Tag: uncertainty

The problems with “Common and Expected Uncertainty”

 

Not all the decisions managers have to make are about risk,meaning decisions that might cause a serious loss, but might also cause a considerable gain.  Actually those risky decisions are very infrequent.  While I’m still claiming that the vast majority of the organizations force the managers to be ultra-conservative, the losses from those decisions are small relative to the huge loss from wrong policies dealing with “common and expected uncertainty.”

Take CCPM (TOC Project Management Solution) and ask yourself how come that planning a clear project buffer is such a dramatic new insight?  How come people insist that there is clear time duration for a task?

Eli Goldratt said that organization force certainty on uncertain situations.  

The paradox is that by forcing certainty management increases the negative impact of uncertainty. We see projects that take too long and shop floors that process too much inventory.  Many organizations suffer from hazards because of lack of manpower, relatively cheap resource.  

The common cause is the concern of every human manager of being blamed of creating “waste”.

The prime example I like pointing to is the use, actually misuse, of sales forecasts.  We know from Probability Theory, or Statistics, that the minimum description of an uncertain variable contains two numbers, usually the average and the standard deviation.   However, the vast majority of the forecast reports, used for various decisions, include only ONE number.  

What is the value of one central measure for a forecast when nothing describes the spread around that measure?  If next month sales of Product134 are forecasted to be 10,000 what is the likelihood that the actual sales would be 4,776, 8,244, 13,004 or even 18,559?

Suppose that the magic number of 10,000 comes from assessment of salespeople, is it clear that it represents an estimated average (expected value in the mathematical language)?  Isn’t it possible that salespeople, who do not have any magic power to see the future, state a number they are comfortable with?  If they are measured by meeting sales objectives, that are set according to the forecast, then they would reduce their estimation. But, if they need Operations to provide availability they would inflate the forecast.  

I think that there is no way to manage an organization without forecasting!  

I also think that Dynamic-Buffer-Management is actually a forecast looking at the combination of sales and inventory and predicts whether the stock buffer is about right.  

However, treating a forecast as one number is a gross mistake.  The reliance on one number allows top management to judge their sales and operations people, however that judgment is flawed and the sales and operations managers have to protect themselves from the ignorance of top management.

The overall impact of mishandling the common and expected uncertainty is HUGE.  Management don’t recognize the need for protective capacity and thus look for high “efficiency”, causing people to pretend being very busy, which means they constantly look for “something to do”, regardless whether it creates valueor not. 

However, protective capacity is truly required in order to maintain enough flexibility to deal with Murphy, as well as with temporary peaks of demand. TOC buffers help a lot to stabilize the flow and by that improve the overall performance, but they do not cover all the areas where people are using their own hidden buffers, causing huge damage:  The hiring process is basically flawed with ridiculous requirements of 100% technical fit instead of requiring learning capabilities; Budgeting processes are flawed carrying no appropriate reserves;  Even the need for maintaining presence in several different market segments is not fully recognized in many organizations.

Is it possible to learn how to deal with uncertainty, particularly the common and expected uncertainty?  The vast majority of the managers have been in a basic course on Statistics, but it does not lead them to handle uncertainty that: does not have clear probabilities, is definitely different than the Gaussian (Normal distribution function), and the samples of similar occurrences in the near past are very small.  

The real obstacle for improving the policies, making them a better match to the inherent uncertainty, is getting rid of the utopia of “optimal decisions” replacing it by “good enough” and stop measuring people by numbers which are exposed to both uncertainty and dependencies.

Is that doable? For me that is what TOC is all about.

How come managers take different decisions for their organization than for themselves?

This post continues the previous post on “A decision is required – a management story with a lesson.

Prof. Herbert Simon, the Noble prize winner, claimed that people are NOT OPTIMIZERS – they do not search for the ultimate optimal choice. Simon called the way people, like you and me, make decisions “satisficers” – looking for a satisfying choice by placing certain criteria and choosing the first one that satisfy all the criteria. This is quite similar to what we call in TOC “good-enough solution.”

My point is that while people are satisficers, once they make decisions on behalf of their organization they are forced to demonstrate that they actively look for the optimal decision. However, there is too much complexity and too much uncertainty on top of it to truly reach optimum decisions. This situation makes the search for optimal decisions, based on “books” written by other academics than Prof. Simon, looks pathetic. Too many of those decisions are wrong and leading to inferior results.

A common cause for this different behaviour is:

Managers are afraid from after-the-fact criticism, which they consider unfair, because it does not consider the conditions when the decision has been made.

Hands pointing towards businessman holding head in hands concept

The key frightening aspect is the possible impact of uncertainty. After-the-fact the decision can be easily seen either as “right” or “wrong”. Admitting to have made a mistake causes two different undesired effects:

  1. Being punished because of the “mistake”, like being fired or just not being promoted.
  2. Losing the feeling of creating value and being appreciated. This is of very significant meaning to executives and highly professional people.

The fear of unjust criticism forces managers to look for two means of protections:

  1. Being super conservative.
  2. Following the “book” when there is a book.

As Mr. Preston Sumner, in his very interesting comment to the story has noted, some CEOs are influenced to do the exact opposite: take larger risks than what they would allow for themselves. This tendency is initiated by the way some large organizations compensate the c-level executives. When a CEO is pushed to show great results by hefty bonuses, while the opposite is not true, the derived greed pushes them to take high risks. Is this really what the stockholders want?

There is critical mistake in looking to “motivate” a person, a CEO or even just a regular salesperson, by linking the actual financial results to payments to the person. Money is always a necessary condition – but it is far from being sufficient to ensure good intentions to look for the interests of the organization.

Dr. Goldratt said that organizations force certainty on uncertain situation. Ignoring uncertainty make people believe that they can judge any decision according to its actual result. If we recognize the need to live with significant uncertainty we need to learn how to judge decisions in a way that would reasonably assess what might happen – the potential damage as well as the potential gain.

This is just the beginning. I claim that failing to openly and visibly dealing with uncertainty is the core problem of most organizations! I’ll certainly come back to this topic highlighting more undesired effects resulting from the core problem.