Improving operational efficiency is never a one-time process for any business. As markets change, competitors advance, technology progresses and customers evolve, businesses have to continually iterate to improve margins, reduce costs, and improve quality. It's not an easy task, but there are ways to holistically improve operational efficiency from every aspect of a business.
What Is Operational Efficiency?
Operational efficiency is all about how businesses reduce waste, improve productivity, and improve the quality of their products and services. It's the ratio between inputs required to keep a business afloat and the outputs they provide. Inputs are things like employees, equipment, raw materials, etc., while outputs are products, customer retention, and more — essentially operating costs vs profit.
- Improving operational efficiency is everyone's job — not just for workers and not just for leadership. All levels should be involved in contributing to reducing costs and improving profits.
- While equipment, technology, and processes are key in reducing errors and improving productivity, so are the human elements in any business. Don't forget to put people first and listen to employees as they often know the daily and inner workings of a business.
- Don't be afraid to take advantage of the latest technologies to automate more. Predictive AI and machine learning can benefit all aspects of a business from marketing and sales to production and customer service.
17 Steps to Improve Operational Efficiency in Businesses
Improving operational efficiency is about more than cutting costs and raising prices for the sake of ratios. Businesses have multiple cogs turning at the same time, and all of them need to be addressed to improve operational efficiency. Whether done internally or through an outside consultant that sees a business with a fresh perspective, improving the costs to profits ratio enters every level and every system of a business.
1. Go “undercover boss”
While there are benefits to seeing things from 30,000 feet, getting into the daily work that makes a business run can help managers see where big operational inefficiencies are. The reality TV show “Undercover Boss” had business owners don disguises and work beside the employees who were preparing orders, packing boxes, washing dishes, and more.
Former UniFirst President and CEO, Ron Croatti, was featured on the show. “Despite the fact I had some difficulties performing many of the various tasks, I was pleased to see the systems and procedures we have in place to ensure quality and customer satisfaction are working nicely in the field,” said Croatti.
He later went on to implement changes based on the lessons he learned from working on the ground level. “The job specifications for sorting towels included the use of a sorting table developed for 25-pound bags of product. In practice, the bags actually weigh 75 to 125 pounds or more, and the contents cannot fit on the table. That's a significant difference that impacts how the sorting job can and should be done,” he said.
Business owners don't need to wear a costume to see the benefits of this approach, though. Doing the work with your employees gives them the opportunity to show and communicate with managers what's causing bottlenecks, glitches in the system, or mistakes in the final product.
It's easy for business owners and managers to make assumptions around inefficiencies based on assumptions or observations but making the effort to regularly work alongside employees means they will see firsthand what's causing issues.
“Too often we establish rules, protocols, and training programs by simply 'observing' various jobs rather than actually 'doing' them," Croatti said. "We need to become more informed by 'doing' the tasks prior to developing or refining job requirements, policies, and new service offerings.”
2. Document and review processes
Undocumented processes can't be reviewed, which means they can't be improved. Creating documentation for even the most insignificant tasks ensures consistency so that repetitive tasks don't have to be redesigned each time. Creating a written, standardized process also means that anyone on the team can take over duties at any given notice.
Many small businesses that do not document procedures often have a single employee or team that knows how to complete certain tasks. If those individuals leave or become indisposed, no one else would be able to take up the process without significant delay, confusion, or errors.
Process documentation also reduces ambiguity so everyone on a team knows exactly what they're responsible for, how to complete the task, and the order of tasks to help reach important KPIs and OKRs. Plus, it can help train new employees on best practices and what to do when things don't go to plan.
Once the documentation outlines all business procedures, business owners and managers can take employee feedback and engage in an iterative routine of reviewing and improving processes. A good process review begins with a deep understanding of the document's objectives.
Once goals are established, reviewers can assess the efficiency of the process by looking at the resources consumed by the process and the quality of the output versus the established standards. Depending on the business, efficiency might be measured by process reliability, first-pass yield, throughput, and value-added ratios.
3. Increase across-department communication
Communication is a value many companies add to their mission statements, but don't deliver on when it comes to daily practice. In fact, “28% of employees cite poor communication as the reason for not being able to deliver work on time,” says Duncan Lambden for business supplier consultant firm Expert Market.
