Saturday, December 27, 2008

Tyranny of Averages

Playing with one of my new toys, I rediscovered the "tyranny of averages". My wife's Toyota Sienna with AWD currently gets 16.4 mpg for the past few years (per a gauge on her dashboard), yet looking at the mileage in realtime with the scan gauge indicates much different information. It sucks gas at the lower speeds/higher rpm getting all that mass moving, but at constant speeds or going down hill gets very high mileage (+64 mpg or higher)

With one tank of gas for a set of measurements - I was able to get to 20.1 mpg. The experience is a bit like a video game. Managing the "low" mpg periods can dramatically increase the average by 25% (20/16). Not bad for a fairly simply device.

This leads to me to wonder where else are we assuming averages are true and missing a huge opportunity to improve business.

I once built a smart shelf for a retailer in Cambridge UK using RFID. As an aside to the project, I started tracking the inventory turns and how it related to day of week, stock levels, assortments (#of different products). Amazingly, you could radically improve turns (and hence) margins by just ensuring that the stock clerk fully stocked the shelf on Thursday afternoons. Fully stock meaning that they put all 3 versions of the product on the shelf and did it before the peak sales happened (Friday and Saturday). Simply monitoring that product on a Thursday afternoon would have more than paid for that stock clerk's salary by delivering additional margins.

Given sales results for this Christmas, I imagine many retailers (and CPG) companies will be searching their portfolios to avoid the "Tyranny of averages"


Kaj Kandler said...

I love the "current Gas Mileage" display in my Jetta. I do the same "game" all the time, ignoring the angry faces behind me, as I do accelerate slowly up the hill, where the next stop sign stops us all every morning.

A simple replacement, is to drive with as much forward vision you can muster in today's traffic. The simple goal being to use the brake as little as possible (not as late as possible, for safety reasons). If you think/look ahead you often know that speeding up to mac movable speed only results slamming on the brakes even harder. And the faster you accelerate the more energy (capital) you are using, just to destroy it when braking (cutting expenses and adjusting to the bust).

A similar game happens every morning on 128 (my daily commute). As soon as possible everybody accelerates and speed forward, just to be stopped by the traffic jam. Especially this stop and race (aided by frequent lane jumps) does slow down the overall throughput. If every body would try to achieve a slow but steady speed, it would be optimal. But who knows what speed this is at a given point in time? As an individual driver you don't have a global vision.

I'd say the lesson for business is to be very vigilant, when growing aggressively and at the first sign of trouble moderate your aggressiveness and invest more cautiously into your growth.

P.S.: Another topic that comes to mind, regarding the law of averages, is the tax system. Where everybody looks at the marginal rate, but the difference for the (long term) budget is the average revenue. May be politicians should get a mandatory lesson of that when entering their posts.

Karl said...

Yep - I have been doing the same thing when driving, though I rarely drive. The challenge for me is how to get my wife and eldest son to "play the game". Is there a display, information on how to "change" their behavior.

A similar issue exists in organizations - how do you communicate technical results in such a way as to change behavior in a non-technical group (sales, marketing)....