Unit 3

Operational efficiency
Operational efficiency is the relationship between an organization’s
output and input, that when healthy, helps businesses cut down on
unnecessary costs while increasing revenue. It’s what businesses strive
to do: produce a high-quality product at scale with as few resources as
possible.
• To decrease extraneous costs, the operations manager must be able
to identify which processes in place are not needed. To do this, they
need to be able to identify a baseline of operations.
Productivity vs. Efficiency: Knowing the
Difference
• Productivity” and “efficiency” are often used interchangeably, but they’re
actually very different. Michael Mankins at the Harvard Business Review
explains the difference simply: operational efficiency is about doing the
same with less and productivity is about doing more with the same.
• Improving productivity requires investing current resources to improve
their performance, so because different companies have different
focuses, there’s not a “one size fits all” approach. For a staffing company,
improving productivity would mean bettering the performance of
recruiters. For a manufacturing company, this would mean increasing the
output of machines. For a brick-and-mortar, this would mean upping
sales per square foot of the store.
When trying to improve productivity, operational efficiency managers
need to find a way to take the resources they have and improve their
performance, which may mean incurring additional costs in training or
repairs. In this case, the cost is justified because the output is
increased.
• Operational efficiency is more concerned about producing at the
same level with fewer resources, so if we revisit our manufacturing
company example, this would mean the company wants to keep the
same number of machines but have them produce more product.
What to Improve First: Efficiency or
Productivity?
We all know putting the cart before the horse just doesn’t work.
Efficiency and productivity work in the same way. If your goal is to
improve the overall performance of your organization, you’ll want to
improve both, but it’s important to improve efficiency first. Doing so
will decrease the level of wasted effort and resources on the part of the
company. Once efficiency has been optimized, the organization can
take steps to improve productivity.
• With this strategy, efforts to increase productivity will be more fruitful
because these efforts are built upon a baseline of operations that’s
highly efficient.
How to Create a Baseline of Operations
• Baseline of operations within an organization describes the functions
in place that makes the organization run.
• You can do this by talking to major stakeholders within the
organization and asking how each department works together to help
the company reach its goals.
• In larger entities, each department may work more autonomously. In
smaller organizations, roles and functions can crossover.
Questions to ask include:
What is the purpose of your department within the company?
How does this department help the company realize its vision?
What are the major responsibilities of this department?
What are the steps taken to carry out these responsibilities?
• The goal is to be able to understand the major functions each
department performs to carry out its duties.
How to Measure and Improve Operational
Efficiency
• Operational efficiency is calculated by dividing output (revenue, sales,
cold calls, inbound leads, etc) by input (resources, man-hours, licenses,
etc). As explained by Mankins in the Harvard Business Review, efficiency is
a matter of producing the same output with less input.
• In order to calculate efficiency, decision-makers need to determine which
output and input variables are most appropriate for their organization.
These variables are determined by their key performance indicators; the
quantifiable metrics that reflect the health of an organization (dictionary).
These can shed light on the overall direction of an organization by
providing unbiased data about performance.
Step 1: Record your performance and compare it against industry
standards. This will give the organization a reference point to measure
improvements.
Step 2: Review the baseline of operations and identify the functions
and goals within each department.
Step 3: Understand the key players involved when it comes to executing
those functions and goals.
• Step 4: Then review how much time it takes to achieve those goals
and the quality of work done every step of the way.
Step 5: Within each step, identify bottlenecks that make that process
slower. Bottlenecks are any functions or steps that are unnecessary for
completing the task at hand. For example, waiting a couple of days for
another approval when two approvals are sufficient would be a
bottleneck.
• Step 6: Remove those bottlenecks. One strategy to eliminate waste is
the 5S method: Sort, Shine, Straighten, Standardize and Sustain. The
leadership team needs to collaborate with other employees to ensure
the right steps are taken.
Step 7: Measure the performance and compare to the previous
baseline of operations to track improvements. Make sure that the
quality of work done along the way is not impaired.
• Step 8: Track performance by creating reports or a dashboard.
Convene with your team at regular intervals to discuss performance
and areas of improvement.
Factors that impact operational efficiency
Here are some key factors that significantly affect operational
efficiency:
Resource utilization:
• Resource utilization refers to planning and maximizing a company’s
available resources. This process directly impacts operational
efficiency because improper resource utilization can be costly.
Extracting the maximum value from resources and eliminating waste
during production and operations is essential in improving resource
utilization and overall operational efficiency.
Production
• Production processes often involve a lot of money, time, effort and
resources for companies. Creating an efficient production plan and
schedule can help your company optimize its production processes.
A proper production strategy can reduce labor costs by eliminating
unproductive time and improving process flows. It can also help
reduce inventory costs, optimize equipment usage and capacity and
improve the delivery speeds of products and services.
