Operational efficiency

In a business context, operational efficiency can be defined as the ratio between an output gained from the business and an input to run a business operation. When improving operational efficiency, the output to input ratio improves.

Inputs would typically be money (cost), people (measured either as headcount or as the number of full-time equivalents) or time/effort. Outputs would typically be money (revenue, margin, cash), new customers, customer loyalty, market differentiation, production, innovation, quality, speed & agility, complexity or opportunities.

The terms "operational efficiency", "efficiency" and "productivity" are often used interchangeably. An explanation of the difference between efficiency and (total factor) productivity is found in "An Introduction to Efficiency and Productivity Analysis". To complicate the meaning, operational excellence, which is about continuous improvement, not limited to efficiency, is occasionally used when meaning operational efficiency. Occasionally, operating excellence is also used with the same meaning as operational efficiency.

Improving operational efficiency begins with measuring it. Since operational efficiency is about the output to input ratio, it must be measured on both the input and output side. Quite often, company management is measuring primarily on the input side, e.g., the unit production cost or the man hours required to produce one unit. Even though important, input indicators like the unit production cost should not be seen as sole indicators of operational efficiency. When measuring operational efficiency, a company should define, measure and track a number of performance indicators on both the input and output side. The exact definition of these performance indicators varies between industries, but typically covers these categories:

If the intention is to compare numbers with others through benchmarking it is important to define, measure and track performance indicators for load and complexity as well. Even within the same industry, customer behaviour might e.g. be significantly different between two markets (or two countries) leading to one company having to assign more resources and cost to handling of customers. Not measuring such load and complexity factors might lead to incorrect conclusions on operational efficiency.

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