What is operational efficiency?

08/08/2023

In conclusion, adopting measures to increase operational efficiency is not just a winning strategy for manufacturing companies, but a universal approach for any type of enterprise aiming for success. It's not just about acquiring new technologies, but about reviewing and optimizing every aspect of business management, from strategic planning to human resources management, through to process organization and space utilization. Reducing waste and increasing efficiency not only reduce costs and improve profits but also contribute to a more rewarding work environment for employees and greater customer satisfaction.

Companies in any industry can take surprisingly simple steps to reduce waste and make customers and employees happier while improving profits. Imagine that everything in the company runs smoothly. Products and services are always of high quality and on time. Customers love us and employees are motivated and engaged. It sounds unbelievable. This utopia is achievable with the help of operational efficiency.

How to achieve operational efficiency?

Operating efficiently means using resources such as time, people, equipment, inventory, and money in an optimized way to serve the business. Efficient companies are leaner, more agile and more productive. Operational efficiency is often mistakenly considered only for manufacturing companies and is about buying better and faster machines. Service and distribution companies also get significant returns from efficiency projects. And it is not necessary to purchase new technology to achieve significant gains (although it can be helpful). In fact, the first step is usually to better manage the team, processes, and information to reduce waste and create more value for customers. Operational efficiency elevates organizations to a level of business maturity that many Italian companies face today. And when they reach the first results from the programs they have started, they say, “We should have done this years ago.”

Operational efficiency helps eliminate waste

According to some estimates, in the average small and medium-sized business, only 15 to 20 percent of an employee’s workday is spent on purely productive activities. The goal of an operational efficiency mindset is to reduce or limit the time spent by workers on non-value-added activities or inefficient processes. By maximizing the amount of value-added work done by employees, the exercise of operational efficiency can make a company much more competitive and pro!bile. Business leaders are often amazed to realize how much waste actually exists in their company.

What is waste? And what are the benefits of reducing or eliminating them? Companies are often equally surprised by the simplicity of some of the changes and the substantial benefits, such as reduced costs, lead times, and production rates:

  • reduced costs, lead times, and accident and error rates
  • more satisfied customers and workforce
  • greater clarity for the team on how the company operates
  • greater adaptability to new business challenges and opportunities (such as those posed by the pandemic)

Improving efficiency can (and should) be a key part of business strategy.

Many business owners believe that constantly “fighting” or controlling crises means that their company is being run effectively. In reality, the business owner has become a victim of this “noise,” and crisis management is the norm. Operational efficiency is about reducing the “noise.”

Imagine a company that is running out of space in its facility and is planning to purchase another building. With targeted consulting and the initiation of an operational efficiency program, the company might find that it is wasting a lot of space in the existing facility and then find ways to reorganize production more efficiently. At the end of the project, the new building will no longer be needed and the company will find itself with extra area in the existing facility, which it could sublet by generating additional income.

How to diagnose operational efficiency problems?

The typical situation is that a company’s leaders begin to get bogged down or exhausted from continually trying to put out fires, are bombarded with emergency requests, ever-changing customer needs, or employees grappling with constant interruptions to their day. Leaders spend their time being reactive and do not add value by proactively preventing problems before they occur.

Lack of attention to fundamental problem-solving

Operational problems often accumulate over time, imperceptibly, as companies grow ad hoc, adding new employees, machinery, and processes in a haphazard manner and with inadequate strategic planning. You find that you run out of space in the building, detect a lot of defects and fail to meet customer demand, or work a lot of overtime without meeting targets.

How can to improve operational efficiency?

You might suspect that there are inefficiencies in your company if you are experiencing effects such as declining profits, difficulty in meeting demand, or even loss of revenue. The good news is that you can quickly increase productivity with an operational efficiency exercise. Operational efficiency exercises generally follow the following steps:

1. Understand the current state. An assessment of the current state generally includes:

  • a review of financial performance
  • calculation of employee productivity metrics and benchmarking against peer companies (e.g., using the value creation index)
  • site visits, interviews, and workshops with owners, management, and employees to understand the company’s
  • vision, goals, strategies and culture
  • policies and organizational structure
  • processes, workflow (e.g., using a process map) and bottlenecks
  • analysis of areas of waste (e.g., wasted labor, time, movement, resources, or space) guided by lean principles
  • assessing the company’s efficiency in different areas, such as quality control, inventory management, and work methods
  • studying the root causes of problems, using tools such as root cause analysis (e.g., a herringbone or ishikawa diagram) and pareto analysis

The truth about business processes

It is not uncommon for business leaders’ perceptions of how things work to differ significantly from what actually happens in the field. It is important to have a clear view of the entire company, not just the problem areas. If you just try to solve problems without a good understanding of the whole company, you may just make more effort and not get to the root causes. We don’t want to put a band-aid on a problem. We want to solve the fundamental problem. That said, if there is an urgent problem, a temporary solution can be proposed to quickly right the course, and then take the time to work on long-term solutions.

2. Develop Priority Projects and an Action Plan

The next step involves using the current state assessment to identify a priority list of solutions that will have the greatest impact in addressing the root causes of problems.