Manufacturing and distribution:
• Strategizing how to optimize distribution channels can significantly
increase profits and stimulate business growth. Evaluating
distribution efficiency can provide your company with key insights
that help streamline product movement. One example of creating
an efficient distribution channel is automating an ordering process.
Rather than having someone contact a vendor, you could digitize a
system that automatically places orders when product inventory is
low. Making this change might optimize a process that would
otherwise be time-consuming and exhaust resources.
Inventory management:
• Developing an inventory management strategy is complicated
because several components comprise a typical inventory process. A
company with high operational efficiency often tracks its stock,
prices products correctly and verifies that its products are in the
right locations at the right times. Evaluating these components can
crucially improve operational efficiency. Implementing different
strategies, such as automating stock control, renegotiating supply
chain contracts and expanding an existing inventory forecast can
also help reduce excess use of resources.
How Do You Calculate Operational
Efficiency for a Business?
• To calculate your business’s operational efficiency, tally all of your
operating expenses and divide the sum total by your total revenue.
Apple Inc example
• Small businesses can see how important operational efficiency can be
for them by studying one of the most valuable companies in the
world:
• Apple Inc. In 1997, Apple’s success was far from certain. That year, it
posted a $1 billion loss and nearly went bankrupt.
• But it was able to turn its business around in one year just by
focusing on improving its operational efficiency.
3 Business Areas Apple Made More Efficient
• In addition to improving the operational efficiency of its inventory
management, Apple was able to improve its operational efficiency in its
manufacturing, administrative, and delivery operations.
• 1. Manufacturing costs:
• If you’re a manufacturing company like Apple, reducing the labor and
materials costs associated with your manufacturing processes will result
in an increase in your operational efficiency.
• In the 1980s and 1990s, Apple owned and operated its own factories to
produce its Macintosh computers. Jobs envisioned Apple’s factories as
state-of-the-art and highly automated, but they proved expensive for the
company to maintain and operate.
• Labor:
• Outsourcing of labour improved the operating efficiency of Apple’s
manufacturing operations because Chinese labor was significantly
cheaper than American labor.
• Materials:
• Apple has consistently negotiated favorable deals with its suppliers in
an effort to improve the operational efficiency of its supply chain
2. Administrative spend:
Regardless of which industry your business operates in, reducing
excess or unnecessary team members will increase your operational
efficiency.
• When Apple was focused on turning around its business in 1997, it
reduced its administrative spend with layoffs; Jobs laid off 4,100
Apple employees at the time.
• This restructuring removed an entire layer of management in the
organization, which not only increased Apple’s operational efficiency
but also made it more effective.
3. Delivery management:
• In October 2020, Apple decided to ship its products to customers
from local Apple stores.
• The decision was made because customers were unable to visit its
stores in person due to the COVID-19 pandemic, and Apple wanted to
reduce the inventory held by its nationwide network of nearly 300
Apple stores.
• According to Apple, this would cut costs and potentially improve its
profit margins.
Product manufacturing
• Manufacturing is the making of goods by hand or by machine that are
intended to be sold to customers upon completion.
• Items used in manufacturing may be raw materials or component
parts of a larger product.
• Manufacturing usually happens on a large-scale production line with
machinery and skilled labor.
Types of manufacturing processes
• A factory operates one of three types of manufacturing production:
• Make-to-stock (MTS): A factory produces goods to stock stores and showrooms. By
predicting the market for their goods, the manufacturer will plan production activity
in advance. If they produce too much they may need to sell surplus at a loss and in
producing too little they may miss the market and not sell enough to cover costs.
• Make-to-order (MTO): The producer waits for orders before manufacturing stock.
Inventory is easier to control and the owner does not need to rely as much on market
demand. Customer waiting time is longer though and the manufacturer needs a
constant stream of orders to keep the factory in production.
• Make-to-assemble (MTA): The factory produces component parts in anticipation of
orders for assembly. By doing this, the manufacturer is ready to fulfill customer orders
but if orders do not materialize, the producer will have a stock of unwanted parts.
Methods of production
The way a product is made will vary depending on:
the type of product
how specialised or customised the product is
the level of skills required by the workers
The main methods of production are:
job production
batch production
• Flow production
Job production
Job production concentrates on producing one product from start to
finish. Once one product is complete, another can begin. It is highly
specialised and very labour intensive.
Some examples:
making a wedding dress
painting a house
• building an oil rig
Advantages and disadvantages
High quality product but Production costs likely to be high
Can customise orders but the Production time may be longer
• Workers involved in entire production process from start to finish hut
Investment in machinery may be higher as specialist equipment may
be needed
Batch Production
Batch production enables items to be created stage by stage in bulk (‘a batch’).
Generalist equipment is used to produce quantities of a product to meet a specific
demand. The production process is stopped on the completion of each batch. A new
batch, usually of a different product, is then produced using the same generalist
equipment and workforce.
The workforce is usually divided into a group designated to work on a particular stage of
the process. Batch production is commonly used in food production.
