The Optimization Trap

In the previous edition of this newsletter I introduced the concept of the Optimization Trap.

Today, I explain what it is.

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Before explaining The Optimization Trap it is necessary to first define some relevant terms: management, problem solving, constraints and optimization.

Here goes.

Management: The utilisation and coordination of resources such as capital, plant, materials, and labour to achieve defined objectives.??In other words - management is about getting things done with the resources that we have.?

Problem Solving: Has been defined as a cognitive process that requires the modulation and control of more routine or fundamental skills?(Goldstein & Levin, 1987). It occurs when we do not know how to proceed from a given state to a desired goal state. This is a key element of management.

Constraints: In mathematics a constraint is a condition that a solution to an optimization problem must satisfy. In management these are limitations or restrictions that are imposed on our decision making and so these could be limitations on capital, plant, materials, or labour. That is, we only have so much money, labour, and so on.

Optimization:??A mathematical technique for finding a maximum or minimum value of a function of several variables, subject to a set of constraints (Johnson D, Constrained Optimization, 2003). More colloquially referred to as solving problems by trading off choices to achieve the best outcome, within the given constraints.?

So, putting those definitions together.

Management is about utilizing resources to achieve a defined objective which means that we must solve the problem of proceeding from a given state to a known goal within certain limitations or restrictions on our decision making so that we make the best trade off between choices.

Phew! That is a mouthful.

The reality is that there will always be constraints in management, that is a fact of life, after all who has unconstrained access to the factors of production???But here is the real issue.

What happens when we unwittingly impose constraints or assume that some variables are either fixed or hard to change when they are not???

You may in fact not realize that you are assuming a constraint that is not actually a constraint.

When this happens you artificially limit the potential to reach the defined objective – in this case optimization.

This is The Optimization Trap.

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Here are some examples of constraints that are often assumed with inventory optimization.??

• The supply chain is fixed, that is, that the parts supply arrangements cannot be changed.
• Internal processes don’t influence the outcome.
• Demand data reflects the actual parts usage, rather than the demands of staff.
• Only ‘my department’ needs to be involved in an optimization program.

In these examples, the assumptions made will reduce the effectiveness of any inventory optimization.?

Next time, I will provide a step-by-step explanation of how this works in the real world.

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