DIY Heuristics

Good news – you have, in all probability, already done this.

Bad news – you don’t realise you’ve built one or more heuristics, or you use them at the wrong time.

Heuristics are rules of thumb, or gut instinct perhaps. We use them all the time, because usually they work very well, very fast, and you don’t need a degree in mathematics (or anything else). You should use them – research shows that they are at least as effective as the best mathematical and database modelling solutions.

There are common ones, which we all tend to use and misuse, and ones that are unique to your business, which you have learnt or developed over time. Sometimes they get misused as well.

They get misused because we know these rules usually work. So we use them always. As we don’t sense check them before use, sometimes we can trip ourselves up. And that can be very costly.

As an example, a firm uses cost per square metre to price its jobs – which is common in its industry. They hadn’t checked that this model works at all for some time, and it’s useful to do that any way. When they did, it transpired that the model means that small jobs work out too expensive, and they don’t get them, and for large jobs, they run the risk of leaving money on the table.  They needed to build 2 more heuristics (like the first one), to sense check large jobs to see if they could value price sometimes (which is not based on any quantity measures), and for small jobs, to decide under what level they simply wouldn’t even bother bidding. Under that level, they stood very little chance, but still incurred the time and expense of the bid.  That freed up some time to spend in the smaller but still worthwhile jobs so their chances of winning those and the job till being profitable were improved.

The other benefit of the exercise is that the limitations of the heuristics (what the firm meant by usually) was clear, so more team members could be allowed to use the model (that is, price jobs), with little chance of them causing a loss or failing to price enough in. So capacity has been built, enabling growth to occur naturally, just by making the rules and their limitations clear.

Every firm has its own heuristics, as well as using quite a few common ones. You need to find yours and check that they work, and importantly, when they don’t. Start by asking yourself what common rules you use for pricing, machine utilisation, people, charge out rates and so on.

If you get stuck, we are happy to help. We have an ever growing bank of heuristics. We would be happy to add yours and share the ones which might work for you.

 

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