For example each morning a bakery will produce batches of the following products one
after another:
white bread loaves, brown bread loaves, rolls, croissants etc.
• The equipment used to prepare and bake the different batches will require cleaning
and minor adjustments by the workforce between each batch.
Advantages and disadvantages
Allows flexible production but Making many small batches can be
expensive
• Inventories of part-finished goods can be stored and completed later
but If production runs are different there may be additional costs and
delays in preparing equipment
Flow Production
Flow production is also known as continuous production. It enables a
product to be created in a series of stages on.an assembly line.
It is defined by the continuous movement of items through the production
process. Large numbers of the same goods are produced continuously in this
production process. There is often an opportunity for a high level of
automation on a flow production assembly line.
Some examples:
car assembly plant
bottling plant
• bicycle production line
Advantages and disadvantages
Economies of scale can be achieved as cost per unit will be low but the
Standardised product is produced
Automated assembly lines save time and money but High initial set-up
costs of automated assembly lines
• Quality systems can be built into the production at each stage but
Workers find work repetitive and boring
Types Of Manufacturing Process
• Five Types Of Manufacturing Processes:
• 1. Repetitive Manufacturing
• Basic manufacturing that creates the same product on an assembly line is engaged in the
repetitive manufacturing process. These types of rapid manufacturing operations will produce
the same or very similar products en masse 24/7.
• The manufacturing industries that utilize this type of production process including:
• Automotive
• Electronics
• Semiconductor
• Durable consumer goods
• These mass production industries are ideal for repetitive manufacturing because the consumer
demand for the finished product is stable and predictable. The assembly line will remain fairly
constant, with few changes as one product is manufactured over a period of time.
2. Discrete Manufacturing
Discrete manufacturing is the cousin of repetitive manufacturing. It too runs on
production lines, but the finished goods that are created during this process often
vary considerably.
When switching between different product models, the assembly line
configuration must often be changed. In manufacturing facilities, this is known as
a changeover and carries setup cost in the form of time, labor, and resources.
• For example, in the computer industry, technology not only develops at a
constantly rapid rate but the customers demand mass customization. The
manufacturing process for producing newer computers and laptops will require
modifications to the assembly line to produce and assemble orders that call for
the latest electronic components.
• 3. Job Shop Manufacturing
• In the job shop manufacturing process, production areas, like workstations and
workshops, are used instead of an assembly line. Each worker may add
something to the product when it passes through their station, before it is
moved on to another, and until eventually the final product is finished. This
method of manufacturing is ideal for custom manufacturing because it tends to
be slower and produces a low volume of highly customized products.
• Take for example a job shop that builds custom cabinets. Workers will be
stationed at their workstations, and they will add to the cabinet as it is brought
to them. One may be in charge of sawing the lumber, another of applying
resin, others in charge of polishing the varnish, and others still in charge of
assembly.
4. Continuous Process Manufacturing
Continuous process manufacturing is very similar to repetitive manufacturing because it runs 24/7, creates the
same or similar products repeatedly, and creates larger order quantities. The key difference here is that the raw
materials used are gases, liquids, powders, and slurries, instead of solid-state components.
It works almost exactly the same as repetitive manufacturing besides the difference in raw materials. An example
of this in practice might be a pharmaceutical company that produces painkillers in larger quantities.
Traditional industrial manufacturing industries that widely utilize continuous processes include:
Pharmaceutics
Chemicals/industrial gases
Fertilizers
Power stations
Oil refining
Paper
• Furnace – Steel, Iron, and Alloys
5. Batch Process Manufacturing
The batch process of manufacture differs quite a bit from continuous process
manufacture and is more similar to discrete and job shop manufacturing. The number
of batches that are created will be enough to serve a particular customer’s needs. In-
between batches, the equipment will be cleaned and left alone until another batch is
required. The raw materials used are more similar to continuous process
manufacturing as they are liquids, gases, powders, and slurries too.
• A prominent example of this is a sauce manufacturer. They may be capable of
creating many sauces – BBQ, ketchup, mayonnaise – but a customer’s order may
only require one of them. Whilst they make one batch of ketchup for a customer to a
specific quantity, the mayonnaise and other sauces won’t be in production – instead,
the machines will be cleaned and left until it is time to create another batch of that
sauce.
Manufacturing cycle time
• Manufacturing cycle time looks into the period from converting
materials into a finished product, including the production process,
travel, quality inspections, and waiting time. Using this article, you can
learn about it and how to implement a manufacturing cycle time
process.
• Successful product manufacturing operation is only possible for
manufacturers with accurate cycle times.
Why track the manufacturing cycle?
• Efficiency and productivity are the key goals of using cycle time KPI in
businesses.
• Other benefits of calculating cycle time include:
• 1. Increased profitability
• Calculating cycle time helps you understand where time is mostly spent
in production, so you know where to cut back on time and increase
profit.
