....Sailing upwind involves a trade-off between speed and distance—the tighter the angle to the wind, the shorter the total travel distance but the slower the boat moves. Mr. Ozanne's computer program had given a target: Sail into the wind at a relatively tight angle of about 42 degrees, which would produce the optimal mix of speed and travel distance.Looking at the video, Mr. Spithill could see that the Kiwis had come to a different conclusion. They were sailing at much wider angles to the wind—about 50 degrees, on average. They were covering more water but reaching higher speeds—more than enough to offset the greater distance traveled. Foiling appeared to be the key. Oracle's computers hadn't anticipated such speeds.
MORAL: models are tools that help you make decisions. Like any tools, they are easy to misuse.
Interestingly when we talk about usage of tools to arrive at a decision, we must also be aware of the input and the boundary conditions which are very vital to the output. Popularly known as GIGO, meaning: Garbage In Garbage Out. When something goes wrong, It is always interesting to back and review the input set as it usually reveals surprising glitches.
ReplyDeleteHidden Cost (Over-reliance on Models)
ReplyDeleteThis is an interesting article illustrating how a European solar panel manufacturer was able to uncover the hidden cost embedded in a decision of whether to locate production abroad to take advantage of production cost savings on a per unit basis versus establishing production at home. The authors here draw caution to the over-reliance on using only traditional tools such as the DCF model to evaluate alternatives because in this case it undervalues the advantage of home-turf flexibility. The company applied the real options valuation concept to complement the DCF analysis. Using real options analysis forced decision-makers to dig deep and reveal what was most relevant and beneficial for production: flexibility and control. Final results of their evaluations on the alternatives revealed that, in their case, the hidden costs of locating production abroad outweighed substantial savings associated with the cheaper production. Keeping production in-house at home gave the company the benefits of more control and the flexibility to respond to problems and production issues with greater speed due to the closer proximity than the alternatives.
Source: https://hbr.org/2010/10/it-may-be-cheaper-to-manufacture-at-home
Good share,
ReplyDeleteMark Hurd's Redemption