Improving a business's operational efficiency hinges on departments communicating openly, frequently, and easily. A few ways to improve cross-departmental communication include finding the right communication technology and tools and finding ways to communicate regularly.
With the COVID-19 pandemic expediting many companies' efforts to go hybrid or virtual, online messaging and meeting tools are part of the daily working landscape. Slack, Zoom, and others are table stakes for many businesses now — even those that have in-person offices.
But companies need more than just the tools to facilitate communication. They also need a culture of open, frequent, and even over-communication. It starts with CEOs and founders and goes through managers and their teams. Leadership can determine what messages cascade down to teams about the company as a whole and what's going on in other departments. For example, in most companies, it's critical that marketing knows what product is working on ahead of time to formulate campaigns, prep website copy, and create demand for a product release.
Open communication for operational efficiency is about more than just telling everyone everything, it's about ensuring that everyone feels comfortable asking questions, seeking clarification, and voicing concerns across departments.
4. Reduce silos
Along with increasing communication across the company and encouraging departmental transparency, find ways for departments to work together to achieve goals and complete projects.
“In silo formation, it is important to realize that individual divisions often have necessary, but conflicting priorities. Usually, when organizations turn into silo, it's because goals, and any compensation tied to those goals, reinforces silo-oriented behavior,” say Hossein Vatanpour, Atoosa Khorramnia, and Naghmeh Forutan in their 2013 study, Silo Effect a Prominence Factor to Decrease Efficiency of Pharmaceutical Industry. “In an organization, the silo effect limits the interactions between members of different branches of company, thus leading to reduced productivity.”
The keys to reducing work siloes are ensuring there are company-wide goals and that everyone on board understands their role in contributing to them. The idea is to encourage collaboration and incentivize everyone to work together to hit those KPIs. This helps eliminate the “us v.s them” mentality across departments and even up and down the management hierarchy.
By finding ways for teams to work together, managers can reduce duplicate work, minimize handoff time between departments, and eliminate mistakes and waste.
5. Be transparent with information
Managers and business owners often think too much transparency will slow down business processes. Being too open about changes, business decisions, and other information only opens the opportunity for feedback that could prevent quick moves and key business decisions. However, transparency before big business changes occur can help save time and improve efficiency in the long run. This also means being open and honest not only from the top-down, but listening to and asking for transparency among employees, too.
In a study of EU lawmakers, administrative sciences researchers Gijs Jan Brandsma and Albert Meijer, “did not find evidence of a correlation between transparency and decision-making efficiency. We therefore reject our hypothesis: transparency neither speeds up nor slows down decision-making.”
However, making transparency work for your business is about more than just telling everyone everything. It requires a thoughtful approach to prevent the negative effects of too much transparency. In many scenarios, facts require context, and complete business transparency with no context can create a culture of blaming individuals for larger issues, cause distrust between teams or groups, and increase resistance.
“Transparency alone does not create a healthy culture, facilitate the shift of knowledge into performance, or improve trust,” says David De Cremer, management studies professor and writer for the Harvard Business Review. Instead, the keys to effective transparency include explaining what goals transparency will help the company achieve, outlining how the information will be collected and distributed, emphasizing learning, and promoting forgiveness, according to De Cremer.
6. Focus on customer service and sales responsiveness
Efficient customer service and sales responsiveness prevents issues before they happen. When customers understand what they're getting before they buy and felt heard throughout the service process, there are fewer returns and more repeat clients (and referrals!).
Faster sales responsiveness can be facilitated through automation and decent segmenting. If the right leads can get information quickly and then get routed to the best sales contact, it's likelier that they'll get what they're looking for and convert into a customer quicker.
Proactive customer support and service is more than just an opportunity to make an unhappy customer happy again, but it means delighting customers through the research and buying processes and beyond. Reaching out proactively also gives customer support and sales the chance to work together to drive even more sales and grow revenue.
Just like in marketing, sales and customer service or support often believe they know what their clients and contacts need. But just as the market changes, so do people's wants; so, it's critical to seek feedback regularly. Seeking and then adjusting to feedback means your sales and customer support teams aren't wasting time and money on outdated processes or responses. Plus, they're keeping those positive lines of communication open to upsell or receive word-of-mouth referrals.
