The Stream by River Logic

Business Optimization: What It Means and Why You Need It

November 13, 2019 | By River Logic

When someone mentions the term business optimization, most imagine it refers to business process optimization used to improve various elements of a business. It's an activity that often involves procuring the services of a business consultant who analyzes the business, identifies process issues and recommends changes to optimize the operation. 

 

This procedure, if not carefully managed, often results in minimal gain and less than satisfactory results because of the difficulty external consultants have in really understanding a business.

This doesn't mean business optimization doesn't work, nor that it isn't important. Many organizations, especially manufacturers, have adopted various business optimization techniques such as lean manufacturing, Six Sigma and the Toyota Way with great success.

In fact, every business should be constantly seeking ways to improve efficiencies, reduce waste and optimize resources as part of their ongoing business practices. Business optimization works best when driven internally and supported by decision support software that helps executives determine which of the many possible business optimization strategies offers the best return.

What Is Meant by the Term Business Optimization?

The dictionary definition of optimization includes phrases such as:

  • Make as perfect as possible
  • Fully perfect
  • Most effective
  • The best alternative

Business optimization is the process of identifying and implementing new methods that make the business more efficient and cost effective. Examples of business optimization include:

  • Introducing new methods, practices and systems that reduce turnaround time
  • Reducing costs while improving performance
  • Automation of repetitive tasks
  • Machine-learning techniques that improve equipment operation
  • Increasing sales through enhancing customer satisfaction
  • Reducing all kinds of waste such as wasted time, scrap production and repeat work.

Key elements of business optimization include:

  • Measurement of productivity, efficiency and performance
  • Identifying areas for improvement
  • Introducing new methods and processes
  • Measuring and comparing results
  • Repeating the cycle

Business Optimization Techniques

While the ultimate goal is to aim for a philosophy of continuous improvement as espoused by the Kaizen Institute in Japan, the first step is a business optimization project. As part of that first step, the organization needs to clearly determine objectives and stipulate specific targets and goals.

Executive support is essential, as is the appointment of a capable team to manage the process. For many reasons, it's best to appoint an internal team that understands the business rather than relying on outside consultants to perform the work. This does not preclude the use of an external business optimization analyst who can guide the process and provide critical input.

It helps to have a business optimization framework that outlines the program and identifies specific goals, especially those that affect employees. It's vital not to neglect the potential impact on employees and take steps to allay fears and create buy-in.

Most optimization processes start with what's termed low-hanging fruit, which are changes that are easy to identify and implement, as these early successes boost confidence. Thereafter, deeper analysis is required to identify and solve more difficult optimization challenges.

Business Silos Impede Business Optimization

Most companies are organized around functional capabilities, and it's almost inevitable that there's a degree of internal competition between different functions. For example, production and maintenance are often at loggerheads over machine maintenance. Maintenance wants to take machines offline for essential maintenance, while production wants to continue running to meet production targets. Another example would be a production manager who resists plans to move production to other lines, even when there are clear benefits.

Internal competition is the primary cause of organizational silos where the goals of each silo differ from each other and those of the organization. The danger of this approach is that as each silo attempts to improve functional performance, it's possible, and in fact probable, that steps to optimize individual silos are incompatible with other plans to improve overall organizational performance. Focusing on internal departmental efficiencies at the expense of organizational agility can severely disrupt business optimization processes.

Benefits of Having One View of the Organization

While organizational silos are detrimental, what's even worse are data silos. These exist in any scenario where an organization has separate software solutions for different functions.

A common example is an organization that has general ledger software for finance, a payroll system for wages and a separate procurement system for manufacturing. Each package offers a different view of the organization, and it's not unusual for information to differ in context, timing and detail. Although IT would almost certainly have software interfaces that permit a degree of data communication between packages, these rarely run in real time, are often one-way and don't resolve the underlying problem of information being held in separate and often incompatible databases.

The problem with this is that data in separate legacy systems is not accessible to everyone, nor is it transparent. Most importantly, it's much harder to create a coherent picture to support data-driven decisions. What's really needed is a solution such as enterprise-wide ERP that offers one view of the organization. While this is the ideal, it's not always immediately feasible, and a viable interim alternative is implementing an integrated business planning solution that extracts information from legacy systems to present information in a commonly understood format.

Optimization or Simulation - Inline

Business Optimization Processes Versus Decision-Making Tools

A key factor for success is a philosophy of making data-driven decisions that measure the financial benefits of proposed changes compared to current practices. This approach does away with guesswork and natural human bias.

A major focus of optimization processes such as continuous improvement and lean management is continually evaluating business processes. These may include simple examples:

  • Rearranging a work station so the operator doesn't have to walk across an aisle to fetch parts
  • Eliminating and consolidating unnecessary paperwork
  • Automating repetitive tasks such as data capture or order entry

In these instances, the costs and benefits of these changes are easy to measure. The difficulty arises when evaluating complex changes such as the best production line for manufacturing a product or how to optimize a product distribution network. In this situation, analysis is complicated because of multiple inter-related variables and many possible outcomes. It's here that decision support tools which use advanced analytics to determine optimal solutions in complex scenarios are powerful alternatives.

Finding the Right Business Optimization Answers

Even where an organization has enterprise-wide software, transactional data held in its databases is structured to optimize business functions, and not for optimization purposes. Despite this, these databases contain a wealth of data that can help organizations determine the best business optimization strategies.

This can be achieved through modern data analysis techniques that make use of algorithms to identify patterns in unrelated and unstructured data sets to support data-driven decision-making. Some even leverage mathematical capabilities like linear programming to provide the absolute best-case scenario for a business to be optimized. This form of business optimization technique is known as prescriptive analytics.

Thanks to the capabilities of advanced modeling software, it's possible to prepare a mathematical model of the business. Once prepared, the model is validated using historical data to verify its integrity. Then, using structured and unstructured data available to the company, optimization solver software identifies the best decisions and organizational changes required to optimize the business. Because the model has been validated, answers have credibility and are free of personal bias.

The Value of Business Optimization and Why You Need it

The direct benefits of business optimization include:

  • Improved productivity
  • Less waste
  • Lower costs
  • Increased profitability

Added to this are less obvious benefits, such as the development of a culture of excellence, improved morale and the elimination of organization silos that impede business operations leading to greater organizational focus.

The cumulative effects of business optimization are such that the business becomes more efficient. In this context, it's wise to bear in mind the Kaizen philosophy of continuous improvement, which means business optimization isn't a one-off project, but an ongoing process that becomes part of the organization's culture. In this way, the business will continue to move forward, remain viable and outclass competition.

Prescriptive Analytics: Why It's Crucial for Profit Improvements - Inline

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