“To measure is to know”, stated physicist, mathematician and problem solver Lord Kelvin. “If you can not measure it, you can not improve it”. This clearly applies to measuring operational efficiency – without appropriate measures in place, how much can we really know about performance and efficiency, and how do we know if continuous improvement activities, change programmes and projects are making the difference we’re looking for?
Organisations are not short of data – they’re awash with it. But not all of that data is being turned into information and it’s not always focussed on the right things, bringing to mind this famous line, “Water, water, everywhere, nor any drop to drink”!
Measuring operational efficiency is key to helping us to know and to improve. Let’s dip our toes into the water.
A Balanced Set of Measures
The ‘technical’ way to measure operational efficiency is to calculate the ratio of output gained to the input expended. Operational expenditure, capital expenditure and people resources, revenue, customer satisfaction and quality are among the elements included in the calculation. These will vary depending on the type of organisation.
Of course one single measure of operational efficiency is not enough to explain performance fully. In addition to measuring resource and revenue there is potential to use a wider range of metrics to establish what the organisation is achieving, how well it is delivering its planned goals and objectives, and how efficiently it is operating. These may cover but not be limited to: financial performance; the delivery of products and services; customer service quality; customer satisfaction; the performance of key processes; health and safety; compliance with legal and regulatory frameworks; training and development of the organisation’s people.
The Balanced Business Scorecard is a useful reference here. Developed by Robert Kapan and David Norton it provides an effective framework for measuring from four perspectives. It includes measures of financial performance, but also addresses performance from the perspective of customers/stakeholders, how internal processes are working, and organisational capacity (learning and growth). The Balanced Scorecard supports the alignment of all work done in the organisation with the strategic goals and a clear understanding of their achievement.
Measuring to understand cause and effect
Measuring operational efficiency as we’ve seen, requires an understanding of how well the organisation is turning resources into revenue, or inputs into outputs. Therefore measures of both the inputs and outputs are necessary. But what about the relationships between the inputs and the output?
The y=f(x), or “y is a function of x” focus of Lean Six Sigma is invaluable when it comes to understanding the connections between outputs and the inputs (and in-process variables) that cause them.
In this formula, y represents the output or required result, and x represents the many variables which influence it. These include input variables, e.g. the quality or availability of inputs, and in-process variables relating to what happens in the process to turn the inputs into outputs, e.g. the timeliness of the activities undertaken, or whether they are carried out right first time.
Y=f(x) means that the output is a function of – or a result of – many different variables at play. If only the output (the y) is measured, organisations will only know about the end result. But if some x’s are also measured, there is the potential to understand which of the many variables are drivingthe end result. Let’s take an incident response process as an example. If the time taken to respond to the incident is the y, x’s may include whether all of the necessary information is received and when, the incident type and the level of the person managing it. Collecting data on these variables will allow the organisation to identify which elements impact most on timeliness. If these can be managed and monitored effectively, then the appropriate result will be achieved. This is cause and effect! To fully understand performance and the drivers of performance, a balanced of input, in-process and output measures is needed.
Operational Efficiency and Waste
The concepts of waste and operational efficiency are intrinsically linked – organisations become more efficient by identifying and removing waste in all work activities. Taiichi Ohno, founding father of the Toyota Production System described his intentions this way:
“All we are doing is looking at the time line from the moment the customer gives us an order to the point when we collect the cash. And we are reducing that time line by removing the non-value-added wastes.”
The time line – the lead time or cycle time – from when the work item (like Taiichi Ohno’s order), enters the process to when it exits, provides an indicator of operational efficiency. Removing activities that don’t add value can reduce the time taken and improve operational efficiency. These activities may include unnecessary checks or approvals, re-work, long waiting times or excessive transportation.
In addition to the removal of non value adding steps, measuring operational efficiency will highlight other opportunities for improvement. Depending on their complexity, these could be addressed through a simple ‘just do it’ approach, through a project, a series of focussed workshops or a broader improvement programme. Whatever the approach, understanding the baseline performance level can support decision making about the actions to take, and provide a clear understanding of the time saved, the cost savings, or the improved operational efficiency as a result.
‘Softer’ Indicators of Efficiency
Some aspects of measuring operational efficiency are hard to quantify, but they’re still important. Going back to Taiichi Ohho’s time line, we’re thinking about the ease of operating the process as well as the time it takes. Efficient ways of working don’t feel clunky or laborious for those performing them, and the payoff may comprise a positive customer experience, happier or more empowered process operators and reduced reputational risk etc – important aspects of operational efficiency, but more difficult to measure.
5S is a case in point. The methodology sets out the steps required to achieve a well organised workplace. Those working in a 5S environment don’t have to spend a long time searching for the information they need, or struggle because of poor layouts or missing equipment. Clearly efficient, though expressing all of the benefits and impacts as measureables is tricky. As Einstein said, “Not everything that counts can be counted, and not everything that can be counted counts”!
Some Pitfalls to avoid when measuring operational efficiency
Among the pitfalls when measuring operational efficiency is having too many measures and metrics in place. If this is the case, it becomes difficult to ascertain the most important outcome (y) measures from the metrics and indicators (x’s) that influence them. The result can be confusing and can disguise real, actionable information from users.
Dodgy data is another pitfall. Can it be verified? Is there a clear and up to date Operational Definition to support it? While data driven decision making is a key principle in efficient organisations, using the wrong data can be disastrous. It is worth taking the time and effort to establish sound measurement systems to make sure the data is accurate and the results reported can be relied on.
But don’t inadvertently make an industry out of it. Over-complex and difficult to manage systems for data collection, analysis and presentation are at odds with the desire to understand operational efficiency. Avoid waste such as ‘translation waste’ – the waste of having to take data from one system, re-format it and input it into another, and other aspects of ‘over processing’ in measurement.
And finally – not doing anything about it…
Turning operational efficiency measures into action
It is important to remember that measuring operational efficiency is a means to an end, and not an end in itself. That end is action – a response to the information that measurement provides. Without that, the whole thing is a waste!
Managing by fact is about basing decisions and actions on (reliable) information rather than on gut feel or guess. It is a principle that should be role modelled by leaders and adopted at all levels.
You don’t fatten a pig by weighing it, or as Taiichi Ohno famously stated, “costs do not exist to be calculated. Costs exist to be reduced”. You could say the same about operational efficiency – it doesn’t exist to be measured, it exists to be improved.
If you would like to know more about measuring operations efficiency, then please do not hesitate to contact us.
You can also find out more about Balanced Score card development here or alternatively our Data analysis services here.
