Not so long ago I came across a few pictures that were posted on LinkedIn that aroused my attention. They touched upon a theme that has been slumbering in my mind for quite a while, namely that off the always returning phenomenon of the trade-off. The pictures that gad around the Internet were about good quality not being possible in combination with speedy service and a very competitive price; you can’t have it all, so it seems. A trade-off indicates an optimization problem; making the best choice considering multiple variables and their interdependence. But unfortunately, optimization assumes certain dependencies instead of challenging the thinking behind these presumed interdependencies. It’s time to get rid of the trade-off!
That Cursed Trade-Off
The essence of the trade-off is that we apparently have to trade in one aspect of performance against another, assuming a certain, known interdependency between those aspects. One of the pictures that was shared by many people on LinkedIn stated “good service cheap won’t be fast”, “good service fast won’t be cheap” and “fast service cheap won’t be good”. A second example read: “The bitterness of poor quality remains long after the sweetness of low price is forgotten”.
The trade-off represents a nice challenge for many people. It is a favorite topic among academics that rack their brains over a large variety of optimization problems. A classic example in the field of logistics is the Wilson (or Camp or Harris) formula. This formula is used to determine the optimal order or lot size based upon a model and a set of accompanying assumptions. The focus in optimization or trade-off problems is on developing the “most appropriate” model and, subsequently, determining the optimum by acquiring and feeding the required data into the model. Unfortunately, more often than not, we do not sufficiently challenge the model itself nor the data it requires. Take again the Wilson formula for the optimum order size. Are ordering costs truly variable? And what, in fact, are “ordering costs” anyway? And is the average inventory truly half of the order size? Isn’t safety stock also dependent upon the order frequency then? And how do we determine the real costs of holding inventory? But OK, the point here is not the Wilson formula in itself, but the essence of these trade-off models in general.
So let’s go back to the pictures on LinkedIn: so why, in fact, can’t good service, fast, also be cheap? And why can’t we apparently deliver a good product at a low price? Even at the strategy level we seem to be infected by this trade-off “virus”: why do we apparently need to choose for either operational excellence, product leadership or customer intimacy? Is it really impossible to have it all? To me, the trade-off is a form of thinking inside-the-box. And we need to break out of this type of thinking when we want to go truly Lean.
Lean: Eliminate the Optimization Paradox
When “going Lean”, one of the challenges will be to get rid of the thinking in terms of trade-offs. The correct question in Lean is not “what is the optimum?”, but “what is in the way to reach our ideal state?”. This is a different kind of question, requiring a different kind of mindset. It isn’t about what is possible right now, but about what is in the way to reach more than we think is possible right now. That requires vision about where we want to go and why, it requires a challenging attitude across the organization (and acceptance thereof) and out-of-the-box thinking.
The question needs to be how we can realize good service fast and cheap. When poor quality leads to high (internal and external) failure cost (including the cost of returns, repair, exchange, claims, warranty, credit notes, and so on), as well as high appraisal and prevention cost, how can we then even think that good quality would be more expensive? And how can slow service be cheaper when long lead times imply that goods need to be stored longer (and that we need the means to be able to do so and manage the stored goods), that we have the risk of damaging or even losing some of these products, that the quality may deteriorate, or that we possibly even have to write off part of the goods, and that when we find a defect we find out that we have quite a lot of sorting to be done, and that we will have difficulty improving as trying to answer the “why”-question five times will be quite difficult knowing the parts were produced a month ago, and that when we then finally maybe see an improvement, we have to say to our management that it will take the time to deplete the current inventory before we will see the bottom line impact of this improvement, and so on, and so on?
In short, good service fast and cheap is just a apparent contradiction. It is up to the organization the break through this paradox by looking at the true causes that underlie both poor quality, long lead times and high costs. So let’s rid our organizations of the trade-off and the optimization problem!
An organization that pursues Lean goes beyond optimization. A Lean organization isn’t looking for optimal, but for ideal. So watch out the next time you’re being asked to puzzle over an optimization problem.