How to increase operational efficiency: 8 key indicators

Your business may be unknowingly leaking profits through inefficient processes. Operating efficiency metrics reveal exactly where time, money, and resources are being wasted. By identifying these efficiency gaps, you can implement targeted improvements that streamline operations and significantly boost your bottom line, often with surprisingly simple changes.

This post will cover what operating efficiency is, its key indicators and benefits, and how to increase it—and your profitability.

What is operating efficiency?

There's a common misconception that operating efficiency (also called operational efficiency) is just about cutting costs. In reality, it's about creating streamlined processes that maximize value while using resources wisely. True operating efficiency improves both the quality of your output and the experience of your team members who deliver it.

Here are the main goals every business should aim for when enhancing operating efficiency:

• Conservation: Minimize the waste of time, materials, and energy by identifying inefficiencies
• Reliability: Deliver consistent quality and faster delivery times, improving the customer experience
• Scalability: Create a system that allows for easy scaling as demand increases
• Profitability: Increase margins by reducing costs and maximizing resource use across all business operations
• Adaptability: Develop flexible processes that allow your organization to quickly respond to market changes and evolving customer demands
• Sustainability: Implement resource-conscious practices that reduce environmental impact while simultaneously cutting long-term operational expenses

Ultimately, operating efficiency is a balancing act that leads to healthier businesses. By optimizing how the organization functions, you create a foundation for sustainable growth, customer satisfaction, and competitive advantage.

What influences operating efficiency?

Understanding what drives operating efficiency helps businesses optimize their processes. Various factors beyond the standard metrics can significantly affect how well your operations perform, affecting your bottom line and overall success.

• Technology infrastructure: Integrated, up-to-date systems reduce manual work, eliminate redundancies, and provide real-time data to inform decisions
• Supply chain relationships: Reliable partners ensure timely deliveries, consistent quality, and better terms, keeping your operations running smoothly
• Process standardization: Clear, documented procedures reduce variation, simplify training, and make it easier to spot inefficiencies
• Quality management: Proactive quality checks catch issues early, reducing rework, returns, and customer complaints
• Regulatory compliance: Efficient handling of compliance requirements prevents fines, delays, and reputational damage while building customer trust
• Resource utilization: Efficient use of equipment, space, and people ensures you're neither underusing nor overextending your capacity

Addressing these underlying factors creates a foundation for sustained efficiency gains. By focusing on these drivers, you can build resilient operations that consistently deliver value to customers while maintaining healthy profit margins.

8 key indicators of operating efficiency

Tracking key operating efficiency indicators reflects how well a business uses resources to achieve desired outcomes. These metrics provide insight into organizational performance, helping management identify areas for improvement and make informed decisions that enhance productivity and reduce waste while maintaining quality standards.

1. Cost per unit

Cost per unit reflects how efficiently you produce goods or services. Lowering this cost, without sacrificing quality, directly increases your margins and reveals where operational waste can be reduced.

Formula: Cost per unit = Total production costs / Total units produced

Example: A coffee roaster spent $30,000 over one quarter on green beans, labor, packaging, and equipment maintenance. After producing 6,000 one-pound bags, their cost per unit came out to $5.00.

To improve profitability, the coffee roaster should review all production costs like packaging, labor, and raw materials, and compare them to industry benchmarks. For instance, if they realize their packaging costs are unusually high and switch to a more cost-effective supplier, they could reduce their cost per unit from $5.00 to $4.68 without compromising quality.

2. Cycle time

Cycle time measures the duration it takes to complete a task or produce a product. Shortening this time allows businesses to fulfill more orders in less time, increasing output without extra labor.

Formula: Cycle Time = Total production time / No.of units produced

Example: The same coffee roaster wants their team to improve their roasting efficiency. They measured their entire coffee production process from receiving green beans to packaging the finished product. In one week, they spent 40 total hours producing 500 one-pound bags of their signature dark roast.

Cycle Time = 40 hours / 500 bags = 0.08 hours (or 4.8 minutes) per bag

If the coffee roaster wants to speed up production, they can analyze each phase from roasting to packaging to identify delays. For example, if they notice the cooling step causes a bottleneck, adding a second cooling tray could reduce cycle time and boost weekly output using the same labor hours.

3. Efficiency ratio (Operational efficiency ratio)

The efficiency ratio measures how much of your revenue goes toward operating expenses. A lower percentage means your business is running more efficiently.

Formula: Efficiency ratio = [(Operating expenses + COGS) / Net revenue] × 100

Example: The same coffee roaster recorded $25,000 in operating expenses and $75,000 in cost of goods sold, with $200,000 in net revenue:

Efficiency ratio = [($25,000 + $75,000) / $200,000] × 100 = 50%

To lower their efficiency ratio, the coffee roaster might explore ways to cut fixed costs or negotiate better rates with suppliers. For example, switching to energy-efficient equipment could lower utility expenses. If they maintain revenue at $200,000 but reduce total operating costs from $100,000 to $90,000, their efficiency ratio would improve from 50% to 45%.

