How Operational Efficiency Works: Tips for Improved Efficiency (2024)

Running your company can feel like a never-ending journey toward a more efficient version of yourself. You’re constantly thinking about how to do more with less and build that finely tuned tomorrow. It’s this spirit that keeps small businesses afloat in today’s hyper-competitive marketplace—and underpins the necessity of an essential business metric: operational efficiency.

Steven Gmelin, vice president of digital sales and strategy at ALOHA, and Chad Stark, CEO of STARK carpet, understand how operational efficiency impacts their business. “I look at operational efficiency as a challenge and a mandate to never be fully satisfied with the current state of the business,” Steven says.

That mandate has helped Aloha hit $100 million in revenue in 2024. Let’s explore the substantial benefits of operational efficiency, and learn strategies to improve efficiency in your own venture.

What is operational efficiency?

Operational efficiency, broadly, means ensuring your business’s internal processes run as smoothly as possible. A business becomes more operationally efficient when it generates more income or returns than it spends on operating costs. The greater a business’s operational efficiency, the more profitable it is—and the more attractive an investment opportunity it presents.

“Operational efficiency is about getting things done right, delivering products or services in the most cost-effective way without cutting corners on quality,” says Chad Stark of STARK Carpet, a custom luxury carpet and rug company. “It’s all about streamlining processes, cutting out waste, and maximizing resources to keep costs low and customer satisfaction high.”

How to measure your operational efficiency ratio

The operational efficiency ratio is a tangible metric for business owners to precisely measure business efficiency by comparing profit margins against the entire business’s operating costs.

Operating costs include both costs of goods sold (COGS) and operating expenses (OPEX). It adds OPEX to COGS, then divides that number by net sales. The formula is:

Operational efficiency rate = [(OPEX + COGS) / net sales] x 100

The resulting number, expressed as a percentage, indicates the portion of net sales absorbed by costs. That rate can be used to gauge operational efficiency when compared against industry benchmarks or a business’s own targets and past performance.

In purely mathematical terms, reducing OPEX and COGS while increasing net sales will improve efficiency.

Efficiency vs. productivity

Efficiency and productivity are often thought of as synonyms, but there’s a significant difference between the two. “Productivity is how much you get done—output,” Chad says. “Efficiency is doing that work in the best possible way; less time, less effort, and fewer resources. You can be productive but not efficient if you’re wasting resources.” In the long run, efficient productivity helps you increase your margins and attain profitability.

Benefits of operational efficiency

Operational efficiency can considerably benefit nearly any sector or function of a business. “When you’re efficient, you cut costs, improve product quality, and stay agile to market changes,” Chad says. “It also boosts team morale by eliminating unnecessary tasks. Ultimately, it drives growth and gives you a competitive edge.”

Specifically, operational efficiency can help you:

• Save time. Higher operational efficiency cuts the time spent by workers on activities that don’t add value to the business and reduces lead times by improving your supply chain management.
• Reduce costs. A focus on efficiency can reduce regular costs and help you identify and eliminate extraneous costs.
• Clarify internal processes. Better internal messaging on how the business functions can lead to quicker identification and resolution of problem areas—and fewer instances of human error.
• Increase satisfaction. Higher-quality products and services delivered in a timely manner can improve customer satisfaction, while eliminating fruitless activities and conflicting messaging can boost employee morale.
• Improve adaptability. An efficient business can quickly adapt to new challenges and growth opportunities. 

Tips for improving operational efficiency

There are a number of ways your business’s leadership team can improve operational efficiency. Here are a few strategies for adopting an operational efficiency mindset:

Understand the state of affairs

Chad recommends mapping out your workflows to spot bottlenecks. Try visualization techniques, like supply chain mapping, to understand what’s working, what isn’t, and where you’re wasting the most time and resources.

Optimize resource allocation

Once you’ve got a sense of the immediate efficiency problems, you can start assessing how you’re using resources like time, labor, and materials. You can dial back resources spent on low-value tasks and reallocate some to high-impact or high-return areas. 

Automate processes and routine tasks

Automating repetitive tasks frees up employees to focus on more complex, value-adding manual tasks. New technology like workflow automation tools and AI-driven solutions can be helpful here, streamlining everything from data entry to customer service interactions.

“Most customer service inquiries are straightforward, making it possible to use automation, self-service tools, and generative AI-assisted responses,” Steven explains. “Of course, this doesn’t solve 100% of CX inquiries, but it gets the majority of the way there, which has been a huge unlock for our team.”

Outsource to experts

Are there certain tasks your team is performing in-house that are taking up more time than is necessary? It might be cheaper to outsource that work to professional service firms. Experts like accountants, marketing agencies, and social media strategists are specialists in their fields, and they can often work more efficiently than an in-house team (and at a lower cost).

Standardize and document business processes

Mapping out your business operations not only shows you the inefficient processes, but the efficient ones too. Standardize these processes to reduce errors, create consistency across teams, better train new employees, and ensure continuity if key team members are unavailable.

Invest in employee training and development

Skilled employees, confident in their training, make more operationally efficient decisions—and they’re empowered to identify inefficiencies themselves. Regularly updating training programs and encouraging a culture of learning can go a long way toward improving team agility and operational efficiency.

Streamline communication

Clear, concise communication between teams, and between managers and employees, minimizes misunderstandings and reduces time wasted on clarifications. Workplace instant messaging tools and calendar-integrated video conferencing applications can keep communication organized and accessible to all involved.

Analyze performance metrics

After mapping out your operations, identifying bottlenecks, and formulating process improvements, you’re going to find yourself with a lot of new data on your hands. Use this data to identify more inefficiencies and track progress while mitigating them. Key performance indicators (KPIs) related to employee productivity, quality control, cost per unit, time per task, and purchase-to-delivery life cycle can reveal where processes are working well, and where they’re breaking down.

“Early stage companies operate on assumptions about expectations and focus on maximizing efforts accordingly,” Steven explains. “As a company matures and scales, those assumptions are replaced with vast amounts of data and customer and employee feedback. Listening and filtering through the noise will help you understand what the real problems are to solve and what will drive the most value.”

Embrace flexible work models

Hybrid or flexible work environments can improve productivity, reduce overhead, and improve employee satisfaction, leading to better performance and greater operational efficiency. At a minimum, remote or hybrid employees can devote the time they would have otherwise spent commuting or settling into a day at the office to high-value tasks.

Prune redundancies

Identify duplicate tasks or processes within departments or across teams, and work to consolidate them to use your resources wisely. Cross-team collaboration—such as regular check-in meetings—can uncover areas where similar tasks are being performed more than once and where combined efforts might save time and money.

Reassess and continually improve

“Operational efficiency is the opportunity to constantly iterate, adjust, retool, and reimagine the way you do something,” Steven says. Business circumstances can, and often do, change. Sometimes drastically. Always monitor and reevaluate your efficiency strategies to ensure continuous improvement.