Using the Economics Value Curve to Drive Digital Transformation

Figure 1:  Economic Value CurveThe only way to improve operational uptime given the economic value curve is to spend more money on maintenance.. That is, in order to move uptime from Up1 to Up2 we need to increase maintenance investment from C1 to C2 as in Figure 2..Figure 2: Traversing the Economic Value CurveThe only way that the organization can improve up-time given the current economic value curve is to spend more money and time on maintenance.. Unfortunately, increasing maintenance spend from C1  to C2 can increase uptime from Up1 to Up2, though the increase is not likely to be linear as uptime reaches its theoretical limit.Unfortunately, economics throws a little wrinkle into the relationships on the economic value curve, and that’s the “Diminishing Returns” dilemma.. In economics, Diminishing Returns is the decrease in the marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, while the amounts of all other factors of production stay constant.. And we can see in Figure 2 how it takes a much more significant investment in maintenance costs (Δ C2 – C1) to achieve a much smaller incremental improvement in Uptime Percentage (Δ Up2 – Up1).Nerd Alert!!. For those who have not totally forgotten their college mathematics, you’ll notice that this is the formula for calculating the slope of a line where m = (y2 – y1) / (x2 – x1).Since the slope is a constant rate of change for a linear function, when the slope of the line drops below 1, then you are experiencing Diminishing Returns on your investments.   The way to change the game and beat the law of Diminishing Returns is to re-engineer the sources of value creation to create a new economics value curve.. That is, for the same C2 spend, how do I get an Uptime Percentage increase from Up2 to Up3 (see Figure 3)..Figure 3:  Transforming The Economics Value Curve with Data and AnalyticsHow do we digital transform our economics value curve?.How do we use data, analytics and design to change the economic value curve?. Doing the same old things, even more quickly and more cheaply with robotics, does not transform the economics value curve..What does transform the economics value curve is to re-engineer the process using data and analytics – using “intelligence.”For example, Amazon has digitally transformed their warehousing operations using non-conventional, analytics-inspired business and operational changes.. More details

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