Erickson, Brown & Kloster, LLC Newsletter for Thursday, September 23, 2021
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Do You Have Operational Efficiency?


Optimal output is the dream of every business leader. But in real life, pressures and priorities mean managers spend most of their time putting out fires, putting Band-Aids on problems and losing the momentum they need to tackle long-term goals because they're dealing with the crises at hand.

A strong strategy for getting on track is to measure the time and resource cost of your inefficiencies by examining redundant tasks and efforts, points of delay or production excess. Assess how you can cut any non-revenue-generating activities or work steps.

Operational efficiency is a matter of producing the same output with less input. Improving efficiency will decrease the effort and resources you use. Once optimized, you can take steps to improve productivity. When operational efficiency is healthy, your business cuts down on unnecessary costs while increasing revenue so you can produce high-quality products or services with as few resources as possible.

To decrease extraneous costs, you need to be able to identify which processes aren't needed. You’ll need to figure out a baseline for your operations, which are the functions that make your organization run. Knowing your baseline helps you understand how each part of the company carries out its duties.

Operational efficiency is a function of your output and input. Your output may be revenue, sales, cold calls or customer satisfaction. Your input may be resources, people hours, licenses or something else entirely. To calculate your efficiency:

  • Decide which output and input variables are most appropriate for your organization.
  • Record your performance and compare it against industry standards. (This gives you a reference point to measure improvements.)
  • Review the baseline of operations and identify the functions and goals in each part of the company.
  • Understand the key players involved when it comes to executing those functions and goals.
  • Review how much time it takes to achieve these goals and the quality of work done each step of the way.
  • In each step, identify bottlenecks that make the process slower and are unnecessary for completing the task.
  • Remove these bottlenecks.
  • Measure performance and compare it to the previous baseline to track improvements. Make sure the quality of work done along the way is not impaired.
  • Track performance by creating reports or a dashboard. Convene your team at regular intervals to discuss performance and areas of improvement.

Drilling down to the details

There's a lot more to operational efficiency than cutting costs. It takes strategy and forethought, and you need to sustain the benefit of operational efficiencies over a period of years.

Technology decisions should be measured by the operational benefits they provide. Assess the operational efficiency gained with technology and see how the customer data platform fundamentally transforms how you'll understand and interact with customers.

Most companies are focusing on tactical business and marketing metrics and not paying much attention to operational efficiencies that drive not only key metrics, but also more efficient ways of working.

Productivity and efficiency are often used interchangeably, but they're actually different. Operational efficiency is about doing the same with less, while productivity is about doing more with the same, according to the Harvard Business Review. For a manufacturing company, a rise in productivity would mean that the same number of machines produces more widgets, but greater efficiency would mean that the company could sell a machine and keep making the number of widgets it was making before with less overhead.

Resource utilization, production, distribution and inventory management are all aspects of operational efficiency. The nature of your business will determine the critical factors for your firm. Create a culture of continuous improvement and you'll start to see the results in productivity, cost containment, employee morale and profitability.

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Erickson, Brown & Kloster, LLC
Erickson, Brown & Kloster LLC
Phone: (719) 531-0445
4565 Hilton Parkway Suite 101
Colorado Springs, CO 80907
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Any accounting, business, or tax advice contained in this communication, including attachments, is not intended as a thorough, in-depth analysis of specific issues or a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, Erickson, Brown & Kloster, P.C. would be pleased to perform the requisite research and provide you with a detailed analysis
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