Predicting the Profit Potential of a Microeconomic Process: An Information Theoretic/Thermodynamic Approach
AbstractIt 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.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 4816.
Date of creation: 11 Sep 2007
Date of revision:
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;
Other versions of this item:
- George, Michael, 2007. "Predicting the Profit Potential of a Microeconomic Process: An Information Theoretic/Thermodynamic Approach," MPRA Paper 5175, University Library of Munich, Germany, revised 05 Oct 2007.
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- D2 - Microeconomics - - Production and Organizations
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-09-16 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John Bryant, 2007. "A Thermodynamic Theory of Economics," Working Papers, Economic Consultancy, Vocat International tefprv2007, Economic Consultancy, Vocat International.
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