• 2. Consistent production rates
• Cycle time helps organizations understand their production flow to
eliminate excess waste and increase productivity.
3. Customer satisfaction
Customers need realistic product development timelines to stay loyal to
your business. Tracking cycle time helps determine the exact delivery
timeframe customers can trust.
4. Gain a competitive advantage
• Cycle time helps businesses stay ahead of the competition by offering
real-time data on a delivery time range. This way, if business owners
operate snail-like production, they can hasten their production time
and gain a competitive advantage.
5. Clear insights on business spending
• Paid individual processes must add value to your production process,
but some don’t. Business owners, manufacturers, and product
managers can understand expense management to optimize
productivity by tracking cycle time. In short, cycle time allows you to
get better insights into your business processes.
How do you calculate manufacturing cycle
time?
To calculate the cycle time, you need to consider both the time required to
complete manufacturing which is the productive and non-productive
hours.
• The productive hours comprise two key elapsed times, the processing
and inspection stage:
• Process time — it is the time spent on the actual manufacturing process.
For example, if you own a bakery, a good example of process time is
when you mix the dough
• Inspection time — this is the time spent on ensuring little to no defects
in the product. It is a quality control measure that should be included in
your production quality control checklist
On the other hand, the non-productive hours comprise the move and
queue time or idle time:
Move time — this is the load and unloading stage when materials and
products are transported between the warehouse and workstations
• Queue time — this is the waiting time before any task commences
The cycle time formula
From the explanation of how to calculate cycle time in manufacturing,
we can draw our formula as follows:
Cycle time = Net production time (per product)
However, the formula above may seem too complicated to grasp. A
straightforward formula to consider is:
Non-productive hours + Productive hours (per product) = Cycle time
or
• Process time + Inspection time + Movement time + Queue time (per
product) = Cycle time
In Python
• Process time(PT) + Inspection time(IT) + Movement time (MT)+
Queue time (QT) (per product) = Cycle time
• We can create a function using the above formula in python.
• # Let’s create a function for cycle time:
• def cycle_time(PT, IT, MT, QT):
• return PT + IT + MT + QT
•
• cycle_time(6,3,2,1)
Automated Production Management System
• One of the most important application areas for automation
technology is manufacturing.
• Three types of automation in production can be distinguished:
• (1) fixed automation,
• (2) programmable automation, and
• (3) flexible automation.
Fixed Automation
• Fixed automation, also known as “hard automation,” refers to an
automated production facility in which the sequence of processing
operations is fixed by the equipment configuration. In effect, the
programmed commands are contained in the machines in the form of
cams, gears, wiring, and other hardware that is not easily changed
over from one product style to another.
• This form of automation is characterized by high initial investment
and high production rates. It is therefore suitable for products that are
made in large volumes. Examples of fixed automation include
machining transfer lines found in the automotive industry, automatic
assembly machines, and certain chemical processes.
Programmable Automation
• Programmable automation is a form of automation for producing products in
batches. The products are made in batch quantities ranging from several dozen to
several thousand units at a time. For each new batch, the production equipment
must be reprogrammed and changed over to accommodate the new product style.
• This reprogramming and changeover take time to accomplish, and there is a period
of nonproductive time followed by a production run for each new batch.
Production rates in programmable automation are generally lower than in fixed
automation, because the equipment is designed to facilitate product changeover
rather than for product specialization.
• Numerical-control machine tool is a good example of programmable automation.
The program is coded in computer memory for each different product style, and
the machine tool is controlled by the computer program. Industrial robots are
another example.
Flexible Automation
• Flexible automation is an extension of programmable automation. The
disadvantage with programmable automation is the time required to
reprogram and change over the production equipment for each batch of
new product. This is lost production time, which is expensive. In flexible
automation, the variety of products is sufficiently limited so that the
changeover of the equipment can be done very quickly and automatically.
• The reprogramming of the equipment in flexible automation is done off-
line; that is, the programming is accomplished at a computer terminal
without using the production equipment itself. Accordingly, there is no
need to group identical products into batches; instead, a mixture of
different products can be produced one right after another.
Automated production lines
• An automated production line consists of a series of workstations connected
by a transfer system to move parts between the stations. This is an example
of fixed automation, since these lines are typically set up for long production
runs, perhaps making millions of product units and running for several years
between changeovers.
• Each station is designed to perform a specific processing operation, so that
the part or product is constructed stepwise as it progresses along the line. A
raw work part enters at one end of the line, proceeds through each
workstation, and emerges at the other end as a completed product. In the
normal operation of the line, there is a work part being processed at each
station, so that many parts are being processed simultaneously and a
finished part is produced with each cycle of the line.
• The various operations, part transfers, and other activities taking
place on an automated transfer line must all be sequenced and
coordinated properly for the line to operate efficiently. Modern
automated lines are controlled by programmable logic controllers,
which are special computers that facilitate connections with industrial
equipment (such as automated production lines) and can perform the
kinds of timing and sequencing functions required to operate such
equipment.