Projects can be divided into two groups:

  • Quick projects that can be completed in the next four weeks or slightly more. It is useful to have up to three of these underway at the same time and assigned to high-level individuals who have the responsibility and authority to make positive changes.
  • Additional projects are to be carried out over six to twelve months. These involve more company-wide and organizational-level changes, which may affect different departments or units of the company. It’s important to identify all the stakeholders who need to be involved and empower them to make recommendations and changes.

For both types of projects, it is necessary to create an action plan that specifies who will carry forward each initiative, a timeline for completion, and key performance indicators (KPIs) or milestones to monitor progress and impact.

Among the operational efficiency projects commonly recommended for many SMEs:

  • Improving the Management Skills of SupervisorsSymptoms: Supervisors often have little or no managerial training, projects are not completed, and lack of planning leads to errors and delays.Solutions: Active human resource management and improved communication.
  • Creating a More Organized, Clean, and Efficient WorkplaceSymptoms: Workspaces are full of clutter, items are lost or misplaced, and safety risks cause accidents.Solution: 5S Methodology.
  • Implementing a Performance DashboardSymptoms: No idea how the company is doing.Solution: A dashboard with KPIs and goals.When setting priorities for solutions, it is essential to have a holistic view of the company: an efficiency program to triple production, which may seem like a great success for the company, can actually lead to chaos in the packaging and shipping departments if they are not ready to handle the increased volumes.

    Care must be taken not to push the bottleneck, or the challenge, downstream.

3. Establish the Right Performance Indicators (KPIs)

To achieve production objectives, ambitious yet realistic performance goals are needed. If goals are achieved, it means the work has been done well and the new approach should be standardized. If the goal is not met, it’s important to understand why and establish a strategy with the team to achieve it. Goals that will never be met create frustration in the team, whereas goals that are achieved every day are too easy, and therefore not stimulating.

These are some of the most common KPIs used to measure operational efficiency:

  • Quality: Often measured by observing the percentage of waste. This indicator is often combined with a customer indicator (e.g., the percentage of returns or the number of complaints).
  • Efficiency: In relation to production cost. This indicator is often measured by comparing the expected time for the execution of an identified task with the actual time spent on that task.
  • Lead Time: Often considered the most important indicator, lead time measures the time taken from order receipt to final delivery, with the goal of significantly reducing production times, waste, and errors, and increasing customer satisfaction. This measure usually has a cascading effect on other indicators.
  • Health and Safety: Companies track the number of days without accidents or the number of days without minor incidents. The COVID pandemic has created a new aspect of this measurement: companies had to ensure that no employee was affected by the virus.

4. Implement Change and Continuously Improve

Changes within a company often encounter resistance from employees. It’s important to give the team the time, resources, and support (including information, training, and tools) necessary for successful implementation.

Good practices for managing change include:

  • Obtaining Consensus: Explain how the change will solve problems, make life easier for the team, and lead to more satisfied customers. Employees need to be convinced that the change will be beneficial. They need to be educated about the reason for the change and its importance for their role and their customers. Change for its own sake is never good.
  • Meeting Regularly: Organize regular team meetings to monitor progress on KPIs or milestones, review dashboards, and follow production planning, thus holding everyone accountable, celebrating successes, and identifying areas for improvement. A brief daily meeting (10-15 minutes) is usually sufficient – in a crisis situation, these meetings can be held twice a day, at the start and midday, to help the team adapt quickly.
  • Updating the Plan: Once the action plan is completed, the exercise must be redone, creating a new action plan for the next six or 12 months: this way, a culture of continuous improvement is created.
  • Encouraging Team Participation: The number of process improvements introduced by the team can be measured. It is crucial to train employees to understand the basics of operational efficiency (such as waste and added value). A good method to present implemented improvements is, for example, making a one-minute video (quality doesn’t matter, but content does): sharing it with the organization stimulates creativity and motivates people.

Companies must commit to constantly reviewing their operations and optimization methods, prioritizing their employees, facilitating their work, and ensuring their satisfaction and sense of accomplishment every day.

5. Introduce Digital Technologies

Companies must consider digital technologies 4.0 from the beginning when embarking on an operational efficiency journey. Thinking of the shop floor, for example, these technologies include digital production dashboards, which provide a real-time visual representation of performance indicators. These data help alert key personnel to situations that require immediate attention, or to detect and analyze the root causes of unplanned downtime and waste. A daily program management system is another type of indispensable software, think of manufacturing companies, but it can also be extended to service companies: it allows managers to monitor the progress of a project, an activity, or a process and can help automate workflow, task assignment, and reminders while ensuring clarity of roles and responsibilities.

In conclusion, adopting measures to increase operational efficiency is not just a winning strategy for manufacturing companies, but a universal approach for any type of enterprise aiming for success. It’s not just about acquiring new technologies, but about reviewing and optimizing every aspect of business management, from strategic planning to human resources management, through to process organization and space utilization. Reducing waste and increasing efficiency not only reduce costs and improve profits but also contribute to a more rewarding work environment for employees and greater customer satisfaction. In a rapidly evolving and increasingly competitive world, operational efficiency is no longer an option, but a necessity. Companies that engage in this path often find that the benefits far outweigh the initial investment, not only in economic terms but also as a continuous improvement of their corporate culture.