Excess capacity

Each organization must have excess capacity to some extent. Examples are:

• if you are a store, you must have more items than a single item on the shelf per specific model
• If you are a manufacturer you need to be able to produce more than the steady flow of orders coming in
• If you are a consulting firm, you should have more consultants than the job at hand

The reasoning is straight forward - there are always some peaks in demand. Some due to market fluctuations, changes in taste, seasonality effects and some due to internal problems, shutdowns where recovery must be at faster speed than the normal one.

The picture below of the Twitter over capacity should not happen - this is bad for business

 

 

I am not delving into the question of how much excess capacity one needs. Let's use the rule of thumb of around 20%.

So far, all is logical. The question then becomes what to do with this excess capacity when it is not needed - this is the normal day to day life.

If the excess capacity is cheap then no one cares - it can sit idle. However, if this is expensive, then it better yield some results. I used to consult to a large steel manufacturer, and believe me the furnace does not stop its production for many good reasons.

A typical mistake is to keep all our resources simply busy since "idle is a waste." Without going into too many details, this is a grave mistake since it just builds inventory, wastes cash and consumes management attention.

The solution is to work on something that can

1. Bring in money
2. Resources can be available again on a very short notice or this cannot be called "excess capacity"
3. Does not tamper with the regular sales

One model I know of is Electric power. Power stations must have such excess capacity. They sell this capacity at a cheaper price and in order not to bring their regular price down it comes with a condition that they can disconnect this electricity immediately.

Today, I saw a very nice model at Amazon Elastic Compute Cloud . They definitely have excess capacity. The way they handle it is to sell what they call Spot Instances.


Spot Instance means that people bid on computation units. When amazon has spare capacity it brings the price down, when it starts running out of regular capacity, it brings the price up. As long as your bid is above the price you own the computation unit and when it is lower than the price your computation stops. Not only that, Amazon segments the price beautifully by letting people compete due to the bidding process.

This is brilliant and it serves real market needs. For example, suppose you are a researcher that just needs much computation, you care much about your cash and you could not care less when your computation happens, you can bid low and wait.

Think of your company, and think how to really utilize your excess capacity.

Amir

Futile actions - are they so futile?

Many times, we avoid taking an action because we think that the result has very little chance of success

If the success of the action brings very little benefit, I do understand and accept this reason. However, I do believe that even if the success of the action will bring huge benefits, still most of us will not take the action.

Why is that?

I think that we have a built-in protective mechanism. The former causes of not taking the action where lame excuses. The real reason is that we believe that our action will embarrass us if it does not succeed. Or in other words - people will consider us as IDIOTS.

The funny thing is that when other people do try such actions, we think these people are brave (even if they fail).

I want to tell you an anecdote I was involved lately:


I was trying to contact a company in my line of business. The company is located in South Carolina. I do not know anyone there and I wish not make a cold call. I was trying to think who I knew in SC and then I remembered. A friend and a former client of mine lives in there. His name is Tommy.

I sent Tommy a short mail in the following ironic spirit "Hi Tommy, I know SC is a very small village having only 20 people but is it possible you know company X?"

This was definitely against all odds. The population in SC is about 4.5 Million. I was not really expecting Tommy to know anyone and I was willing to "suffer" if Tommy shoots me an email back with "are you crazy?"

The answer came 15 minutes later. Tommy buzzed me back and said "I know their founder, we were in the fraternity together, do you want a warm introduction?"


I encourage you all to avoid the erroneous assumption of what will people think of you and try more actions even if their chance of success is slim.

And for the Star Trek fans - It is good that Jean-Luc Picard decided to resist the Borg even though it was clear that "resistance is futile"

Amir

Correlation or cause & effect

Many people confuse between effects and their causes

I read a great anecdote about it in a book called Freakonomics by Steven Levitt - the story was about a study that found a high correlation between the number of books a kid has at home and his performance level at school. In short, the more books the kids had the better he succeeded at school.

No wonder that the education system wanted to invest in a project where it provides every month a new book to all the kids at school. The reason was - if more books means higher success, then we should get the children more books.

It is obvious that people are confused between correlation and cause-effect.

The cause of the success in studies may or may not have anything with the amount of books. Maybe smarter kids tend to read more books? or maybe it has to do with the educational values of the parents at home? Do you really think that if you take a bad student and give him 100 new books he will suddenly become a good student? of course not!

The episode ends when the author explains that in this city someone got his senses back before investing several million of dollars for this misunderstandings.

As a business you must understand cause and effect. If you do not, it will be very difficult to understand why you succeed or why you fail.

When you get success a signal you should be able to understand its cause and enhance it and when you get a failure signal you need to avoid the same mistake again. It is easier said than done though and you must be very careful or next you will be the one with an anecdote like the book-success correlation.


Regards,
Amir