The capacity-efficiency tradeoff components

One of the things brought to light by Covid has been the balance between capacity and efficiency. In general, things with high excess capacity aren’t efficient and things with high efficiency lack excess capacity. Another way to think about capacity is as a margin of safety.

Each link in the medical supply chain, wrote Scott Gottlieb, balances capacity and efficiency. Swabs, like those for Covid, are produced efficiently.

“One of the things I learned at the FDA, watching other critical medical products go into shortage, is that it’s often the lowest-margin constituent in a complex supply chain that’s most vulnerable to shortages. Often the only way to produce such a part profitably is to manufacture it at a very large scale, which means it’s likely to be made by a small number of big, consolidated suppliers.” – Scott Gottlieb, Uncontrolled Spread, published 2021

Sixty percent of the swab market was from an Italian supplied, an Italian supplier in the Lombardy region. Eventually the United States scaled up swab productions only to be limited by the machines that ran the tests, another part of the system where the incentives pointed more towards efficiency than capacity. A system is only as strong as the weakest-link-in-the-supply chain.

There is a tradeoff between efficiency and capacity and that tradeoff depends on time and consequences.

“Flatten the curve” demonstrates this. Our highly efficient (low capacity) healthcare system could have been overrun. The consequences of that were huge. One physician friend thought she might have to work in a field hospital – and she’s a dermatologist.

A smaller example is a student taking Algebra. If an Algebra exam is during a sport season, the student will have less time to study being highly efficient with their use of time. The lack of capacity might lead to a lower grade.

However, in the case of Algebra, the time and consequences are more muddled. Is the goal to ‘learn Algebra’ or ‘score 93% on the Algebra Chapter Two Test’? In the case of the former, the time pressure changes.

Personal finance encompasses this idea too. A large capacity is an emergency fund. Those dollars could be invested to earn the historic seven percent. Time here matters too. Typically a person has one source of income (their job) and these vary in pace of payment. A salesperson can work more – and get paid more faster – than a bookkeeper. Their time aspect is different and the consequences for each depends on the difference between income and expenses.

Like the tuning of stereo, these three aspects can be balanced to fit the conditions. There is a trade off between efficiency and capacity. There are consequences in that exchange. And there is cadence for reaction.

Big shocks, like Covid, are out of our control. But though exogenous to our life, there’s still at least three dials to get things that sound right.

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