Scarce Resource Management

Introduction

Is your organization missing or falling behind on major opportunities because of limited or missing scarce resources? If so, would you be interested in having a management process to help you provide those resources in a time and cost effective way? If you are interested, you should read this paper and use the proven techniques described here to manage your scarce resources much better.

If you are satisfied that you need help with managing your scarce resources, you should skip ahead to the section titled Key Problems with Traditional Ways of Managing Scarce Resources. If first you want to better understand the benefits of doing better in this area, go to Potential Benefits from Scarce-Resource Management. If you want to explore the process itself, there is an outline under Key Process Elements. Otherwise, read on.

One reason that all companies make slower progress than could otherwise occur is because bottlenecks are created by shortages of time, the unavailability of people, and scarcities of other resources. You have had the experience of being in a busy government office, bank, grocery store, or take-out restaurant standing in line waiting while one employee served each person in turn. The equivalent occurs all the time throughout organizations, creating unhappy customers, frustrated employees, higher costs and lower profits for shareholders.

Many of these scarce resources are poorly managed because they are not very visible to management or the casual observer. A well-regarded hotel chain was chagrined to learn that its customers were annoyed by long delays for their room service breakfasts. Despite adding more people to take orders, prepare the food, and deliver the trays and tables to guest rooms, no significant improvement occurred for the guests. Looking into the causes helped the hotel management eventually discover that room service waiters were delayed at least 12 minutes in the morning each time they needed to ride an elevator. Why? Because the housekeeping staff was using the same elevators during breakfast hours to deliver large amounts on laundry. The housekeepers often held the elevator at the floor they were delivering laundry on, rode up one floor, and repeated the process. The solution: Changing the laundry delivery schedule away from the breakfast hours freed up the elevators for room service, and customer satisfaction among these guests soared. The elevators were the scarce resource that needed to be managed in this case.

As you can see from this example, careful measurement is a critical factor in locating the scarce resource causes of problems. Management experts usually suggest that once you have found a problem that you need to ask why you have that problem at least 5-10 more times about the responses you get in turn, until you will reach the actual source. The more ways you can measure your operations, the more you will learn. This measurement challenge is addressed in more detail in The 2,000 Percent Solution: Free Your Organization From "Stalled" Thinking To Achieve Exponential Success (AMACOM Books, New York, January 1999).

Another example of this problem comes from the U.S. automobile industry during that years when Japanese companies were making great inroads into the Big Threeâs (General Motors, Ford, and Chrysler) combined market share in the 1980s. During a visit to an automotive supplierâs plant (half owned by a Japanese company, and half owned by an American company), a very significant insight was provided into one cause of the market share shift. The supplierâs CEO commented that the components of most American cars were designed then to last 3 to 4 times the expected life of the car. The Japanese components were all designed to last one day longer than the expected life of the car. This meant that the Japanese components were much less expensive to produce, but that the tolerance for error by suppliers was quite small. These extra long-life specifications for the American-designed cars added unnecessarily to costs while providing no discernible benefit, thus hurting the Big Three, their customers and suppliers. The scarce resource that needed to be managed in this example was skill in developing specifications for components that precisely matched customer needs.

A third example comes from the pharmaceutical industry. Companies usually have vast amounts of resources, yet find themselves resource-constrained in many ways. For example, such companies will usually try to grow earnings in consistent patterns. The higher the earnings-growth target, the fewer future opportunities the company can pursue in its research-and-development efforts. This, in turn, means less future growth. Working with such a company in the early 1980s, Mitchell and Company found many ways the company could grow its new product development without penalizing near-term earnings. The result: the company more than doubled its market share over the next 15 years as it successfully out-developed its competitors for essential new products. The scarce resource that had to be managed here was expense funding that hit the companyâs profit-and-loss statement.

A fourth example comes from the utility industry. Competition is rapidly replacing monopolies, and each company has the opportunity to grow much faster by entering and expanding into deregulated businesses. Utilities normally operate with fairly high debt levels and frequently pay-out almost all of their earnings in dividends. Where is the expansion capital to come from? Working with many utility companies, Mitchell and Company has found new forms of capital to supplement traditional common stock and debt that have propelled those using this capital into industry leaders virtually overnight while improving the value of each companyâs common stock, making future common stock-based acquisitions more attractive and feasible.

Why do companies have so much trouble locating and managing their scarce resources? The simple answer is that companies seldom search for their most important bottlenecks and how to overcome them. Why? First, in the short-term, bottlenecks seldom cause companies to miss their budgets or other targets that management focus and compensation are tied to. Missing budgets or other targets is the normal trigger to draw added management attention. For most organizations, the largest costs are the costs of lost opportunities, yet hardly any companies measure or focus attention on these opportunity costs. If organizations did, they would probably soon begin rooting out the factors that hold their companies back from achieving these benefits. Second, all but a few members of management are limited to solving problems in their own function or at their own locale. If coordination is needed with other functions or locations, very few people have the authority to explore those issues. Of the few people who do, these are the people who are furthest from the problem and least likely to notice that the problem exists in the first place.

If an organization discovers that scarce resources are very valuable to manage, the organization will meet another hurdle: Inexperience in making better use of or supplementing the scarce resources. Scarce-Resource Management is designed to overcome all of these problems by instituting a management process that will routinely search out and effectively overcome these obstacles.

Without searching for and attending to your organizationâs scarce resources, your company will continue to underperform its full potential by a wide margin. During consulting assignments over its twenty year history, Mitchell and Company has continually found that mismanagement of scarce resources is one of the largest causes of lost opportunities for companies. Successful solutions always involve making better use of the resources you have, augmenting those resources in reasonable-cost ways, and finding ways to use less of these resources.