4. Asset utilization

Asset utilization measures how well a business uses its assets to generate revenue. A higher ratio indicates that machinery, equipment, and human resources are used efficiently to generate revenue. This is crucial for businesses with significant investments in physical or intellectual assets.

Formula: Asset utilization ratio = Total revenue / Total assets

Example: The same coffee roaster's owner tracked their asset utilization over two years. In the first year, with $180,000 in revenue and $150,000 in assets (roasting equipment, delivery van, and inventory), their asset utilization ratio was 1.2.

To improve asset utilization, the coffee roaster should look for ways to get more revenue from existing equipment. For instance, if they add a mobile coffee cart that operates on weekends without needing new roasting equipment, they could increase revenue from $180,000 to $225,000 while assets stay roughly the same. That would raise their asset utilization ratio from 1.2 to 1.4.

5. Throughput

Throughput measures how much product your business can produce in a given timeframe. Higher throughput means you're using resources more effectively without increasing costs.

Formula: Throughput = Inventory in process / Flow time

Example: A coffee roaster had 50 lbs of coffee beans in process, taking 5 hours from sorting to packaging. This is calculated as:

Throughput = 50 lbs / 5 hours = 10 lbs/hour

To increase throughput, the coffee roaster should analyze where production slows down. For instance, if each batch of 50 lbs of beans takes 5 hours, they're operating at 10 lbs/hour. But if they add a second cooling tray to shorten the flow time to 4 hours, they can raise throughput to 12.5 lbs/hour, boosting total output without increasing team size or hours.

6. Labor productivity

Labor productivity tracks how much output is produced per hour of labor. Boosting this metric means more output from the same team.

Formula: Labor productivity = Total output / Labor hours

Example: A coffee roaster tracks how many pounds of roasted coffee their team produces per hour of work. Last quarter, their three employees worked a total of 1,440 hours and produced 4,320 pounds of packaged coffee, giving a labor productivity of 3 pounds per hour.

If the roaster wants to fulfill more orders without hiring new employees, they could optimize their workspace or provide targeted training. Improving efficiency through better layout or task assignment could raise productivity from 3 lbs/hour to 3.5 lbs/hour, resulting in 5,040 pounds with the same labor hours.

7. Customer satisfaction

Though it focuses on external outcomes, customer satisfaction reflects internal operating efficiency. Smooth processes and timely deliveries result in higher satisfaction levels, while operational delays or poor quality negatively affect customer perceptions.

To improve customer satisfaction, the coffee roaster should streamline fulfillment processes. If they reduce average delivery time from five days to two by optimizing their order system, customers may notice the difference, leading to higher satisfaction scores and fewer complaints. This kind of operational improvement directly strengthens customer loyalty.

8. Defect rates

Defect rates measure the percentage of products with errors or quality issues. Lowering this rate means less waste and rework, which are two major drivers of operational inefficiency.

For example, to reduce defect rates, the coffee roaster could implement standardized checklists and recalibrate equipment regularly. If they currently discard 4% of bags due to sealing errors, improving quality control could bring that down to under 1%. That change would save thousands in materials over time and help prevent disappointing customers with flawed shipments.

Benefits of operating efficiency

Embracing operating efficiency delivers powerful advantages for businesses of all sizes. Beyond simply cutting costs, streamlined operations create ripple effects that positively affect every aspect of your organization.

These six key benefits drive sustainable business growth and competitive advantage:

• Reduced costs: Streamlined operations cut unnecessary spending on time, labor, and materials
• Higher profitability: Producing the same output with fewer resources increases your margins
• Faster time to market: Shorter lead times help you respond quickly to customer demand and seize new opportunities
• Improved employee satisfaction: Clear workflows and fewer bottlenecks reduce stress and make work more rewarding
• Better customer experience: Consistent quality and on-time delivery lead to higher satisfaction and loyalty
• More strategic decision-making: Real-time data visibility allows you to proactively manage performance and spot risks before they escalate

By prioritizing operational efficiency, companies gain competitive advantages while creating better experiences for both employees and customers.

Operational efficiency vs. productivity

Operational efficiency and operational productivity are often confused with each other, but they focus on different aspects of business performance. Efficiency is about optimizing resources, while productivity is about increasing output.

Although both concepts are important for business performance, they have distinct focuses and outcomes:

An easy way to distinguish between the two can be broken down by considering two businesses: business A finishes more projects (high productivity) but uses excess labor and materials, while business B completes fewer projects but with minimal waste. The latter is more efficient, and often more profitable in the long run. Productivity may drive growth, but efficiency sustains it.

Identifying and resolving operational bottlenecks

Bottlenecks occur when one part of a process limits the performance of the entire system. These constraints slow down operations, cause delays, and increase costs, even when everything else is running smoothly.

