Why you need to know about the Business Optimization triangle

Business Optimization is like the Bermuda triangle. Some improvement targets are officially announced by companies and never found again.

To find back the business benefits of higher service levels, lower costs and reduced working capital, thanks to the magic of optimization, you need to understand following about the optimization triangle.

Optimizing a business is hard work. Looking for the best possible outcome leads to conflicting priorities between sales chasing revenue, and other functions trying to contain inventory and other costs.

Some companies achieve growth with cash flow problems. Others achieve healthy profits but accumulate working capital, or cut costs and loose revenue opportunities. Or any other permutation between these 3 corners of the business optimization triangle.

Finding the right balance between these conflicting objectives, optimizing each of your business decisions, is indeed extremely challenging without a proven methodology.

Below I share a proven recipe about how, in a couple of years, my team in a multi-billion USD manufacturing company achieved service improvements, whilst at the same time dramatically lowering working capital and other costs.

1. Clarify the Business Goals

What keeps me going is my Goals. (Muhammad Ali)

Every business in the world is driven by 3 very conflicting priorities:

1. Increase Revenue: satisfying customer demand to generate revenue and maximize the Return On Investments on company assets (Revenue)
2. Improve Margin: containing costs helps maintain a healthy profit (Cost)
3. Control Working Capital: ensure the delay between generated Revenue and Spend does not lead to Cash Flow problems as the company grows (Inventory)

To make your business grow you need to simultaneously increase your profit, your return on investment and your cash flow. (Eliyahu Goldratt)

2. Find the right balance

Balance is not something you find, it is something you create.

Because different departments look at each KPI in isolation, with a different priority and horizons, it becomes difficult for the company to achieve the right balance between service, cost and working capital.

Typically the sales scorecard focusses on revenue without visibility on the generated costs and resulting profitability. The supply chain functions (procurement, manufacturing, logistics,...) target customer service, and periodically addresses excess cost and working capital based on operational or financial reports. This generates a pendulum as sales push for quarter and year end revenue spikes, forcing the supply chain teams to eliminate the resulting excess inventories and costs.

Across the company, very few look at the impact of their decisions on service, cost and inventory at one given time. A closer look at the math behind business optimization can help us understand how we can fix this problem.

3. The math behind Business Optimization

To successfully optimize a business, we need to start understanding the relations between KPIs, rather than improving them in isolation!

Business performance is determined by the tension between the goals you set and the constraints you face. Due to physical constraints, there are only a finite number of options in the real world to meet our goals. Our choices to achieve superior performance are limited and we need to make collective choices as a company, about the KPI we will improve (sometimes at the expense of other KPI).

Creativity comes from constraints. (Biz Stone)

Once we established our KPI preferences and modeled our main real-life constraints correctly, two types of mathematical models are available to solve our optimization problems: heuristics and function-based algorithms.

Function-based algorithms calculate the best result in a finite number of steps. By systematically choosing input values from within an allowed set and computing the value of the function, the program can find a result as close as possible to the goals you set.

Heuristics are iterative methods that converge to a solution over time continuously improving the result.

Depending on the defined goals and the rules and constraints at play, specific heuristics or function-based algorithms will provide a better and/or faster result.

The importance is to provide the best possible answer in a timely manner. Remember a plan is directional and does not need the highest accuracy, given the main ingredient, the forecast is often not very accurate either.

In general it is far better to achieve a 95% perfect decision ahead of time, than a 100% perfect choice when it is already too late!

Embrace reality, even if it burns you. (Pierre Berge)

The opportunity leveraging optimization to improve our business results are huge. During my years at a manufacturing company, my team eliminated tens of millions of dollars of yearly recurring waste in our supply chains, whilst improving customer service. And these goals were achieved by focussing on the low hanging fruits only!

As the Japanese proverb says: money grows on the tree of persistence.