To assist you, Mitchell and Company has drawn on its many successful experiences to create this management process to locate areas where scarcity of resources is causing delays and how to overcome these deficiencies, improve performance, and create greater results with existing resources across the organization. The process of Scarce-Resource Management benefits from best practice research, theoretical best practice thinking, and parallel successful experiences in other fields where scarce resources are a limitation (such as systems analysis).

By contrast, most organizations try to get at the problem by layering in additional resources at a cost level that the organization cannot afford prior to receiving the benefits. The subsequent earnings shortfall triggers a wave of cost cutting and reorganization that often make the scarce resource problem worse. Scarce Resource Management will help you avoid this unhelpful route.

Potential Benefits from Scarce-Resource Management

The more bottlenecks and delays you have, the more beneficial this management process will be for you. This process can also be combined with other leadership and management processes we have shared with you to enhance the effectiveness of those processes as well as your day-to-day activities and decisions. Your potential gain from mastering this management process is measured by the size of the benefits you enjoy from achieving more results sooner.

For most organizations, Scarce-Resource Management will provide several thousand times its costs in benefits. Here are a few reasons why this ratio is so positive.

• If you can accomplish more, the benefits of the good things you do begin to occur sooner. In the case of the hotel company, they could serve more room service guests and have more repeat overnight guest business. That in turn means more profitable hotels, more cash to expand, and more franchisees interested in expanding -- which means faster growth of the chain through building new units.

• If you have scarce resources, you are probably over-resourced in other areas, and these costs are unnecessary while the scarce resource limitations continue. The extra life in the automotive parts is a good example.

• Making your scarce resources more productive also lowers costs throughout the organization. When the elevators were being better balanced in their time usage, the room service tasks could be done with far fewer people. Also, the pharmaceutical company reduced its sales and administrative costs as a percentage of sales by being able to spread these costs over more products, that resulted from a larger new products effort.

• Lowering costs because of better utilization of resources often provides other important benefits. For example, if a car has parts that are designed to last for a shorter life, it will often be lighter which can help gasoline efficiency and make the car more appealing to those who are sensitive to this cost. The utility company was able to use its lower cost of capital to serve its nonregulated customers with lower prices than if it had used traditional financing. This led to more sales and earnings, and a lower cost of equity capital in turn, as well.

Key Problems with Traditional Ways of Managing Scarce Resources

To help you better diagnose some of the opportunities you have to benefit from Scarce-Resource Management, here are some additional questions relating to frequently-employed ineffective management practices. If you find that you have large opportunities that were previously unexplored, these can become the first areas where you apply the new process.

1. Do you know what your scarce resources are? If so, have you scaled down the parallel resources to match these scarcities? Or do you usually throw more resources at important areas that are behind schedule in achieving your goals? A classic example of the last is a new product development effort that becomes bogged down with more people and money, when the problem is the lack of a missing skill on the team.

2. Do you focus attention on how to find substitutes for these scarce resources that will enhance your effectiveness and efficiency, or do you insist on putting more strain on the same resources? If you have a highly productive team, many companies will load the team with more and more assignments until the teamâs progress ceases.

3. Have you matched the adjacent resources that work with your scarce ones to be the same size as the scarce resources actually needed, or did you increase the adjacent resources so that more bureaucratic and communications delays occurred? Many companies will take an already busy CEO and expand the number of people who report to the CEO, thus increasing the time needed for meetings and communications.

4. Do you treat all resource uses as having the same priority, or do you have a gate-keeping arrangement to guard access to the resources? In our hotel example, the linen and the room service had the same priority at the same time, and the guests suffered. Management stepped in to allocate the elevator resource, and the guests and the hotel prospered.

5. Do you try to expand the effectiveness of scarce resources using your own thinking only, or do you study the best practices of others and consider theoretical best practices that no one has done yet, well beyond the best practices of today? In our car example, perhaps the theoretical best practice is to have cars with three different lengths of lives to match the length of time people want to own them, so that prices and costs could be further reduced to match the real needs of the owners. For example, in areas where a lot of road salt is used, the car will be hopelessly corroded by the salt long before its engineered life is over. Why pay extra for that unusable life span?

6. Do you have the same resource scarcities now that you had 10 and 20 years ago, or have you worked systematically to increase the scarce resources? At some point, the hotel chain has to rethink how many service elevators are needed in its basic building design or access to elevators will always be a problem. A personal example may help emphasize this point. A hotel in New York (part of a different hotel chain) was and is notorious for having too few elevators for hotel guests. The elevators also frequently breakdown from the heavy use they get. Once a member of Mitchell and Companyâs staff was on a full elevator in that hotel that unexpectedly stopped between floors. The good news was that the hotel manager was trapped on the same elevator, so repair crews quickly rescued everyone. Mitchell and Company personnel have been warned for almost two decades not to ride in that hotelâs elevators and to avoid the chain as much as possible.

Key Process Elements

This process allows you to succeed by accomplishing the following tasks:

1. Locate scarcities that have the largest actual and opportunity costs.

2. Scale down resources that are overly large relative to the scarce resource areas.

3. Locate substitutes to expand the scarce resources.

4. Reduce resources where you have too many resources to be effective.

5. Prioritize the use of remaining scarce resources to the highest pay-off areas.

6. Expand your awareness of your choices in areas 1-5 through examining current best practices in and out of your industry, and determining ways to approach the theoretical best practice in the next six months.

7. Shift expansion of scarce resources to ways that will create the most resources in scarce areas for the long-term.

Next Steps

Mitchell and Company will be providing training in this process to Twenty Times Progress members. If you would like more information about Twenty Times Progress, please explore our web site or e-mail Don Mitchell at askdonmitchell@yahoo.com.

Licenses to use the process and training to apply the process are also available to Mitchell and Company clients. Please contact Don Mitchell also if you have this interest.

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