To identify and resolve bottlenecks effectively:

• Map your workflows: Visualize each step in your process to see where time and tasks accumulate
• Track cycle times and throughput: Look for stages that consistently take longer or slow down output compared to the rest of the process
• Watch for inventory pileups: Excess materials or work-in-progress before a specific step often signals a bottleneck
• Use operational data: Real-time analytics tools can reveal underperformance or unexpected delays
• Gather employee feedback: Frontline workers often spot issues before data can. Their insights help validate what the metrics show, or reveal problems you missed
• Benchmark your performance: Compare your KPIs to industry standards to identify if certain processes are lagging behind

By combining quantitative data with operational insight, you can pinpoint the true source of slowdowns and make targeted changes.

How to increase operational efficiency

Increasing operational efficiency is about making processes work better with fewer resources and less waste. These practical approaches will help your team spot inefficiencies, clear up bottlenecks, and build lasting improvements across business operations.

1. Understand your current state

• Conduct a diagnostic review: Evaluate workflows, resource allocation, and overall performance. Use tools like SWOT analysis to identify both internal and external factors affecting efficiency.
• Gather baseline data: Collect quantitative and qualitative data on key performance indicators (KPIs) such as cycle time, cost per unit, and throughput. This will provide a benchmark against which future improvements can be measured.
• Identify process bottlenecks: Look for delays, redundancies, or areas where resources are under or overutilized. Employee feedback can be instrumental in this step, as frontline workers often have valuable insights into the day-to-day challenges.

2. Set realistic objectives

Establish clear, achievable objectives that align with business goals. Implement the SMART criteria (Specific, Measurable, Achievable, Relevant, Time-bound) to ensure that your goals are well defined and trackable.

3. Develop an action plan

Create a detailed action plan outlining the necessary steps to achieve your objectives. Include timelines, responsible team members, and the resources needed for implementation. This plan serves as a roadmap for efficiency improvement efforts, ensuring that everyone is aligned and aware of their responsibilities.

4. Establish key performance indicators (KPIs)

Identify metrics that align with your operational goals. Continuously track these KPIs to evaluate performance and identify trends that require attention. Common KPIs include cycle time, cost per unit, and throughput.

5. Set up automation

Automate workflows to reduce manual errors and free up employee time for higher-value activities. Use platforms like Ramp for financial automation and spend management to enhance efficiency. Automation can significantly reduce the time spent on administrative tasks, leading to faster and more reliable operations.

6. Practice effective human resource management

Consider your team members as your greatest operational asset. Invest in proper training, clear role definitions, and thoughtful staffing to help prevent bottlenecks while keeping employees engaged and productive.

• Manage positions: Align employees with roles that match their skills and strengths to improve productivity and job satisfaction
• Train employees: Provide ongoing training and development opportunities to update employees on industry trends and enhance their effectiveness
• Use time-tracking tools: Monitor how employees spend their time, including billable and non-billable tasks. Analyze data to identify inefficiencies and effectively manage workloads.
• Encourage open communication: Allow employees to collaborate and share ideas for process improvements
• Act on feedback: Improve processes and demonstrate that employee input is valued, fostering engagement and commitment

7. Increase energy efficiency

Look for opportunities to reduce energy consumption and improve sustainability in your operations. Conduct an energy audit to determine how electricity and water are used. Implementing energy-saving initiatives can lead to cost savings and environmental benefits.

8. Establish strategic partnerships

Collaborate with suppliers, service providers, or other businesses to improve efficiencies across the supply chain. Here’s how:

• Define clear objectives for the partnership that align with the interests of both parties
• Develop a formal agreement outlining roles, responsibilities, and expectations in writing
• Foster open communication through regular updates to build trust and ensure alignment
• Collaborate on small joint projects to assess compatibility and effectiveness
• Adapt and evolve the partnership as market conditions or business needs change

By adopting these efficiency strategies, your organization will see tangible benefits: lower expenses, better quality, happier employees, and a stronger market position. Begin with small changes and gradually develop a workplace culture that values ongoing improvement.

Enhance operational efficiency with Ramp

Ramp helps finance teams move faster by eliminating manual busywork and providing complete visibility into company spend. With one unified platform, you can streamline financial workflows, reduce delays, and reallocate time to high-impact work.

Ramp supports operational efficiency at scale with features like:

• Automated expense reporting: Eliminate manual receipt tracking and expense form filling
• AI-powered insights: Identify cost-saving opportunities without spending hours analyzing data
• Real-time spend visibility: See all company spending in one dashboard with instant updates
• Smart approval workflows: Customize approval chains to prevent bottlenecks and speed decisions

Ramp gives your team the speed, control, and clarity needed to operate more efficiently every day. See how smarter finance operations can unlock time, savings, and stronger decisions.

Get started with Ramp.