Businesses with higher operational efficiency can respond to the changes in the ecosystem much faster. This was evident as the COVID-19 pandemic challenged the global business environment. Operational efficiency defined the speed at which enterprises were able to respond to choked supply chains and changing consumer preferences.
The end objective of every business is to drive revenue and increase profitability. There are only two ways to achieve better profitability – increasing sales or reducing cost. By achieving one or both of these objectives, a business can continuously grow even in turbulent times.
Businesses should aim to reduce costs and achieve cost efficiency to be more competitive in the marketplace. Irrespective of the size of the business, cost efficiency can help businesses achieve higher profitability and make procurement an integral part of operations. Cost efficient operations can be achieved by strategic planning and opting for the right tools, among other things.
What is Cost Efficiency
The concept of cost efficiency revolves around saving money or resources to improve the quality of a process, product, or service of the organization. Companies usually measure cost efficiency by comparing it with the output achieved or the revenue earned due to the costs incurred by the company. The level of cost efficiency in any organization keeps changing as there is always a scope for improvement.
For instance, a company may spend $100 to create a product worth $500. As the company continues to discover ways to reduce the production cost further and improve quality simultaneously, the cost efficiency will continue to improve along with the improved quality of the product.
The meaning of cost efficiency can be different for each company depending on the industry, business cycle and current level of operations. However, achieving higher cost efficiency is in the interest of all organizations.
Cost Effective vs. Cost Efficient
Now that you have understood what is cost efficiency, it is now time to understand the difference between cost effectiveness and cost efficiency. Businesses typically use the two terms, cost effective or cost efficient interchangeably, but there is a difference in what these terms mean.
For instance, the major difference is in the two words, efficiency and effectiveness. Cost effectiveness of efficacy focuses on achieving predetermined objectives within set parameters related to cost. If the business can achieve the set objective within the set cost, the decision is tagged as cost effective.
It is important to note that the most cost-effective solution need not be the most cost efficient for the organization. To achieve higher efficiency in business operations, businesses need to balance increased cost saving and generate long-term value for the business.
How to Achieve Cost Efficiency?
Cost efficiency is also known as the cost of efficiency that the business needs to pay to improve the overall business operations. Here are some steps that you can take to achieve cost efficiency in your business:
Conduct a Cost-Benefit Analysis
To start with, you need to have a cost-benefit analysis in place. This is required for all major business activities, products, and services. The basic expectation of undertaking a cost-benefit analysis is to figure out how much each product, service, or business decision is contributing to the overall revenue and profitability of the firm.
The costs to be considered include direct, indirect, opportunity, intangible and risk-related costs. The potential benefits that need to be considered should include tangible, intangible, and greater competitive advantage or market share.
The cost-benefit analysis exercise needs to be exhaustive and should include as many possible decisions, products and services to conduct a thorough analysis.
Invest in Digital Solutions
Another step that can be taken to achieve cost efficiency is to opt for digital solutions. You can go for solutions like procure-to-pay software that can help you streamline your procurement operations and bring better cost efficiency to the business. For example, advanced procurement technologies can help enterprises leverage strategic low-cost country sourcing (LCCS) toward driving cost savings and maximizing efficiencies.
You can also opt for comprehensive supply chain software that helps you align all aspects of the supply chain and achieve higher cost efficiency. For example, multi-echelon inventory optimization helps companies make better use of their
Make Cost Efficiency a Part of Your Company Culture
You need to make cost efficiency part of your company culture. Only after you motivate all your employees to work with a cost-efficient ecosystem can the business achieve better results.
The business needs to be cost and time efficient, and each employee needs to be clear on what being cost efficient means to each department. You can consider the cost responsiveness frontier chart to understand the level of responsiveness and the cost involved.
Consolidate Business Activities
As much as possible, you need to consolidate business activities to achieve higher cost efficiency. For example, one of the biggest challenges for any business is its departments working in isolation, which means that the business is wasting valuable resources. Consolidating business activities has been observed to bring cost efficiency into business operations due to increased scale and negotiation power.
Focus on Innovation and Value Creation
The ultimate objective of any business should be value creation for the consumer. You should focus on innovation and value creation to achieve better cost efficiency. As you continue to innovate and create more value for the consumer, the business will find newer ways to cut down on costs to achieve cost efficiency to help the business grow.
Cost efficiency is critical for the success of any business. You need to take the relevant steps explained here to achieve sustainable cost reduction in business. As it is a continuous process, the strategy to achieve better cost efficiency would evolve with the increase in the size of business operations. A dollar saved is a dollar earned.