Six Sigma and KPI’s: Your Operating Expense Ratio (OER)

Running a business can be expensive. No matter what industry you’re in, what services you offer, or products you make, there’s an ever-changing cost for doing business. Typically, how expensive it is to operate your business determines how profitable you are. Likewise, your operating expenses determine your return on investments, growth aspirations, and revenue. While there are multiple ways to determine how expense your operations are, the most straightforward is your operating expense ratio (OER). This ratio considers all your day-to-day expenses and compares them to your overall success. Yet, what can you do to improve your OER? Learn how Six Sigma is changing hundreds of organizations’ OER’s for the better!

What is OER?

OER is your operating expense ratio. This calculates essentially how expensive it is to operate your business. Costs, such as maintenance, sales, R&D, rent, and more are all used when calculating your OER. In a basic ratio, you sum up your operating expenses for a set time and divide it by your sales revenue for the same period. In the end, you have a ratio that you can use to compare your operating expenses to yourself and other organizations within your industry.

Most organizations will use their OER to compare quarterly reports to each other, analyzing how it changes over time. Ideally, you want to see your operating expenses decrease and sales to expand. However, this is easier said than done. If your OER is lower one quarter or below average compared to others in your field, Six Sigma offers multiple tools to improve it.

Six Sigma and OER 

One of Six Sigma’s most noticeable features is reducing waste. Whether it’s production, manufacturing, or equipment, Six Sigma methodologies can reduce your overall waste tremendously. Our Lean Fundamentals course provides you with the greatest insight into doing precisely this. Combining with the fundamentals of Six Sigma, Lean introduces you to proper data collection and management. This allows you to analyze and see where your organization is producing the most waste. By cutting down on waste production, you can decrease your operating expenses. Additionally, producing less waste leads to a greater return on your equipment, machines, and workforce. These, plus more directly improve your OER.

Kaizen Approach

Another way to improve your organization’s OER is to use the Kaizen approach. Kaizen focuses on improving the communication within an organization and seeking where to make improvements. These areas include improving customer satisfaction and your staff’s problem-solving. Likewise, it increases your products’ quality, staff loyalty, and employee skillsets. With Kaizen, you work from within to greatly improve your organization. As a result, your organization is more efficient and positively impacts your OER.

One key factor about OER’s you must remember is that it must be compared to similar companies and organization within your industry. For example, if you’re a product manufacture and you compare your operating expenses to an R&D firm, your ratio will be abnormally high. Likewise, you must compare your ratio to yourself across multiple periods to properly analyze how it changes with time.