7. Improve order fulfillment
With the age of Amazon Prime and instant order tracking, customers often expect short shipping times — even with global supply chain issues. The key to fast shipping is fulfillment efficiency. The quicker you can get a product out the door, the faster it can get into your customers' hands. Fulfillment bottlenecks or gaps can cut into profits and even slow the growth of your business.
The top way to improve your fulfillment process efficiency is to make sure your inventory metrics are accurate in the first place. If your stock room doesn't match your website or ordering system, your business will suffer from deadstock, backorders and stockouts. You can prevent these issues by spot-checking, creating a thorough labeling system and using automation and inventory management systems to eliminate manual data entry mistakes.
Another way to ensure your fulfillment process isn't holding you back is to create a warehouse layout that enhances efficiency and speed. This includes mapping out the layout, making the best use of your space, choosing the right tools and equipment to fulfill orders, and organizing the storage area efficiently.
These previous steps will help businesses increase their pick rates, or how quickly it takes to retrieve a product from the warehouse and move it to the order container and picking accuracy. Improving picking speed is all about decreasing travel time for warehouse pickers. Meanwhile, picking accuracy is measured by how many times a correct product is chosen and packed.
8. Reduce bottlenecks
Bottlenecks exist at all levels of an operation. Oftentimes we think of them as purely floor-level issues, but they can happen all the way through to leadership and ownership. Leaders at the top of a business who can't adapt as the company scales often slow growth, cannot manage resources properly during times of quick expansion or refuse to let go when it's time to delegate.
In production, the keys to reducing bottlenecks include noticing the signs before it grinds the process to a halt. Bottlenecks can often be more than just a single person. They can be caused by poor communication, a badly managed process, a single piece of equipment, a certain software, flaws in sales workflows, or even the overall morale or attitudes of staff. Essentially, you have a bottleneck when one aspect of your procedure or process functions at a much lower volume or speed than any other step in the operation.
Reducing bottlenecks can come down to adding or lowering capacity. Businesses can contract out work until the causes of the slowdown have been addressed and a longer-term plan created. This could also give managers time to retrain staff and seek feedback on the production processes to prevent further bottlenecks and fix existing issues.
Of course, equipment and technology maintenance are also critical to reducing bottlenecks. Ensuring everything runs smoothly and there are no unnecessary shutdowns can mean a more productive process. Bottleneck spotting, fixing, and prevention are all ongoing processes. It's not a one-and-done fix, but something to stay vigilant about.
9. Track KPIs and performance metrics
Every business owner and manager wants to believe they're data-driven, but if key performance indicators (KPIs) aren't established and measured, then they might as well be winging it. A KPI is a way to quantify progress toward a specific business goal. If a procedure isn't moving the business toward that goal in some way, then it may be affecting the operational efficiency of the company or department.
Operational KPIs include those that fall under marketing, retail operations, sales operations, logistics, customer service, IT operations, and HR operations. To cover all bases, ensure KPIs are both long- and short-term goals. It's important to verify that the KPI you create fits your industry. Marketing agencies will have very different goals and measurements than manufacturing, for instance.
KPIs that work for any given business have practical value and are something people within the organization can act on to achieve. For example, asking a new hire to research, select, and completely revamp your marketing automation system in just four weeks is a near-impossible task.
A good KPI is measured at the right frequency, whether it's daily, weekly, or even annually. The tracking interval needs to make sense for what you're measuring. A product that takes a month to manufacture or assemble may not be measured on a weekly basis. Meanwhile, a spend metric like cost per click (CPC) in online advertising would need to be checked at least every day or week to ensure the business isn't wasting money (if saving money is the KPI). Establishing (or refining) your KPIs and tracking them can lead to more efficient operations in all departments.
Performance metrics are like KPIs, but often have an industry benchmark beyond internal company goals. Metrics often identify what's already happened and how a person or team performed, but they don't necessarily provide the steps for what to do next. It''s still important to measure them for the business, however, because they give us an idea of how efficient the entire production process is — or isn't. Measuring performance metrics can tell a business owner or manager why the company isn't hitting its KPIs.
