Operating effectiveness
From CEOpedia | Management online
Operating effectiveness - the yield allowing an organization to convert, utilize minimal resources, (inputs) into maximum products (outputs) by factors like reducing defects in products, the cost or waste of time, energy, developing better products faster.
Evaluating the Operating Effectiveness of Controls at a Service Organization
When the user auditor's risk assessment includes an expectation that controls at the service company are operating efficiently, the user auditor should receive audit evidence concerning the operating effectiveness of those controls from one or more of the following procedures [1]:
- receiving and reading a SOC 1 Type 2 report, if obtainable
- performing appropriate tests of controls at the service organization
- using another auditor to perform tests of controls at the service organization on behalf of the user auditor.
Design vs Operating Effectiveness
| Audit Evidence Should Support Your | Design and Implementation | Operating Effectiveness |
|---|---|---|
| Understanding of how the control is designed | X | X |
| Evaluation of whether the design is effective | X | X |
| Determination that the control procedure has been implemented | X | X |
| Understanding of how the control procedure was applied throughout the period | X | |
| Determination that the control was applied consistently throughout the period | X | |
| Understanding of who or by what means the control was applied throughout the audit period [2] | X |
Examples of Operating effectiveness
- Reducing defects in products: Quality control procedures and processes, such as inspections and testing, can be used to reduce defects in products, resulting in higher levels of operating effectiveness.
- Reducing the cost of production: Companies can implement lean production strategies to reduce the cost of production by eliminating waste and inefficiencies. This can be achieved by streamlining processes and utilizing automation.
- Developing better products faster: Through the use of agile development methods, companies can develop better products faster. This involves breaking down product development into smaller, more manageable steps, allowing for faster development cycles.
- Utilizing minimal resources: Companies can optimize their resources by utilizing the most efficient methods for achieving their goals. This includes using the most efficient tools, resources, and processes, as well as optimizing the use of personnel and other resources.
Advantages of Operating effectiveness
Operating effectiveness helps organizations to make the most of their resources and turn them into successful products or services. The following are some of the advantages of operating effectiveness:
- Greater Efficiency: Operating effectiveness helps organizations to increase their efficiency by reducing defects in products, minimizing the cost of production or reducing waste of time, energy and resources. This increased efficiency leads to improved profitability and cost savings.
- Increased Productivity: Operating effectiveness helps organizations to make better use of their resources and achieve higher productivity. By reducing costs and increasing efficiency, organizations are able to produce more goods or services in less time without sacrificing quality.
- Improved Quality: Operating effectiveness allows organizations to produce goods or services of higher quality. By reducing defects, organizations are able to produce products that meet customer expectations and are more likely to be accepted in the market.
- Improved Customer Satisfaction: Operating effectiveness leads to improved customer satisfaction as the products are of higher quality and better meet customer requirements. This leads to increased customer loyalty and higher revenues.
- Reduced Risk: Operating effectiveness reduces the risk of projects going over budget or failing to meet customer requirements. By taking proactive steps to reduce defects, organizations can ensure that their projects are completed on time and within budget.
Limitations of Operating effectiveness
Operating effectiveness can be limited by several factors, including:
- Limited resources - Operating effectiveness can be limited by a lack of necessary resources, such as personnel, materials, or capital, to meet the demand for a product or service.
- Incompatible technology - Operating effectiveness can be hindered by outdated or incompatible technology, which can slow down production or make it difficult to produce a quality product.
- Poor planning - Operating effectiveness can be hindered by inadequate planning and forecasting, which can lead to an inability to meet customer demand.
- Human error - Operating effectiveness can be hindered by human error, such as incorrect data entry or incorrect instructions being given.
- Lack of training - Operating effectiveness can be hindered by a lack of training or expertise among personnel, which can lead to mistakes and a decrease in efficiency.
- Poor communication - Operating effectiveness can be hindered by poor communication among personnel, which can lead to a decrease in productivity.
- Poor quality control - Operating effectiveness can be hindered by poor quality control, which can lead to an increase in defects and a decrease in customer satisfaction.
Operating effectiveness involves many approaches that help organizations maximize their output and minimize their inputs. These approaches include:
- Lean manufacturing - a production practice that emphasizes the minimization of the amount of time and resources required to produce a good or service, thus maximizing efficiency.
- Six Sigma - a set of techniques and tools for process improvement. It is designed to reduce defects, reduce costs, and improve customer satisfaction.
- Total quality management (TQM) - a management approach focused on ensuring quality in all areas of an organization, from product design to customer service.
- Process improvement - a methodology that seeks to identify and eliminate inefficiencies within a company’s processes, ultimately leading to improved performance and higher profits.
- Automation - the use of technology to automate processes, such as robotic process automation (RPA) or artificial intelligence (AI), to reduce manual labor and save time.
- Supply chain optimization - the process of reducing costs and time by improving the efficiency of the entire supply chain, from raw material sourcing to customer delivery.
In conclusion, operating effectiveness involves many approaches that help organizations maximize their output and minimize their inputs, from lean manufacturing to supply chain optimization.
| Operating effectiveness — recommended articles |
| Continuous operations — Flow analysis — Shewhart cycle — Zero defects — Operational control — Lean manufacturing — Quality factors — Uniformity of production — Quality assurance |
References
- AICPA (2017), Reporting on an Examination of Controls at a Service Organization Relevant to User Entities' Internal Control Over Financial Reporting (SOC 1) John Wiley & Sons
- Delaney P. R., Whittington O. R. (2011), Wiley CPA Examination Review, Outlines and Study Guides John Wiley & Sons
- Fitzgerald M. (2011), Report on Controls Placed in Operation and Tests of Operating Effectiveness for the Bureau of the Public Debt's Fed. Invest. Branch from August 1, 2009 to July 31 2010 DIANE Publishing
- Fowler E., Graves P. (2013), Managing an Effective Operation Routledge
- Mitchell J. S. (2015), Operational Excellence: Journey to Creating Sustainable Value John Wiley & Sons
- Zisman B. S. (2019), Banks and Thrifts: Government Enforcement and Receivership LexisNexis
Footnotes
Author: Klaudia Wojtas
