Chapter 10 Bottleneck Calculation: Optimal Product Mix
Efficiency and effectiveness are often mentioned in the same breath. The second comes first and that is what the optimal product mix is all about. EFFECTIVENESS, doing the GOOD things, EFFICIENCY, doing things GOOD. Doing the wrong things very efficiently leads to disasters. ‘Bottleneck Calculation: Optimal Product Mix’ is the title of Chapter 10 in the unmissable study book ‘Business Economics VI Groundbreaking’.
The production factor that is present in relatively the smallest quantity, and is therefore relatively the most scarce and therefore determines the production volume, it is called the bottleneck factor. The contribution margin per bottleneck factor unit is called the shadow price, and that is the highest coverage contribution per unit. When applying in a different direction, the matter is this coverage contribution, because the costs per unit are then not relevant, the missed yield possibility is what matters. Thus optimum use of the bottleneck factor units can be made safe.
If there are hundreds of products (every type, every size, every color, is yet another product) and hundreds of constraints (often there are many different production factors, different machines, various types of labor, etc.) the Simplex method is worthy of recommendation and should be applied to get a good calculation of the optimal product mix. The Simplex method is a linear programming technique. Linear programming is one of the many optimizations (disrespectfully said) – tricks and petty facts – from Operations Research or Operational Research. That is factual a tool box for managers and it is one of the branches of mathematics. With the aid of a spreadsheet and the Solver in Excel the Simplex method is quick and easy to perform. The whole Simplex procedure as well as how to calculate all of it easily with the help of Excel, it is completely explained in Chapter 10 of ‘Business Economics VI Groundbreaking’, not to be missed study book.
A bit of inefficiency is not a disaster. On the contrary. A little space is needed. Also to make mistakes. To learn from ones own mistakes. Especially maneuvering space is needed. To be able, by trial and error, to adapt the organization (a learning being) smoothly to changing circumstances. There is more to achieve with an optimal product mix and less efficiency than by implementing an unsuitable product mix as efficiently as possible. The latter will require a lot of effort and you will still be defeated by a better organised competitor. The effectiveness can be assured with little effort, which is more successful.
This book harshly criticizes out-of-date Business Economics textbooks.
You are very poorly trained in business economics even at Business Schools that ignore ‘Business Economics VI Groundbreaking’.
A self-study book, hardly needing a teacher. Necessary also for many managers in companies to improve their own performance.
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