The objective is always profit (almost always)
When using optimisation in a business environment, the objective should (almost) always be to maximise profit. To some this might be a controversial opinion, to others it might so obvious as to not be helpful. I think the statement is not only true, but also it is imperative to keep in mind when optimising. The reason profit is the universal objective function is that returning a profit is the goal for almost every business (excluding non-profits, of course). Note that safety, legal compliance, and morals are always a constraint, something that the end result (the solution) must adhere to; these are not allowed to lie on a sliding scale and so we don’t optimise for them.
Sometimes it is tempting to blindly optimise market share, volume, margin or some other performance measure depending on the current business strategy. These performance measures, however, are in service to being a more profitable company in the future, or safeguarding future profits. In an ideal world, the objective should be something similar to the Net Present Value (NPV) of the optimisation result taking into account the effect of market share and volume. Perhaps there is good reason to believe that market share, volume or margin are a good proxy for profitability and so we end up optimising for these, but it’s important to keep in mind they are only proxies for profitability.
The reason it is useful to remember that every performance measure is a proxy for profitability is that it stops us from making absurd decisions. If you’re a trucking company and you’re truly optimising for volume, then you should take any job so long as it fits in your schedule, regardless of how little revenue the job provides. But this is foolish! It’s possible for a job to bring in so little revenue or cost so much that it shouldn’t be taken, but how do we find that line? It depends on how profitable the increase in volume will be in the future. So we see, the idea that “profitability is the end goal” is not a trivial or overly meticulous observation but it helps us to be aware of the limits of our approximation.
If you’re needing help evaluating what you should optimise for or require assistance optimising your operations, send an email to hello@northcardinal.com.au and let’s have a chat.