Automated assembly
• Assembly operations have traditionally been performed manually,
either at single assembly workstations or on assembly lines with
multiple stations. Owing to the high labour content and high cost of
manual labour, greater attention has been given in recent years to the
use of automation for assembly work.
• Assembly operations can be automated using production line
principles if the quantities are large, the product is small, and the
design is simple (e.g., mechanical pencils, pens, and cigarette
lighters). For products that do not satisfy these conditions, manual
assembly is generally required.
• Automated assembly machines have been developed that operate in a manner similar
to machining transfer lines, with the difference being that assembly operations, instead
of machining, are performed at the workstations. A typical assembly machine consists of
several stations, each equipped with a supply of components and a mechanism for
delivering the components into position for assembly.
• A workhead at each station performs the actual attachment of the component. Typical
workheads include automatic screwdrivers, staking or riveting machines, welding heads,
and other joining devices. A new component is added to the partially completed product
at each workstation, thus building up the product gradually as it proceeds through the
line.
• Assembly machines of this type are considered to be examples of fixed automation,
because they are generally configured for a particular product made in high volume.
Programmable assembly machines are represented by the component-insertion
machines employed in the electronics industry, as described above.
Robots in manufacturing
• Today most robots are used in manufacturing operations; the
applications can be divided into three categories:
• (1) material handling,
• (2) processing operations, and
• (3) assembly and inspection.
Computer Integrated Manufacturing
• Since about 1970 there has been a growing trend in manufacturing
firms toward the use of computers to perform many of the functions
related to design and production. The technology associated with this
trend is called CAD/CAM, for computer-aided design and computer-
aided manufacturing.
• Today it is widely recognized that the scope of computer applications
must extend beyond design and production to include the business
functions of the firm. The name given to this more comprehensive
use of computers is computer-integrated manufacturing (CIM).
CAD
• Computer-aided design (CAD) makes use of computer systems to assist in
the creation, modification, analysis, and optimization of a design. The
designer, working with the CAD system rather than the traditional drafting
board, creates the lines and surfaces that form the object (product, part,
structure, etc.) and stores this model in the computer database.
• By invoking the appropriate CAD software, the designer can perform
various analyses on the object, such as heat transfer calculations. The
final object design is developed as adjustments are made on the basis of
these analyses. Once the design procedure has been completed, the
computer-aided design system can generate the detailed drawings
required to make the object.
CAM
• CAM involves the use of computer systems to assist in the planning,
control, and management of production operations. This is accomplished
by either direct or indirect connections between the computer and
production operations.
• In the case of the direct connection, the computer is used to monitor or
control the processes in the factory. Computer process monitoring involves
the collection of data from the factory, the analysis of the data, and the
communication of process-performance results to plant management.
These measures increase the efficiency of plant operations. Computer
process control entails the use of the computer system to execute control
actions to operate the plant automatically, as described above.
• Indirect connections between the computer system and the process
involve applications in which the computer supports the production
operations without actually monitoring or controlling them.
• These applications include planning and management functions that
can be performed by the computer (or by humans working with the
computer) more efficiently than by humans alone.
CIM
• Computer-integrated manufacturing includes all the engineering
functions of CAD/CAM and the business functions of the firm as well.
These business functions include order entry, cost accounting,
employee time records and payroll, and customer billing.
• In an ideal CIM system, computer technology is applied to all the
operational and information-processing functions of the company,
from customer orders through design and production (CAD/CAM) to
product shipment and customer service. The scope of the computer
system includes all activities that are concerned with manufacturing.
In many ways, CIM represents the highest level of automation in
manufacturing.
Asset Performance
Asset performance refers to a business’s ability to take operational
resources, manage them, and produce profitable returns. A business
can coax a positive performance out of its assets resulting in positive
company performance.
• Ratios such as return on assets (ROA), and other metrics that track
how efficiently a firm uses its assets to generate revenue and how
efficiently operations are being run, are measures of asset
performance.
Understanding Asset Performance
• Asset performance refers to the way a business can manage the use
of its operational resources. Certain metrics and ratios can measure
the use of resources. Analysts rely on these metrics and ratios to
compare the asset performance of many companies across the same
industry. Analysts use metrics like the cash conversion cycle, the
return on assets ratio, and the fixed asset turnover ratio to compare
and assess a company’s annual asset performance.
• Typically, an improvement in asset performance means that a
company can either earn a higher return using the same amount of
assets or is efficient enough to create the same amount of return
using fewer assets.
Return on Assets (ROA)
The most common way to determine a firm’s asset performance is to
look at its return on assets (ROA). ROA looks at the net income
reported for a period and divides that by total assets. To measure
total assets, calculate the average of the beginning and ending asset
values for the same time period.
