“Efficiency” can cost too much

See Henrik Mårtensson’s “The Cost of Queues” on how an extreme focus on “cost effectiveness” can damage an organization. (Thanks to Jack Vinson for the referral on his blog “Knowledge Jolt with Jack.”)

If you try to become more cost effective by reducing capacity, and thereby capacity cost, all will be well at first, from an economic point of view. (The people who are let go are usually of a different opinion.) The catch is that this will increase the queues in the system. This increases lead times. Consequently, cost associated with lead time will also increase. (In manufacturing there is also a considerable storage cost due to increased inventory, but we will ignore that for the purposes of this blog post.)

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