Improving operational efficiency is a top priority for manufacturers aiming to stay competitive, reduce costs and improve production quality. Yet, many teams find themselves caught up in the day-to-day and overlook the big-picture strategies needed to drive long-term improvement.
Investing time and resources into optimizing your equipment, workforce and workflows can generate significant returns: according to McKinsey & Company, manufacturing companies that embrace advanced operational strategies can boost productivity by up to 30% within a few years. In a global landscape where margins are tight and customer expectations are high, this level of performance improvement is critical.
In this guide, we’ll explore practical strategies, metrics to monitor and tools to help improve operational efficiency, with an emphasis on real-world implementation and measurable outcomes.
What is operational efficiency in manufacturing?
What is operational efficiency in manufacturing? Simply put, operational efficiency refers to how well a company converts inputs like labor, materials and energy into outputs — finished goods — with minimal waste. In manufacturing, this includes everything from how much scrap is produced to how often machines are idle. The end goal is for 100% of your input material to be used and transformed into your final product.
Measuring the efficiency of your process can take many different shapes across industries, but it ultimately entails measuring, comparing and tracking specific metrics. Knowing how to improve operational efficiency in manufacturing is a result of proper tracking and analysis of your most important metrics:
- Throughput: How many quality products are produced within a given time
- Uptime: Machine availability and reliability
- Scrap rate: Material wasted due to defects or rework
- Cycle time: Time required to complete one unit of production
For example, an electronics manufacturer might track yield per hour, while a food packaging plant could measure the rate of packaging line stoppages. For plastics manufacturers, some important metrics to consider are how much raw material you waste during purges, product changeovers, scrap and defects. Any amount of waste is, by definition, an inefficient process. High efficiency means more quality output using fewer resources.
Metrics like Overall Equipment Effectiveness (OEE) combine availability, performance and quality into one benchmark, making it a go-to measure of overall operational efficiency. In contrast to productivity-focused metrics, OEE emphasizes operational effectiveness, helping teams focus on doing the right tasks in the right way — not just doing more.
Monitoring OEE alongside other key performance indicator categories, such as downtime, throughput and yield, gives a more complete picture of both efficiency and quality. These metrics serve as the foundation for initiatives that drive operational excellence, allowing manufacturers to benchmark, identify bottlenecks and plan strategic improvements.
Additionally, effective resource management — such as optimizing labor allocation and minimizing material waste — supports long-term gains in both cost control and employee productivity.
How to calculate operational efficiency in manufacturing
In the world of manufacturing, there’s a simple and ubiquitous calculation that manufacturing businesses use: your total operating expenses divided by your total revenue. In other words, all the money you spend making your product, and how much money you make selling your product.
Understanding how to calculate operational efficiency in manufacturing is the first step in perfecting your operation from an efficiency standpoint. The basic operational efficiency ratio compares a company’s operating expenses to its revenue:
Operational Efficiency Ratio = Operating Expense / Revenue
This formula provides a snapshot of how efficiently a business is converting expenses into sales. A lower ratio indicates higher operational efficiency. Unlike productivity ratios, which often emphasize volume, the operational efficiency ratio emphasizes operational effectiveness — how strategically resources are being deployed for optimal output.
Example Calculation
If your manufacturing operation has $800,000 in operating expenses and $2 million in revenue:
800,000 / 2,000,000 = 0.4 (or 40%)
This means that 40% of your revenue is consumed by operational costs — leaving room for better efficiency gains through cost reductions or throughput improvements. It also signals an opportunity to evaluate labor utilization, machine performance and supplier spend — all of which directly impact your overall efficiency profile. Over time, improving this ratio can lead to stronger profit margins and more agile operations.
Additional operational efficiency metrics to monitor include:
- OEE (Overall Equipment Effectiveness)
- Scrap and defect rates
- Cost per unit
- Labor efficiency
Tracking these key performance indicators over time gives insight into areas where you can reduce waste and improve asset utilization. You can quickly see if you’re spending too much on your operation or if you’re making too little in sales. The answer to either of these scenarios can dramatically change how you run, manage and maintain your operation.
In the end, measuring operational efficiency in manufacturing isn’t just about identifying what’s wrong; it’s about understanding where and how to apply focused improvements that build toward long-term operational excellence.
Increase operational efficiency with these 7 steps
Improving operational efficiency is not a one-time fix — it’s a continuous improvement process. By systematically identifying bottlenecks, waste and underperforming assets, you can make lasting changes that improve outcomes across the board.