10. Manage financial strategies
To maintain operational efficiency and scale a growing business, it's critical that companies have a sound financial strategy in place. The competition is always innovating, and the market is constantly fluctuating. While many business owners must be flexible with their finances, they also need a blueprint to maintain healthy margins.
“Most professional service firms have operating profit margins from 25-40 percent. This means that out of every dollar of revenue, 25-40 cents drop to their bottom line as pre-tax profits,” says David Finkel for Inc.com. Creating a project financial analysis can determine which clients, projects, products or services are improving your operational efficiency and financial status and which aren't working well for your business goals.
Businesses can also manage their financial strategies for greater operational efficiency by working to perfect their workload balance. Products or services with a long sales cycle or a longer-term production cycle can mean a lower daily rate of work than if these projects were balanced with some shorter-term projects or products. However, a business shouldn't run on just short-term, urgent projects either. A balanced workload of different types of projects can help ensure business owners are never left waiting for invoices to clear.
11. Leverage automation and technology
One of the easiest ways to improve operational efficiency is to leverage technology and automation. While there's never a “set it and forget” mindset with technology, automation can eliminate the human errors that decrease efficiency. Technology can also prevent issues before they happen and investigate where bottlenecks or other issues are occurring in a process. This improves quality and production efficiency.
Automation is more than just an “if-this-then-that” scenario. AI and machine learning can take technology usage to the next level including basic, process, advanced, and “intelligent” automation. Businesses use automation for everything from sending email marketing correspondence to targeted segments all the way to performing dangerous industrial tasks in unmanned vehicles to keep employees safe.
The key to using automation and technology effectively is ensuring the free flow of data and analytics. This means giving up antiquated spreadsheets and moving to systems that allow the collection, organization, analysis, and distribution of data to all departments in a business automatically. This level of data automation allows managers to make decisions based on current information without having to worry that the latest spreadsheet is updated and correct.
When configured and used to the best of its capabilities, automation can help businesses make higher quality products, improve profitability, keep workers safer and increase overall operational efficiency to help meet and exceed KPIs.
12. Change your workplace culture
The adage that “if you do what you've always done, you'll get what you've always gotten” rings especially true in business operations. Employees are the lifeblood of a business and a negative culture without a business can mean unsatisfied workers, higher turnover, and poor production. Each business has its own unique culture based on its mission, core principles, leadership styles, and company KPIs. These values also depend on the products or services offered.
If managers and leadership haven't considered what the culture of the business is, it's time to consider creating it purposefully. It may seem contrary to the emotionless world of business, but it's critical to propagate a company culture of trust and relationship building among teams. Data from MIT Sloan School of Management found that the more trust companies build with their employees, the more productive and satisfied those employees were.
In the study, researchers Richard Locke and Monica Romis studied two Nike factories in Mexico. In one, employees did not have the agency to make choices about their own work. In the other, employees had the autonomy to make decisions about the speed of their work and the order of activities. The employees who were trusted to make their own decisions about their work were twice as productive and produced units at a much lower cost. Changing your culture for the better improves operational efficiency, financial margins, and turnover rates.
13. Offer employee training
To make operational efficiency a priority throughout the ranks of an organization, employee training is critical. Training should be for everyone — not just those on the production line. As technology improves, everyone on the team should be involved in continuing education to stay informed of best practices, regulatory changes, and company policy updates.
Training can be cross-functional so employees can learn what the overall workflow looks like and their part in it is. It can also include training leadership on better people management, the latest HR technology, and how to set OKRs and KPIs for the business and their employees.
Employees can be trained on new methodologies and processes, the latest equipment or technology, or even relationship management within their own departments. Employees are also more likely to stay when they feel as though management is investing in their career development and helping them advance their knowledge in their field.
Keep training top of mind for everyone by creating programs to incentivize the use of newly learned knowledge, highlighting when team members display their new skills, and posting any new processes and procedures around the workplace to keep best practices at the forefront.
14. Put people first
Many companies believe they put their customers first but being a people-first company is also about making sure your employees feel like they're being put above profits and shareholders, too — and turnover is expensive. Listening to employee feedback can improve morale and bring to light issues that managers or leadership may not see from where they sit.
