In an ideal world, your business would have the perfect plan and as long as you followed X, Y, and Z, you would be efficient and successful.
However, the real world is far from ideal. Take for example the current financial crisis and economic slowdown. Jittery consumers are spending less and less, making the task of forecasting more difficult for companies. It’s hard to come up with assumptions when you don’t have a solid base.
Even during stable economic conditions, manufacturers are faced with shifting customer demand, surprise promotions, etc., that disrupt the concept of optimization. It is impossible to attain, much less maintain that kind of an ideal standard.
Instead of focusing solely on some mathematically generated ideal, companies should be focusing on “managing for the moment,” according to Trevor Miles, Director, Product Management, Kinaxis.
“The rules of business are not fixed -- what’s true one day may not be true the next,” Miles said. “There is a degree of uncertainty and a human element to it. It’s fuzzy.”
He adds that companies usually follow exactly what their optimization model dictates, which can often lead to problems.
“Optimization assumes you know things like demand, volume and mix absolutely, and optimization models are assumed to be correct 100 percent of the time,” Miles added. “That’s impossible due to the degree of uncertainty.”
Miles suggests that instead of taking optimization results as a concrete answer, companies look at it as more of a sense of direction. It’s not a goal in itself, but more of a stepping stone.
You need a plan -- that’s something that remains constant whether you are aiming for optimization or you are managing for the moment. However, you need to be able to modify that plan and track your progress and respond to any problems as soon as possible.
“Your forecast is only your best guess,” Miles said. “But what are you going to do when an order comes in for 50 percent blue iPods when you were expecting only 20 percent? The problem isn’t coming up with a plan -- the problem is managing variation.”
Suppose your optimization model tells you to source from Supplier B for those 20 percent blue iPods. Now that you have 50 percent, it tells you to source from Supplier C, even though you already ordered materials from Supplier B. What do you do now? Which model do you follow?
“You must come up with a compromise between those dealing with the customers and those dealing with the manufacturers and suppliers.” Miles said.
Consider the high-tech industry. The industry has changed dramatically since the concept of optimization was introduced, according to Miles.
“Companies like Apple no longer make products within the four walls of their building,” he said. “If you don’t make it, what’s to optimize? It’s more about coordination than optimization and about collaboration instead of control.”
According to Miles, the optimization model can only take you so far. You have to add in the human element to make the final decisions. But how do you balance a mathematical model with a human component?
“We offer a balance scorecard to companies,” Miles added. “They can compare financial and performance measurements from different scenarios and compare their objective values.”
It’s all about finding a balance between optimization goals and real world situations. You should be managing for the moment instead of chasing what could be unrealistic ideals.
“We had a customer who didn’t know that Wal-Mart was running a particular promotion. That resulted in a demand spike,” Miles said. Our customer had to face a tough decision -- should they short other clients to fill the order from a major player like Wal-Mart? How do you value one company over another? It’s hard to fit that into a mathematical equation.”
There should be a degree of optimization in your planning stage, but you need to monitor your operations and the environment around you to track changes. Then you have to respond to any problems that arise as soon as possible to stay on track.
“I’m not saying optimization is wrong, it’s just insufficient,” he added. “You can put your employees in a room and tell them where the dartboard is, but it’s up to them to actually hit the bullseye.”