1. Implement and increase automation. If your automation practices and systems are years or decades old, you may be surprised by what the current automation landscape can offer. Automation is one of the most effective ways to improve operational efficiency. Today’s systems use technology and data to be “smarter” and more powerful than ever. Whether replacing controllers and components, integrating automation with “old-iron” equipment, or implementing additional technology to be even more collaborative with human workers, reviewing your current automation state and identifying opportunities is an ideal place to start in order to improve operational performance.
2. Maintain a focus on safety. Safety is your number one responsibility to workers. It also plays a major role in an efficient facility. Employee injuries and equipment malfunctions require downtime — sometimes for the entire facility — and will typically require equipment repairs, maintenance, time off and a wealth of other resources in reviewing and (if necessary) rectifying what went wrong. By maintaining a company-wide focus on safety, you can avoid these problems.
3. Train and retrain. Employee training covers a broad range of areas: best practices, company-specific information, safety and more. The saying goes, “knowledge is power,” and in a manufacturing facility, it is especially true. Be sure that all employees have been recently trained and updated in best practices for machine operation, maintenance and safety — as well as any other areas pertinent to your operation.
4. Keep up with maintenance. Improperly maintained machines are the enemy of efficiency. Neglected equipment breaks down more often, does not operate at peak performance, and can pose danger to workers. Consider adhering to a preventive maintenance schedule, rather than a reactive approach. Operational efficiency can also be greatly improved through predictive maintenance analytics that identify potential issues early on, creating a more targeted and effective maintenance practice in your organization.
5. Artificial intelligence. As companies turn to Industry 4.0 and 5.0 best practices, they’ll start to evaluate how automation plays into their operation. For most manufacturing companies, artificial intelligence (AI) can be an invaluable tool. AI can be trained to work with your specific process, noticing small discrepancies and making logical decisions in fractions of a second. How AI integrates into your existing workflow largely revolves around how much automation you want and how much insight you want into your machines. As a simple example, AI can track how your machines are performing and predict maintenance tasks or spot potential defects before your product even gets to its inspection phase.
6. Review the facility floor layout. For related processes to work together most effectively, the facility floor should be laid out in a planned, intentional way. If you’ve added equipment and capabilities over the years, your floorplan may not be optimized, and you might not be operating as efficiently as you can. Assess your processes, workflows and current layout, then determine whether different locations for equipment may be worth the time investment.
7. Define goals. With an efficiency goal in mind, you and all of your employees can have a concrete target to work toward. Benchmark your current efficiency performance metrics, such as cost per part, accepted pieces per cycle, relevant failure metrics, average downtime, overall equipment effectiveness (OEE), etc. Then, decide how you would like to see those numbers improve over several time periods — for example, six months, one year and three years. Creating a vested interest in improving these metrics across the facility will yield better results than an undefined efficiency goal.
8. Optimize supply chain coordination. Enhancing communication and transparency with suppliers improves delivery timing and reduces inventory risks. ERP platforms and supplier portals streamline updates and planning. This strengthens your entire supply chain ecosystem, minimizing delays, improving lead time accuracy and supporting better resource management across production workflows.
9. Monitor energy consumption. Energy often represents a hidden operating expense. Use energy monitoring software or integrate tracking with your CMMS to highlight high-usage assets and optimize energy loads. Real-time energy insights allow facilities to shift usage away from peak hours, reduce utility costs and uncover equipment inefficiencies that might otherwise go unnoticed.
10. Streamline changeovers and reduce setup time. Shorter changeover time means higher availability. Use SMED practices, standard operating procedures and modular tooling to speed transitions. By standardizing changeover processes and training staff on efficient techniques, manufacturers can reclaim valuable production time and support more agile operations.
11. Leverage data analytics for continuous improvement. Equipment sensor data and maintenance logs can reveal chronic bottlenecks. By leveraging analytics, you can drive process improvements, uncover root causes and boost operational efficiency. Analytics also enable predictive insights, allowing you to intervene earlier, reduce waste and refine long-term strategies with measurable key performance indicators.
12. Enhance cross-functional collaboration. When maintenance, production and engineering teams collaborate, shared goals replace finger-pointing. Regular cross-departmental check-ins keep projects aligned and accelerate response time. Cross-functional collaboration fosters accountability, streamlines communication and ensures that every team is contributing toward shared goals for improved operational effectiveness.
