Do you suspect that inefficiencies in your business are increasing your costs, keeping you from meeting demand or hurting profits?
Operational efficiency encompasses several strategies and techniques used to accomplish the basic goal of delivering quality goods to customers in the most cost-effective and timely manner. Resource utilization, production, distribution and inventory management are all common aspects of operational efficiency. The most critical factors vary by the nature of the business — manufacturing, distribution or retail
What Is Operational Efficiency?
Operational efficiency is primarily a metric that measures the efficiency of profit earned as a function of operating costs. The greater the operational efficiency, the more profitable a firm or investment is. This is because the entity can generate greater income or returns for the same or lower cost than an alternative. In financial markets, operational efficiency occurs when transaction costs and fees are reduced.
- Resource Utilization
Getting the most value from resources and eliminating waste in production and operations are operational efficiency considerations. From a labour perspective, you want to get the most production or sales results possible from your employees. You also want your financial investments and the materials used in operations to generate the highest possible revenue. Achieving efficiency in your costs of goods sold and overhead costs is a key aspect of building a high profit margin.
- Production
For manufacturing companies, efficient production is a major element of operational efficiency. This includes optimizing equipment, product processes and employee output so that you produce the greatest number of quality products possible with the time and money invested. Manufacturers often invest in lean manufacturing training to identify wasted production steps to cut out any non-revenue-generating activities or work steps. Achieving efficient production helps manufacturers get greater mark-up on sales to distributors and ensures the end customer gets a good value.
- Distribution
Distribution efficiency is key for manufacturers, wholesalers and retailers. In fact, many distribution channel partners collaborate in distribution efficiency through supply chain management. This involves software-driven analysis to find the most efficient ways to move goods from manufacturer to wholesaler and from wholesaler to retailer. Efficient routing and delivery scheduling are common aspects of efficient distribution. Some companies get creative in other ways to eliminate waste or inefficiency. Non-competing companies might share truck space, for instance, to avoid less-than-full loads if they move goods on similar routes.
- Inventory Management
For all distribution channel members, inventory management is key in operational efficiency. The just-in-time inventory concept has become common in many distribution channels. Product resellers typically only want to produce or hold enough inventory to meet immediate demand. Excess inventory costs money to manage, move and throw out, in some cases. Manufacturers, therefore, must exercise caution in producing just enough goods to meet demand. Resellers only want to buy goods they expect to sell soon. This is a delicate balance, though, because you don’t want to run out of products and alienate customers.
Hear from our master trainer, Mr. Andrew Cheah on a webinar on Operation Efficiency.
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