Having compassionate and accessible leadership can also make employees and customers feel like they're contributing to a brand that is about more than just lining their pockets. Oftentimes, employees may not feel like they have the chance to talk to the “higher-ups” or the leadership team. This can take the form of all employee meetings with transparency into KPIs, goals, missed targets, and other issues. Sharing the good and bad can make people at all levels feel involved. It can also mean skip-level meetings where everyone can talk to their boss' boss about plans, processes, gripes, and wins.
Putting people first also means putting customers and even potential customers first, too. Being people-centric means being sensitive to what's going on in the world and in the lives of your target market. Focus on messaging, make sure it's appropriate to your market, and apologize when you miss the mark.
So how does all this improve operational efficiency? Talking to employees makes sure you're not missing the minutiae of the daily work but also ensures that leadership can be aware of issues, bottlenecks, and processes that need to be changed. Plus, focus groups of your target market can help you know what they want and expect from your company and how to best message and market to that group. It may seem like an extra step or a nice-to-have, but people-first perspectives improve efficiency just as well as process improvement or financial strategies.
15. Remove barriers to success
Bottlenecks reduce the production levels of departments and teams just like barriers to success reduce the accomplishments of team members. Along with listening to your team and putting people first, it's critical that business owners and managers also make the effort to remove barriers to success for their teams and the individual members.
One way to do this is to learn what employees enjoy about their jobs, what they want to be doing (it's ok if it's not this job forever!), and what their ultimate career goals are. The key is to help them reach those goals or get as close to them as possible within your organization. Employees that feel heard and invested in will, in turn, invest in their jobs and the company.
Removing barriers to success can also come down to removing any unrealistic expectations or outdated process requirements. If we go back to the “Undercover Boss” example with Ronald Croatti, former CEO of UniFirst, he discovered that the requirement that employees button the damp cotton shirts before pressing them proved near impossible.
"We press all of our shirts at no additional charge because we feel that's important for our customers' professional image," he said. "I've asked for a test of snaps to replace the top buttons on some of our 100% cotton shirts to make the pressing job easier. Snapping is much faster than buttoning when it comes to wet garments and such a change should speed up the pressing line considerably. Ultimately that's good for our production employees and good for our customers."
Removing these barriers to success makes work easier, makes employees better at their jobs, and also works for customers.
16. Iterate and focus on continuous improvement
Improving operational efficiency is a constant effort. As markets change, technology advances, competition improves, and customers evolve, businesses must keep up. Each of the steps listed above should be revisited regularly and some may even require outside consultation to see things from a fresh perspective.
Leadership and managers should set regular intervals of checking in on procedures and find ways to continually improve operational efficiency. In every business, there are opportunities to improve, iterate, and stay ahead of the competition. Even small advancements can have impacts on costs, productivity, employee happiness, and quality at scale.
17. Utilize ERP software
Enterprise resource planning (ERP software) is a single solution for business management that covers all bases — supply chain, financial, order, warehouse, and inventory management. All-in-one software allows businesses to see all their data and forecasting in a single place, so they can make better decisions, free up time, automate repetitive tasks, identify new opportunities, and more.
Ambassador Foods helps brands, mostly from outside the country, enter the U.S. foodservice market. Using ERP has given the company the ability to negotiate with food distributors about pricing while knowing the exact margins they need to stay profitable. Plus, their staff saves time not having to do the manual work of verifying the numbers. “Because our entire business is in NetSuite [ERP] in real-time, I have more trust in my reports because I know the information is correct,” said Opher Yunger, owner of Ambassador Foods.
ERP helps companies improve operational efficiency by streamlining more manual processes, giving everyone access to real-time data to make better decisions, managing supply chains even as buyer behavior shifts, and meeting demand by planning inventory accurately.
Improving Operational Efficiency Doesn't Have to Be All-Consuming
By taking the steps above one at a time and constantly iterating, improving operational efficiency doesn't have to be an all-consuming task. It's a task that can be done little by little in daily, weekly, or monthly steps, and is better done step by step than waiting until the business is forced to do it all at once. Getting buy-in from all levels of an organization and making it everyone's job is one way to delegate the responsibility. Keeping lines of communication open and rewarding transparency can reduce issues, improve product quality, and help businesses retain highly trained employees, too.