• Return on Assets (ROA) = Net Income/Total Assets
Some analysts take earnings before interest and taxation (EBIT) and
divide them by total assets:
Return on Assets (ROA) = EBIT/Total Assets
• This is a pure measure of the ability of a company to generate returns
from its assets without being affected by management financing
decisions.
In Python
Return on Assets (ROA) = EBIT/Total Assets
• Let’s create a function in python to calculate ROA:
• def ebit(sales, Cogs, operating expenses)
• return (sales+cogs+operating expenses)/sales

• def ROA(ebit, assets):

• ebit = ebit(sales,cogs,operating expenses)
• return ebit/assets
What Is a Good ROA?
• Whichever method you use, the result is reported as a percentage
rate of return. A return on assets of 20% means that the company
produces $1 of profit for every $5 it has invested in its assets. You can
see that ROA gives a quick indication of whether the business is
continuing to earn an increasing profit on each dollar of investment.
Investors expect that good management will strive to increase the
ROA—to extract a greater profit from every dollar of assets at its
disposal.
• Falling ROA is a sure sign of trouble around the corner, especially for
growth companies. Striving for sales growth often means major
upfront investments in assets, including accounts receivables,
inventories, production equipment, and facilities. A decline in demand
can leave an organization high and dry and over-invested in assets it
cannot sell to pay its bills. The result can be a financial disaster.
Efficiency
The term “efficiency” refers to the peak level of performance that uses
the least amount of inputs to achieve the highest amount of output.
Efficiency requires reducing the number of unnecessary resources used
to produce a given output, including personal time and energy.
• Efficiency is a measurable concept that can be determined using the
ratio of useful output to total input. Increased efficiency minimizes
the waste of resources such as physical materials, energy, and time
while accomplishing the desired output.
Understanding Efficiency
• The term efficiency can be defined as the ability to achieve an end goal with little to no
waste, effort, or energy. Being efficient means you can achieve your results by putting
the resources you have in the best way possible. Put simply, something is efficient if
nothing is wasted and all processes are optimized. This includes the use of money,
human capital, production equipment, and energy sources
• .Efficiency can be used in a variety of ways to describe various optimization processes.
As such, analyzing efficiency can help reduce costs and increase bottom lines. For
instance:
• Corporations can measure the efficiencies of their production process, which can help
them cut down costs while increasing output, which can lead to higher sales and
revenue.
• Consumers can purchase energy-efficient appliances to cut down their energy bills
while reducing greenhouse gases.
• Investors can determine the efficiency of their investments by using
the return on investment (ROI), which highlights an investment’s
return relative to how much it costs.
• As noted above, efficiency is measurable and can be expressed as a
ratio or percentage. You can measure it by using the following
formula:
• Efficiency = Output ÷ Input
• Output (or work output) is the total amount of useful work completed
without accounting for any waste and spoilage. If you want to express
efficiency as a percentage, simply by multiplying the ratio by 100.
Types of Efficiency
Efficiencies can be divided into many different categories. We’ve
outlined some of the key types below, including economic efficiency,
market efficiency, and operational efficiency.
Economic Efficiency
• Economic efficiency refers to the optimization of resources to best
serve each person in that economic state. No set threshold
determines the effectiveness of an economy, but indicators include
goods brought to market at the lowest possible cost and labor that
provides the greatest possible output.
• Market Efficiency
• Market efficiency describes how well prices integrate available information.
This means that markets are efficient when all information is already
incorporated into prices. There is no way to beat the market since there are no
undervalued or overvalued securities available.
• Operational Efficiency
• Operational efficiency measures how well profits are earned as a function of
operating costs. The greater the operational efficiency, the more profitable the
firm or investment. This is because the entity is able to 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.
Supply chain efficiency
• Even the most adept supply chain managers must dedicate the time
to rework their efficiency strategies as their company grows and the
business climate continues to evolve.
• These days, customer expectations are at an all-time high, especially
when it comes to fulfillment speed, which means that each moving
part of the supply chain must be thoroughly assessed and
painstakingly monitored to best ensure that the product is being
brought into the market with both speed and effectiveness in mind.
No matter how efficient your supply chain is running, finding ways to
improve your supply chain is something you should always be doing.
• But knowing how to improve and optimize your supply chain can be a
challenge — not only for small brands but also for established
ecommerce businesses.
• What is supply chain efficiency?
• Supply chain efficiency is a business’s ability to use resources,
technology, and expertise in order to minimize logistics costs and
maximize profits. The goal of an efficient supply chain is to save money
and maximize profits by optimizing the processes and stages in the
supply chain.
What’s the difference between supply chain efficiency and supply chain
effectiveness?
Supply chain efficiency is defined as the internal standard of
performance of an organization, while supply chain effectiveness is the
external standard of performance.
• In other words, supply chain effectiveness focuses on meeting the
demands of groups outside your organization; and supply chain
efficiency refers to meeting those demands as quickly and cost-
effectively.
What is supply chain responsiveness?
