Practical optimisation

Optimisation is brilliant. It can turn increase profitability, reduce risk, increase output and even turn an non-viable project or factory into a viable one. It can save time, produce less waste and better utilise inputs so that costs are reduced.But it’s difficult, right? That’s why so few people pay real attention to it, why so many organisations don’t invest in the process, right? Well, the basic concepts are straightforward, and there are often valuable easy wins to arise from simply looking at the problem in the right way and understanding what the key drivers of production or profitability are.

The Goal

Eliyahu M. Goldratt wrote a called “The Goal” in the 1980s describing a practical, real-world approach to optimising a production plant. Written in the Socratic method, it guides the reader through the understanding of one approach of optimisation and explains how and why it works rather than insisting on taking the author’s word for it. The approach isn’t perfect, but it is a brilliant introduction into how to look at problems, and where typical management accounting falls down as a tool to manage production.

Demonstrating a principle – Making a cup of Milo

Milo is a warm, chocolate and malt drink produced by Nestle in some markets, including South Africa, Australia and some South-east Asian countries. If you don’t have Milo in your market, you can still follow the story considered here by thinking Ovaltine or even just your favourite brand of hot chocolate.

Milo on kitchen counterCan of Milo
The steps involved in making a cup of Milo are as follows:

  1. Retrieve can of Milo powder from cupboard
  2. Retrieve sugar bowl from its normal location
  3. Find your favourite mug and place it on the counter
  4. Find a teaspoon (try the drying rack next to the kitchen sink)
  5. Fetch the milk from the refrigerator
  6. Pour the milk into the mug
  7. Return the milk to the fridge
  8. Place the mug into the microwave and set on full power for approximately 2 minutes
  9. Wait for two minutes
  10. Retrieve mug of hot milk from the microwave
  11. Add several spoons (usually 3 or 4) of Milo powder into the mug and stir
  12. Add sugar to taste and stir some more
  13. Return Milo and sugar to respective cupboards
  14. Return mug to microwave for a further 10 seconds to give the drink that extra rich and foamy texture
  15. Enjoy!

This will take approximately 215 seconds as shown by the table below:
Optimisation example - Milo step before optimisation

The problem area here is step 9. We wait for a full two minutes while the rest of the plant (our brain, hands, feet and eyes) is shutdown with nothing to do.

A simple re-ordering of the steps can save 30 seconds out of this process.

Optimisation example - Milo re-ordered steps after optimisation

The key here is that step 9 now only has a plant downtime of 100 seconds (compared with 120 before) and step 14 now has no downtime at all (the 5 seconds is required to insert the mug into the microwave).

Principles revisited

The example above is trivial, and I’m not pretending that it is anything else. However, the principle behind the process is important. This is one of the key ideas put forward in the book “The Goal”. In order to optimise an entire, complex process or plant, one needs to identify the bottlenecks and optimise those first. There is little point in shaving a few microseconds off the time taken to put the milk back in the fridge when more than half of the total time spent in production is waiting for the “bottleneck” microwave to finish it’s job. If one could make the microwave work faster, that would also be a key component of the optimisation process.

The principle is, identify the bottleneck and optimise that and the processes surrounding that.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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