The Importance of Small Differences

The importance of a small difference between two large numbers.

Readers may well be wondering what an article under this heading is doing on this website – so, please bear with me, all will be explained.

Politicians, Aid Professionals and Businesses are all agreed on the need for Development and Expansion in Zambia – Development to raise the standard of living and to diversify away from a single resource; Expansion to try to keep up with a growing population (that is currently doubling every 25 years or so). What few people appreciate is that this D&E can ONLY be financed by Profits – either profits generated within Zambia or profits in richer countries that donate funds to aid our development. In fact it is even worse than that, it is Profit AFTER Tax and AFTER the Business has rewarded it’s shareholders (or in the case of a privately owned business, it’s owners, who also need to live and so have to be able to make drawings from the business.) So, on one side you have the Gross Income of all Sales from the Business, on the other you have the total of Costs, Taxes and Drawings. . . the small difference between these two (which in hard times can be negative) is the only money available for Development or Expansion. One CAN develop (in the short term) on borrowed money, but that loan will have to be repaid, and can only be repaid with what is left with this small positive difference.

So very obvious. Yet it took me an embarrassingly long time to realize that the corollary of this is that a small (0.5%) improvement in output can have a significant effect on this small difference. Imagine a company that’s funding for Development (i.e. after Costs, Taxes and Drawings) is only generating a 2% surplus for expansion. If that company learns to squeeze a 0.5% improvement, then the surplus becomes 2.5% and that is TWENTY percent higher.

Again, obvious (and I hope there are no other readers who took as long as I did to learn that simple, obvious, fact).

But I want to bring to your attention the fact that the significance of this small difference applies to two other resources that are also extremely limiting: Time and Management.

Imagine a very successful, well-run company, but the entire resources of all the management is already fully committed to running that company. Expansion and Development require a lot of invested management time in order to execute a successful expansion. The total amount of D&E time required will probably be small (as a percentage of Total Management Resources), but it will be a large chunk of what SURPLUS Resources are available. Therefore, anything that reduces available Management Resources, even by a small percentage of the overall resources available, would have a significant impact on the spare resources available for D&E.

The same is true of Time – not only Management Time, but also Workforce Time and even Machine Time. Imagine a company (a cement factory would be a good example) that has invested millions in a complex plant that is running at near maximum capacity. So assume it is averaging 7300 hours of production a year (365 x 20 hours a day). Management (and shareholders) want to increase production by just 5% – or 1 hour a day – 365 more hours. Yet a delay with customs clearing on two separate occasions means that on two occasions 2 days and 3 days of production were lost. That is only 5 x 20 = 100 days of the old, standard production, but it is 27% of the planned expansion.

In conclusion, just as we can take the vital importance of Expansion and Development as a given, so too must we then include the vital importance of maintaining efficiency in everything that we do. The Government, in particular, must appreciate that time spent by society on taxation is time taken away from development. Taxes paid by society is finance taken away from development and must therefore be spent with as least as much efficiency and frugality by government as they would have been spent in the businesses generating the Taxes at source.

Bruce Danckwerts