13. Optimize inventory and MRO parts management. Poor inventory management and inaccessible maintenance parts slow repair timelines. Automated MRO and spare parts management systems improve availability, reduce stockouts and cut excess. This ensures technicians have what they need when they need it, reducing downtime and maintaining steady equipment availability.
14. Embrace modular and flexible manufacturing systems. Flexible systems allow rapid line changes and scale-ups without major redesign. This improves responsiveness to customer needs and limits downtime during new product introductions. Modular layouts also support leaner operations by allowing faster adaptation to shifting market conditions or production schedules.
15. Invest in employee empowerment and feedback. Workers closest to production often have the best ideas for efficiency. Empower them to suggest improvements, join continuous improvement teams and flag issues early. This builds a culture of engagement and trust while also enhancing overall employee productivity and performance.
Manufacturing efficiency vs. productivity
Manufacturing operational efficiency is different from manufacturing productivity — although some companies use the words interchangeably, efficiency looks at the quality of your product, while productivity looks at the quantity.
For example, a productive manufacturer might fabricate a million units a year, but they have a 20% defect rate, so they’re only selling 80% of their manufactured inventory. A different manufacturer who focuses on efficiency makes 800,000 units a year, with a 1% defect rate. Both companies are selling roughly the same amount, but the “productive” operation is wasting a ton of time and money with an inefficient process.
As a result, their calculated operational efficiency is going to be much worse. By improving efficiency, manufacturers can identify and eliminate the root causes of operational waste — whether it’s excess material use, unnecessary motion or avoidable machine downtime. This not only lowers costs but also contributes to sustainability goals by conserving resources and reducing scrap.
Leveraging maintenance and technology to drive efficiency
Smart maintenance strategies and connected technologies are transforming operational efficiency. By shifting from reactive to predictive approaches and integrating real-time machine data, manufacturers can prevent unplanned downtime, optimize labor use and move from guesswork to precision, ensuring that resources are allocated where they’ll have the greatest impact.
The Role of Predictive Maintenance
Predictive strategies minimize unnecessary scheduled work and extend asset life. Using condition-monitoring tools like vibration sensors and thermography, maintenance teams can act based on actual wear, reducing unexpected failures.
CMMS and Real-Time Data Tracking
A CMMS platform tracks maintenance history, asset performance and work orders in one place. When combined with real-time sensors, it enables proactive service decisions and better team coordination.
Integrating IIoT for Smart Automation
Industrial IoT (IIoT) devices capture real-time data from machines, enabling automated alerts, process adjustments, and centralized visibility. This supports process optimization and ensures issues are addressed before they cause downtime.
Together, these tools form a robust operational efficiency strategy grounded in data, responsiveness and cross-team visibility.
Move towards greater efficiency today
Are you ready to improve operational efficiency at your facility? For over three decades, ATS has helped manufacturers across the globe improve industrial asset performance and production output through a variety of equipment maintenance and MRO services. From predictive maintenance strategy implementation, to technical training, to MRO asset management, we’re here to help make your factories run better. To learn more about how we can help you improve your plant performance, visit our website or contact our maintenance specialists today.
References
Goering, K., Kelly, R., & Mellors, N. (n.d.). The next horizon for industrial manufacturing: Adopting disruptive digital technologies in making and delivering. McKinsey & Company. https://www.mckinsey.com.br/~/media/McKinsey/Business%20Functions/McKinsey%20Digital/Our%20Insights/The%20next%20horizon%20for%20industrial%20manufacturing/The-next-horizon-for-industrial-manufacturing.pdf
U.S. Department of Energy. (n.d.). Energy management programs. https://www.energy.gov/eere/iedo/energy-management-programs
Martin, R. L. (2019, January–February). The high price of efficiency. Harvard Business Review. https://hbr.org/2019/01/the-high-price-of-efficiency
Burke, R., Laaper, S., Hartigan, M., & Sniderman, B. (2017, August 31). The smart factory: Responsive, adaptive, connected manufacturing. Deloitte. https://www.deloitte.com/us/en/insights/industry/manufacturing-industrial-products/industry-4-0/smart-factory-connected-manufacturing.html
National Institute of Standards and Technology. (n.d.). Smart manufacturing. U.S. Department of Commerce. https://www.nist.gov/smart-manufacturing
