Introduction
Whether you’re running a business or managing a department, growth always comes with a new set of challenges.
Maintaining team collaboration. Cutting down on delays and errors. Maximizing employee performance. Every aspect of your daily operations can turn into a burning pain.
That’s why high-growth companies aim to consistently improve operational efficiency and sustainably boost the bottom line. Put simply, operational efficiency defines the best possible way of using your resources to run your business/team smoothly and gain profits.
Let's dive deeper into the concept of operational efficiency to learn why it’s important for today’s businesses. I’ll break down the best tools and tactics for operational improvements.
TL;DR: Operational efficiency
- Operational efficiency is the ability of an organization to reduce waste in time, effort, and materials while maintaining high-quality output.
- It focuses on reducing waste, streamlining processes, and improving quality control.
- Setting efficiency goals, defining KPIs, and implementing tactics are key steps in improving operations.
- Tools like automation, SOP documentation, and data analysis can enhance efficiency.
- Monitoring metrics and adjusting strategies are essential for long-term success.
What is operational efficiency?
Operational efficiency measures the ratio between:
- Inputs or resources required to run a business, like employees and equipment, and
- Outputs or results produced, like products or services.
It calculates the profitability of your business by estimating whether you’re able to recover the cost of your inputs and gain a profit or not.
The concept of operational efficiency aims to reduce waste in any form—time, materials, customer acquisition, customer retention, and similar. You can improve operational efficiency through initiatives like:
- Setting a baseline of operations.
- Eliminating unnecessary steps in a workflow.
- Optimizing production resources.
- Creating SOPs for employees.
In essence, improving operational efficiency focuses on streamlining business processes to increase output or reduce production time.
Efficiency vs. productivity
The concept of business efficiency is different from productivity. Productivity is a measure of output that estimates the amount of products produced or work completed in a given time.
Higher productivity can mean more products are produced. But higher efficiency means more high-quality products are produced using the same or fewer resources.
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How to create a baseline of operations for your business
Ready to prepare the groundwork for your business operations? Let’s break down five critical stages of building the baseline for long-term operating efficiency.
1. Outline the biggest bottlenecks setting you back
Before you set out to improve operations, you should know what you need to improve. This helps you create a baseline of operations and measure operational efficiency.
While there’s no easy way to find the answer, most teams dig into their biggest weaknesses—what’s holding you back from hitting your targets?
Here are three key areas to investigate when trying to identify your biggest bottlenecks:
Processes
If you struggle to build systems your team can consistently follow, you’re not alone. Confusing, chaotic or inefficient processes are the ultimate Achilles heel for many teams.
You need to map all business-critical internal processes on a whiteboard and find where people get stuck. And don’t do this process mapping exercise in a closed conference room! Ask all the people involved in each process to collect relevant insights. These insights will turn into your scope for process improvement.
Communication
Communicating within a team of five is no big deal. But effective communication within a team of fifty is a Whole. Different. Ballgame.
When businesses don’t prepare the right channels and guidelines for team communication, they end up paying the cost of operational efficiency.
Poor communication can only lead to mistakes and missed targets. That’s why you should take a closer look at your communication systems to work toward operational improvement.
Resource allocation
Some teams are over-staffed, while others lack support—sounds familiar?
You might have the strongest communication setup and airtight processes. But it can all go down the drain with improper resource utilization. So, zoom in on any of these anomalies and inconsistencies to optimize resource allocation.
2. Define efficiency goals and performance indicators
Setting goals might feel like a no-brainer and the kind of blanket advice you read everywhere for everything.
But setting efficiency goals doesn’t work on the same logic as other aspects of your business. You have to do some legwork and think critically to lay down your goals for operational efficiency.
Here are a few best practices I found while researching how organizations approach goal-setting for improving operations:
- Consider your value chain: Look at your entire business operations to identify key activities and processes that add the most value to your brand. Dedicate more resources to these areas to boost process efficiency and deliver more value to your customers.
- Set dynamic goals: Create dynamic goals to quickly adapt to market trends and evolving customer needs. You can also plan your goals according to planned improvements in internal infrastructure and use a quarterly review cycle to track progress.
- Align efficiency with CX: Operational efficiency can drive actual ROI when customers are satisfied with your product/service. So, it’s not about producing something quicker or cheaper. Instead, align your efficiency goals with the improvement in overall customer experience.
- Create cross-functional teams: Break down silos within your organization by setting up more cross-functional workflows. You can create a ripple effect of efficiency from one team to another by maximizing collaboration between different departments.
Goal-setting is just half the battle. You also need the right operational KPIs to review your performance, measure operational efficiency and make strategic improvements. So, choose relevant performance indicators that align closely with your operational processes.
For example, if you want to enhance delivery times, you should consider the average time from order to delivery as a KPI. Then, set a benchmark for your team to collectively work toward.
3. Chalk out tactics for improving business operations
- Finding gaps ✅
- Setting goals ✅
- Selecting KPIs ✅
- Eliminating areas of waste ✅
Now, you’re all set to create your operations improvement roadmap with select tactics to drive efficiency.
Here are some key strategies to improve operational efficiency and reduce costs.
Identify and eliminate waste
- Conduct waste audits: Assess different areas of operation to pinpoint inefficiencies, wasted materials, and redundant processes.
- Encourage employee feedback: Create avenues for employees to report waste or suggest process improvements.
Leverage automation for streamlining processes
Workflow automation is your key to unlocking faster results without errors.
