Operational efficiency is a business’s ability to produce revenue, manage expenses and operate at the same time. If a company can produce revenue at a lower operational cost, it can free up capital for other investments or acquisitions. Fintalent’s Operational efficiency consultants note that the concept is related to portfolio management and an organization’s ability to allocate resources so as to maximize financial gain in the long-run.
Operational efficiency is an important component of business management and often used to establish the health of a company. The concept provides managers with a great way to see how much they are contributing to the bottom line by measuring operational costs against revenue and resources.
The concept of efficiency in business has been around for quite some time, but it was not until the early 1900s that it became a more well-known term. Developments in manufacturing techniques and technology prompted the need for efficiency analysis, which led to formalized operations analysis techniques such as cost accounting, inventory management, process improvement and quality control.
In the 1970s, David E. Lilienfeld developed the first benchmark for efficiency in the purchasing field that emerged from a need to compare businesses’ performance. The benchmark was used to measure and report on efficiency in purchasing systems and was called K.R.E.E. (Key Relationship Efficiency). K.R.E.E., however, did not result in higher level business results as desired by early adopters of the concept of operational efficiency — instead it only resulted in cutting down on costs and was not considered profitable for most organizations that implemented it.
Over the next decade, manufacturers of all types began to implement lean manufacturing, a concept to eliminate wastes in their operations. The term was originally coined in Japan and was developed by a Toyota engineer in the 1950s. It found its way into North America via companies such as Xerox Corp. and Hewlett-Packard Co., who were trying to improve their own manufacturing processes at the time.
Lean manufacturing seeks to avoid wasteful practices and maximize productivity within an organization by applying elimination of waste activities throughout business processes. Wasted resources in an organization include not only funds but also wasted time and materials, leading to a higher level of operational efficiency within the organization.
In the 1980s, the United States experienced a significant recession that led to an increase in business cost-cutting, including manufacturing and distribution. This in turn led to an increased interest in operational efficiency as a way to regain profitability. The concept of operational efficiency is often used by market analysts as a benchmarking metric for benchmarking performance.