Optimization of resources is one of the most crucial tasks in business and every day life. The larger the variety of resources we have at our disposal, the more complicated the task of their optimization becomes. There are mind-blowing models developed with very sophisticated technology trying to approximate the complexity of, let's say, genetic engineering.
However, there is a fundamental optimization problem associated with any type of job we undertake. Whether you are a business owner, a financial exec, a manufacturing manager, a movie producer, a janitor, or a cook, you have to joggle these three basic properties of production: Time, Cost and Quality.
When we want to optimize these three resources we want to accomplish the job at hand with the highest quality, over the shortest time, and at the lowest cost. Unfortunately, both logical and empirical observations show that one cannot achieve all of these targets at the same time.
In practice, the dynamics within any economic system characterized by the presence of these resources can be described by three right triangles in the illustration above, in which the shorter the line representing one or another property, the closer we are to the desirable level of that resource.
As Pythagorean theorem shows, the hypotenuse (the side opposite to the right angle) is always larger than either of the catheti (the legs). So, what do those triangles show us?
You can accomplish something as quickly as possible and at the lowest cost, but the quality will be far from the desirable level (triangle 1). I can give a task of creating a profitability model for a new line of business to my junior analyst and give him one day to do so. Do I even have to describe what I will get from him, if anything, tomorrow morning?
On the other hand, you can strive for the highest quality achieved at the shortest possible time, but then it will not be cheap (triangle 2). I can drop everything else on my agenda and outline detailed specification for the model myself, and then hire a team of highly paid developers to design it. The result – outstanding functionality available for use within 2-3 days, if you can afford it.
Finally, you can keep the quality standard on the level and cost at a reasonable low, but it is going to take a long time to achieve the desired result (triangle 3). I can give the task to my VP of Financial Planning & Analysis, who is very good at creating this sort of models, but has another 15 ongoing and new projects I already assigned to him. So, I instruct him not to spend more than 1 hour a day on this one to keep the cost relatively low. When will I see the model ready? Who knows?
Simple? They teach Pythagorean Theorem in 8th grade AP Math. Now go and try to explain this to your boss. Good Luck!
The Frustrated CFO 