Operational Efficiency

By Tuesday November 29th, 2016 Operations

The most concise (least technical) definition of operational efficiency is provided by Webopedia.com: “Operational efficiency is the capability of an enterprise to deliver products or services to its customers in the most cost-effective manner possible while still ensuring the high quality of its products, service and support.”

Operational efficiency is an important concept because businesses need to understand how much inputs they will need to produce a satisfactory output. This is a complex issue because efficiency does not mean basic cost cutting. Companies usually need to measure cost on one hand and quality of the product, services, and support on the other.

Operational efficiency is complex because it needs to be measured by multiple channels. These metrics usually serve multiple stakeholders, such as the producers of goods or services and the sellers of those same goods or services. In this case, there needs to be agreement on the cost/quality ratio for everyone to be satisfied.

Because we are measuring cost on the one hand versus quality, we need to find broad measures that satisfy all stakeholders. For example, brokerage firms have operations departments that quantify the cost of clearing trades, while the sales department wants to ensure that the trades are serviced quickly and correctly. So the end goal for a brokerage company is to clear trades quickly and accurately (taken together, we will call this quality), while still minimising the staff associated with each trade.

The quality component is easily monitored through an error report, and a time to execute report (which should be within some pre-determined time, as ultimately determined by the customer).

The cost component is more difficult to assess. There is a significant support network of IT specialists, accountants, mailroom staff, computers, leased lines, and other pieces of overhead that are needed to allow operations to function to the satisfaction of the sales and customer support staff. This an all-in cost that needs to be determined and understood in order to determine the actual cost of operations (total cost).

As you reduce these total costs, quality might suffer. The efficiency frontier lies where your quality is acceptable to the customer given a certain level of inputs.

In our example, one problem was identified. The company should only be satisfied when it consistently hits its benchmark (efficiency frontier), as determined by industry standards or the arbitrary demands of senior management. It is an iterative process, which requires constant measurement, control, and management

In summary, companies need to determine what they must measure, by determining what problem they are trying to solve. Companies will reach operational excellence when they reach the desired cost/output ratio through iteration and rightsizing.

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