The Definition of Operational Costs—and How to Improve Operational Efficiency

  • 4/29/2020
  • Read Time : 4 min
definition of operational costs

A manufacturing production process is made up of many separate operations. The complexity of these processes makes it extremely difficult for an individual to notice and design more effective operating patterns and cycles. Fortunately, advances in sensor technology make it possible for machines to send back real-time data and alerts, contributing to the improvement of operational efficiency.

These efficiencies can take many different forms, from real-time alerts and analytics, to augmented reality solutions. So, a better definition of operational efficiency might be drawn from the most common operational costs that create a drain on efficiency.

Definition of Operational Costs

Operational costs are associated with running a production line and are generally incurred in four ways. Reducing these costs is the purpose behind operational efficiency.

  • Raw materials (or direct materials): These are the materials directly used to create your finished product. For example, if you’re manufacturing tires, this will be the cost of rubber, wire, fabric, and extra chemical components. Efficiency can be measured in the reduction of scrap materials that must be reclaimed, reworked, or discarded and replaced.
  • Direct labor: This is the cost of employing your workforce, including your maintenance employees or your workers operating and overseeing the machinery. Efficiency improvements may be measured in the reduction of employee turnover and training costs, or improvements in speed and precision of skilled tasks, and minimizing accidents that cause scrap, waste, and downtime.
  • Variable overhead: These are the overhead costs that are liable to change, depending on your business activities. For example, the amount of electricity you use will vary from month to month, depending on your orders for the month, or the amount of excess raw materials or finished inventory sitting in a warehouse. Operational efficiency can be measured in the precision with which these variables can be anticipated, and the ability to minimize both an excess or lack of necessary resources.
  • Fixed overhead: These are the costs that remain constant. For example, these are salaries, the depreciation of machinery and the cost of office rental, heating, or lighting. By their definition, fixed overhead costs are hard to optimize in the short-term; but long-term efficiency improvement may come in measuring productivity against salary costs, or the ability to extend the life of machinery through better maintenance and usage.

Digital Strategies to Improve Operational Efficiency

Having provided a definition of operational efficiency through a lens of cost, we can examine strategies to optimize efficiency and costs. Each of these solutions rely on some combination of innovative industrial technology, including industrial connectivity, Industrial Internet of Things (IIoT), and augmented reality (AR).

Reduce Unplanned Downtime and Scrap

Until now, unplanned downtime has been an expensive and unavoidable cost of manufacturing. In fact, global process industries lose around $20 billion of revenue a year as a result of unplanned outages. In the past, manufacturers have had no information on which asset or manufacturing line is slowing down production. They have been forced to wait until a malfunction occurs, and then disrupt production with costly outage time.

IIoT-enabled real-time alerts, however, are transforming this aspect by not only making it possible to know when a machine is malfunctioning and why, but also providing data that will make it easier for you to predict when a machine is likely to break. This means you can move from a reactive to a predictive approach, allowing you to arrange your minimal downtime to a period that suits your production calendar. These alerts can also predict and prevent miscalibrations or errors that would otherwise generate literal tons of scrap and bring production lines to a costly halt.

Optimize Your Production Process

The vast quantity of data provided by real-time alerts means that engineers can look at historical trends to identify a production line’s maximum threshold. You can then use this data on your machinery’s performance and apply it to other production lines and processes. It is now possible to not only orchestrate real-time management within a facility, but as industrial innovators are already doing, use the digital solutions to optimize across multiple plants and factories. As market demands require an increasingly agile and complex production environment, these insights can make a dramatic improvement in your uptime and efficiency.

Make Your Workforce Safer and More Productive

Augmented reality tools and the IIoT can transform the productivity of your workforce. AR-based training can accelerate preparing new hires for the shop floor. AR step-by-step instruction can help less skilled workers work better and make less mistakes; it can also help employees of all skill levels perform highly-customized or rapidly-changing tasks.

The IIoT can further complement efficiency gains by allowing workers to see if machinery or equipment is functioning correctly and safely. Deviations in performance or potential asset health problems can be caught with IIoT real-time visibility and notifications. Maintenance technicians can be actively alerted to proactively correct issues. This same data can be pushed to plant managers who can balance production lines to ensure proactive maintenance is down at the most efficient time. IIoT data can even be delivered through AR devices (smart devices or headwear) to help maintenance technicians triage, prevent, and resolve issues faster and with greater precision.

The Impact of Operational Efficiency

As we have seen, the operational costs of running a production line are significant. Using these digital solutions to improve operational efficiency and reduce operational costs deliver a huge competitive advantage.

Now that you have a definition of operational efficiency, and understand ways to solve for it, check out our eBook to discover the hidden drains on asset efficiency—and what you can do to solve for them.

Tags:
  • Augmented Reality
  • Industrial Internet of Things
  • Aerospace and Defense
  • Automotive
  • Electronics and High-Tech
  • Industrial Equipment
  • Life Sciences
  • Oil and Gas
  • Digital Transformation

About the Author

Prema Srinivasan, Digital Content Marketing Manager

As a Digital Content Marketing Manager, I bring the latest technology stories to the forefront. I'm passionate about engaging readers and empowering decision makers with relevant, up-to-date content.