- Start by identifying the most repetitive, low-value and time-consuming tasks in your operational plan.
- Find the right tools (or build your own) to automate these tasks/processes.
For example, you probably spend your team’s precious time creating invoices every week or month. You can easily automate this process with an invoice generator.
Maximize standardization with SOPs
Knowledge gaps can quickly dig a big hole in your revenue pipeline. Your operational efficiency takes a direct hit when employees struggle to find the right information or make mistakes due to inaccurate guidance.
That’s why you need SOPs to build consistency across the board. SOPs allow you to document every crucial detail about a process, so your employees have everything they need to perform the task.
And with a tool like Scribe, creating SOPs is a walk in the park!
Scribe does all the heavy lifting to take screenshots, annotate them, capture text + keystrokes and a lot more while you simply capture your screen as you walk through a process. And you’ll get a visually packed step-by-step guide in just a few seconds.
Here’s a Scribe in action:
Say yes to data for decision-making
You can’t rely on guesswork or your gut to improve operations. Instead, you need real, concrete data to drive business efficiency.
Data can reveal everything about your business, like:
- What tasks or initiatives are driving growth?
- What are your employees’ or customers’ expectations?
- What are the key trends in your operations this quarter?
- Which areas or activities are negatively impacting revenue?
Collect data about different aspects of your business to find opportunities for improvement and define your overall strategy.
Invest in employee productivity
Your employees are a critical factor in your operations. When you support their growth, you fuel your business growth—it’s as simple as that.
So, focus a part of your strategy on improving employee productivity through the right tools and processes. You can nurture an environment of continuous learning and hold regular check-ins to understand their expectations from work.
Optimize resource allocation
- Right-size inventory management: Implement just-in-time (JIT) inventory management to minimize storage costs and waste from obsolescence.
- Cross-train employees: Equip employees with diverse skills, allowing them to fill multiple roles and improve productivity during fluctuations in workload.
4. Pick the right tools and resources for your workflows
Once you’ve outlined the tactics for enhancing efficiency, you can start building your tech stack. Give your team the right tools and resources to implement these tactics strategically rather than wasting hours on a particular initiative.
Here are some essential tools you need to build operational efficiency:
- Time tracking tools like Toggl, Clockify and Harvest.
- Tools like Asana, Trello and ClickUp for project management.
- Documentation tools like Scribe and Notion.
- Process automation tools like Zapier.
- Team wiki tools like Slab and Slite.
The best way to build your tech stack is to work as per a budget. You can map tools to different tactics or goals, and choose the ones that fit into your budget.
5. Measure success and decide on the next steps
The final stage in this process is monitoring crucial operational metrics to track performance regularly. You should create a success framework to objectively assess your progress and set milestones for the coming months or quarters.
This step will tell you how effectively you’re able to fix the problems using your current set of tactics. It also reveals whether you need to go back to the whiteboard to rethink your strategy.
Case study: How a marketing operations manager multiplied efficiency with process documentation
When Lynne Miller joined a real estate company eXp Realty as marketing operations manager, her role was solely to increase operational efficiency across the marketing department.
What was her best bet to fulfill this massive responsibility? Process documentation with Scribe.
Lynne quickly noticed the team’s manual approach to documentation processes with Google Drive was creating process discrepancies and wasting time.
She leveraged Scribe to automate the SOP creation process for:
- Creating an extensive library of FAQs.
- Breaking down critical processes into visual step-by-step workflows.
- Sharing information and providing answers in seconds.
With Scribe, Lynne reduced documentation time, tracked processes, and created a visual workflow for larger teams to access.
Want to replicate Lynne’s success? Grab this free operational plan template to start documenting your goals and priorities as the first step.
FAQs
What is the operational efficiency ratio?
The operational efficiency ratio, also known as the operating ratio or efficiency ratio, is a financial metric used to evaluate how well a company utilizes resources to generate revenue. It measures the proportion of operating expenses that a company incurs for every dollar of revenue earned.
The operational efficiency ratio formula is:
Operational Efficiency Ratio = Operating Expenses / Net Sales
- Lower ratio: Indicates better efficiency, as the company is spending less per dollar of revenue generated. This implies effective resource utilization and cost management.
- Higher ratio: Indicates lower efficiency, as the company is spending more per dollar of revenue generated. This could be due to various factors like inefficiencies in operations, high overhead costs, or lower profit margins.
Limitations of the operational efficiency ratio:
- Doesn't consider non-operating income and expenses: The ratio solely focuses on operational expenses and net sales, excluding non-operating items like investment income or interest expenses.
- Industry-specific: Interpretation of the ratio can vary depending on the industry. For example, a higher ratio might be considered acceptable in a service-oriented industry compared to a manufacturing industry.
What is operational effectiveness?
Operational effectiveness refers to maximizing resource utilization to outperform competitors in producing goods and/or services.
Like operational efficiency, operational effectiveness involves:
- Streamlining processes.
- Reducing or eliminating waste.
- Improving quality control.
- Enhancing productivity.
Next stop: Planning for operational efficiency
Operational efficiency isn’t limited to cutting costs for increasing profits. It’s an intricate balance of resources going into your business and output produced.
As your business scales, you inevitably have to plan for operational efficiencies to create sustainable growth. And the sooner you start planning for it, the fewer blockers you’ll deal with in the long run.
So, sign up for Scribe to document processes and empower employees with the right knowledge at the right time.
