operational efficiency is not a strategy. However, both are important in the business world. In an article called “ What is strategy ”, published in the Harvard Business Review, Porter defines:

Operational efficiency is the ability to do better what competitors already do. While strategy is to do things that competitors don’t do and, thus, stand out in the market.

In a very simplified way, in an analogy you will never forget: imagine that the market is a great desert. When walking through it, your company needs to manage the available water, set up camp and defend itself from animals. These actions represent the management of operations and operational efficiency comes from it.

The efforts that the company needs to make to find the best source of water, set up the safest camp and escape dangerous animals represent the strategy used.

Do you understand the difference between strategy and operational efficiency? Easy, isn’t it?

How to achieve operational efficiency?

As we saw at the beginning of the article, operational efficiency is strongly linked to the processes that a company carries out to produce its products or services. Therefore, knowing each stage very well is essential.

Thus, to achieve operational efficiency, it is necessary to map the organizational processes to verify three points:

  • if there is waste;
  • if they occur with quality;
  • if they are making a profit.

If the manager identifies failures in these steps, the solution is to find alternatives to eliminate each of them. Below, we list practical actions to implement an operational plan that ensures efficiency:

  • have suppliers that offer discounts for bulk purchases;
  • try to implement motivation programs among employees, for example, a Profit Sharing Program or gamification ;
  • encourage your employees to “put on their shirt” and promote engagement ;
  • pay special attention to equipment and software, avoiding late maintenance and renewal;
  • seek to store accurate data and avoid acting on assumption;
  • keep inventories updated and controlled;
  • observe if employees occupy positions for which they are prepared. If not, try relocating them to improve productivity .

Attentive to these tips, the manager will have greater control over the organization’s processes. So, if you identify failures that reduce profits and quality or increase waste, you can look for alternatives to ensure operational efficiency.

How to improve the efficiency of a company?

The purpose of this content is to help companies increase their profitability, improve management and prevent possible crises, that is, achieve operational efficiency.

For this, it is necessary to have a strategy, map and constantly reevaluate processes. The company’s leaders must always be attentive and prepared to correct the route, if necessary.

Therefore, always study the business situation and the company’s positioning in the face of competition. Fix processes that don’t meet the organization’s needs. To do so, listen to the leaders and ask for reports.

In addition, production costs should not be neglected. Knowing how to identify them is essential to avoid waste that can change the final price of products or services. Therefore, if there are flaws in the processes, they must be mapped and corrected.

Keep in mind that these actions need to happen on a constant basis and not just serve as palliative measures. With planning and strategy, processes can be more assertive or must undergo adjustments in search of the desired operational efficiency.

What are the tips to increase operational efficiency?

After knowing the concept and understanding why it is important to have this criterion in organizations, it’s time to take action. Here are 10 practical tips to increase operational efficiency in your company. Follow:

  1. seek strategic partnerships: they are important to expand the company’s productive capacity;
  2. take care of human capital: have qualified employees in the workforce, adapting their skills to the work they perform and maintaining a good level of motivation among them;
  3. have a market vision: thinking about the future of the organization is important to define demands and not frustrate expectations. Keep the focus on what customers need, but know how to predict what they may need;
  4. find new sources of revenue: do this while not ceasing to invest and reducing costs. Still, it is worth renegotiating contracts with partners and suppliers and reducing bank expenses;
  5. have good financial planning: always seek lean budgets and renew them monthly, if possible. Even small variations must be considered carefully;
  6. assess exchange rate risks: whether the result of exports or imports, exchange rate variations can directly affect companies. So be aware of the world economic scenario. If possible, negotiate purchases in local currency;
  7. Be careful with financing: granting credit tends to be more difficult in times of crisis. Therefore, have a good resource planning to avoid surprises and not get into financing;
  8. look for innovation: be open to technological support and look for innovative products and services. Give preference to low cost;
  9. Invest in Outreach: Look for smart, self-sustaining ways to promote your product or service. Therefore, be sure to invest in communication, promotions and advertising, even in times of crisis;
  10. be willing to adapt: ​​flexible and easy-to-deploy processes, people and systems can be critical to surviving in a competitive market. Remember that business is never static, no matter the industry.

By following these tips — and implementing others that may emerge as a viable alternative — we hope that it will not be necessary to reduce costs based on layoffs. The priority is to preserve human resources and intellectual capital, after all, these are the company’s most valuable assets.

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