Supply chain responsiveness refers to the ability to react quickly to
sudden changes in the environment that affect your logistics processes.
• Examples include the ability to scale up when the COVID-19 pandemic
hit (i.e., meeting demand for more than double the amount of typical
online orders when lockdowns went into place), or getting inventory
shipped quickly during the period of time when some of the busiest
ports in the world were completely overloaded with container ship
congestion.
• Components of a responsive supply chain
• Flexibility is at the core of a responsive supply chain, which is not just reacting to
changes but being proactive as well.
• The objectives of a responsive supply chain include:
• Meeting customer demand (delivering on time and at the expected cost)
• Being able to scale up or down when demand forecasting goes awry
• Managing costs during volatile times
• Continuously improving processes and workflows to fit the current needs and
situation
• Reducing risk through diversification, planning, and by establishing the right
partnerships
There are several key stakeholders (and often third-parties) involved in ensuring a
responsive supply chain runs smoothly, including:
Your company leaders
Your manufacturers and suppliers
Your fulfillment center(s) and 3PL
Your technology providers
Your shipping carriers
Your customers
• All of these stakeholders must be responsive communicators, with
communication going both ways.
How to improve supply chain efficiency in 7
steps
• Whether you’ve just started your business, or it’s already well-established,
improving supply chain efficiency can seem like a monumental task. If you don’t
know where to start, here are seven steps towards greater supply chain efficiency:
• Step 1: Expand your supply chain visibility
• The first step in improving supply chain efficiency is to increase your visibility over
logistics operations.
• The best way to do this is to implement inventory management strategies that allow
you and your team to track inventory levels as they move through stages, from
receiving to warehousing, to being packed, picked, and shipped to customers.
• A modern inventory management software (IMS) can provide more visibility, as well
as the ability to access real-time inventory tracking, so you can avoid stockouts,
backorders, and overpaying carrying costs.
• Step 2: Develop a good relationship with your suppliers
• Communication with your suppliers is key! When you have a good
relationship with your suppliers, you can plan better and avoid any
shortages, delays, or issues early on.
• A dependable supplier is responsible for tracking the work-in-process
inventory phase (i.e., the movement of raw materials being processed
into finished goods), which impacts the quality of the products you sell
and how quickly you can obtain more inventory.
• Once you have discovered suppliers that are both responsible and
flexible, you’ll need to continually foster those relationships through
clear and open communication and conflict resolution.
• Step 3: Automate your supply chain processes
• Finding ways to automate supply chain processes is one of the best
ways to improve efficiency, reduce human error, increase supply chain
performance and velocity, and save time and money in the long run.
• However, since automation technology, equipment, and robotics can
be costly, many ecommerce businesses rely on a tech-enabled 3PL
that have made investments in automation to optimize their supply
chain.
• This way, businesses can invest more in product development,
marketing, and other important initiatives.
• Step 4: Implement supply chain software
• With so many processes taking place simultaneously across your supply
chain, it’s important to use implement the right software and technology
that allows your team to work as efficiently as possible.
• Step 5: Cultivate supply chain experts
• Once you’ve made the decision to implement all of the changes above, the
next step is to create a training plan for your employees.
• Remember, your supply chain is only as efficient as the people who manage
it. Warehouse associates, order fillers, and logistics managers should all be
trained on standard operating procedures to provide consistency, efficiency,
and accuracy in their decision making.
Step 6: Establish green initiatives across your supply chain
• Going green is business value that more customers these days are looking for. Your
customers are becoming extremely aware of the steps that companies are taking (or
not taking) to reduce their carbon footprint, so it’s important to consider ways to
reduce waste.
• Step 7: Optimize your supply chain regularly to remain efficient
• Improving your entire supply chain is not a one-time fix. It’s a process that needs to
be reviewed and optimized as often as possible.
• It’s important to continuously collect and analyze warehouse inventory
management performance to identify areas of improvement where further
efficiency and higher order accuracy can be achieved. This can be done by investing
in technology, automating processes, or hiring logistics experts to help.
4 Supply chain management efficiency best
practices
• One thing to make your supply chain more efficient — but keeping it that way is
another matter altogether. To maintain an efficient supply chain, here are four supply
chain management best practices to consider.
• 1. Implement an effective inventory management process
• Keeping track of your inventory at all stages of your supply chain requires an
investment in technology to improve inventory management processes. There are
several inventory apps on the market that can you help you:
• Optimize stock control.
• Avoid inventory stockouts.
• Set automatic reorder points.
• Improve demand forecasting.
• And much more.
2. Use a warehouse management system
By using a warehouse management system (WMS), you can manage
inventory storage, track inventory in real time, and boost productivity
to efficiently fulfill orders.
• A WMS is designed to monitor the daily operations of your
warehouse, so you can decided what areas need improvement, how
to save on costs, and how to become more efficient
• 3. Create a returns management system
• Implementing a smooth returns management system is important for
two main reasons:
• 1) It allows you to keep track of damaged inventory that needs to be
returned to the supplier.
