Predicting the Profit Potential of a Microeconomic Process: An Information Theoretic/Thermodynamic Approach

Michael George

MPRA Paper from University Library of Munich, Germany

Abstract: It would be of great benefit if management could predict the huge profit benefit that would result from modest investments in process improvement initiatives such as Lean, Six Sigma and Complexity reduction. While the application of these initiatives was initially restricted to manufacturing, they have been expanded to product development, marketing, and indeed all microeconomic processes... This paper derives an equation that, subject to further testing, appears to make such a profit prediction possible allowing a rational investment in microeconomic process improvement. That the profit of a company is greatly increased by the reduction of internal waste was originally demonstrated by Henry Ford, but has been greatly extended by Toyota. All waste in a process results in longer lead times from the injection of work into the process until its delivery to the customer or user. Thus the increase in profit is principally driven by the reduction of lead time. The lead time of any process is governed by Little’s Law. The central result of this paper is that the reduction of Little’s Law leads to an equation for the reduction of process Entropy in analogy to thermodynamic waste in a heat engine. Case studies are used to estimate the magnitude of Boltzmann’s Constant for Microeconomic processes. The resulting Equation of Profit allows the prediction of the amount of waste cost elimination based on explicit Lean, Six Sigma and Complexity reduction parameters.

Keywords: Profit Increase Prediction; Process Entropy; Information; Complexity; Waste; Equation of Profit; Little’s Law; Business Analogies with Thermodynamics; Boltzmann’s Constant of Business; Carnot; Shannon (search for similar items in EconPapers)
JEL-codes: D2 D24 D83 (search for similar items in EconPapers)
Date: 2007-09-11
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