• 2) It maintains customer satisfaction by making sure that any damaged
or wrong products are returned as swiftly, cost effectively, and easily
as possible.
4. Use real-time data for continuous improvement
When you have access to the right data from an analytics reporting
tool, you can make better-informed decisions for supply chain
planning.
• Inventory turnover rate, order accuracy, time to ship, warehouse
capacity used, and average cost per unit for storage, fulfillment, and
shipment are all critical metrics to track, as they provide insight into
which areas of your supply chain are thriving and which require
improvement.
Product Customization
• Not all of your customers want the same thing or use your product the same way.
Product customization is the key to catering to these different needs and serving
your customer base in a meaningful and personalized way.
• What is product customization?
• Product customization refers to enabling customers to personalize a product
according to their needs and preferences. Add ons, exclusive functionalities,
templates, and flexibility with product design all count as different forms of
personalization.
• Product personalization is an essential element in delivering tailored customer
experiences to different segments of users. It is the key to driving customer
loyalty and increasing customer satisfaction. Here’s a closer look at why you
should be customizing your products for your customers.
4 Ways customized products impact customer
satisfaction
• 1. Cater to different customers’ requirements
• Regardless of whether you sell a physical product or online software,
your customer base has different wants and needs.
• Remembering that all of your customers are different, is critical to
creating a product that is attractive to as many people as possible. As
the old saying goes – if you try to appeal to everyone, you’ll appeal to
no one.
• 80% of customers have grown to expect and desire personalized
experiences.
Instead of being just generally suitable for your clientele, you can
customize your product to be specifically perfect for every different
segment of users.
• Brands such as Netflix and Function of Beauty have been developed
around the idea of hyper-personalization, which makes it possible for
everyone to get exactly what they want at the press of a button.
• 2. Gain loyal customers
• Customization is a great business strategy because it makes customers
happier, and happy customers are repeat customers.
• According to a McKinsey study, successful personalization programs yield
more engaged customers and drive up the top line. It results in positive
experiences that have led to 20 percent higher customer-satisfaction
rates and a 10 to 15 percent boost in sales conversion rates.
• Customers who can customize their experience find value either through
exclusivity in the form of a personalized, unique product, or specificity in
the form of a feature that works in a way they would like.
• 3. Understand your customers better
• There’s no denying that customization is an expensive affair. It takes time and
money to offer multiple versions of the same product. Your development
team needs to dedicate resources to building out new customization options.
• But by offering customization, you get answers to the most important
questions: “who are my customers?” and “what do they really want?”
• Customization can help you understand how your users use your product and
what they expect from it. You can identify and add popular features currently
offered as customization into the core product itself to boost customer
satisfaction and retention. This information can also be helpful when you’re
looking to revise your development or pricing strategy.
• 4. Boost sales and business success
• Allowing your customers to customize their products is a clever way
to stand apart from the competition. After all, who knows what they
need, better than the customer themselves?
• When customers are satisfied with their personalized products, they
are more likely to tell their friends and family about them. Your
customers might also take to social media to share these positive
experiences too. As a result of offering personalization, you get word-
of-mouth marketing, a great, organic way to grow your business.
How to get started with product
customization
1. Create user personas
• The first step to identifying potential customization opportunities is by
understanding the different people who use your product. Creating
user personas can help illustrate the different segments of your user
base. According to the Interaction Design Foundation, user personas
are:
2. Look into feature requests
• The second way to find opportunities to enhance customer
satisfaction through customization is to look at what customers are
already asking to do.
• To understand what customers are asking for, look closely at your
customer support tickets and feedback forum. Tagging incoming
customer conversations with “feature-request” or “customization”
can make it easier for product teams to pull reports based on what
customers want.
3. Consider the customer journey
It’s not enough to personalize your product alone. You need to ensure
that the customer has a unified experience pre and post purchasing the
customized product.
• Look for ways to offer customers a unique and personalized
experience at each stage of their journey.
• When you understand the different stages of the buyer’s journey, you
know the goals of the customer at each touchpoint. You can
personalize each of these touchpoints to help customers achieve
these goals.
Examples of product customization in B2C
1. Customizable TV bezel by Samsung
Compared to the rest of a house, a TV always feels like it stands apart
from its surroundings. But with Samsung’s new customizable bezel, TVs
can fit right into the decor.
• With this personalization, customers can now match their TVs to
photo frames, curtains/wall color, or anything that suits their
preferences.
2. Customizable moon lamps by Art Galore
Art Galore, an online store selling customized products, offers
customizations on top of a moon lamp (a lamp that looks like the moon
and changes color). Art Galore allows customers to add text and photos
of their choosing on a moon lamp, making it a perfect
birthday/wedding gift.
• This is a great example of standing out and offering a niche in a
market that might seem like it’s unilateral.