What is Wrong with Local Optimization Anyway?

How could it be wrong to optimize anything, local or not?
Well, if by local optimization we mean having a resource in our system utilize an optimum amount of its inputs, to produce timely, sufficient, but not excessive, output to subsequent steps in the process, then there is nothing wrong, as long as this optimization contributes positively to the system's goal.
Note that timely, sufficient, and not excessive, output is defined by subsequent steps in the process. As such, this output might, at times, be zero.
Note also that optimizing the whole system may call for one step or process to be removed altogether.
If this is how we are approaching the problem of efficiency, then we are not actually doing local optimization.

Consider, however, the following approaches to optimization:

• Increasing the resource utilization to 100%.
• Getting the maximum possible throughput out of every resource.
• Keeping everyone busy all the time.
• Removing all idle time.

If this is our focus, then we are heading for trouble, and we are introducing a significant waste in our system.

To see why this is the case, consider the following consequences of increasing a resource's throughput in our system to the maximum:

• More inventory to manage in subsequent processes, If these subsequent processes are not ready, or capable, of consuming all the output.
• More load on subsequent processes, since now they will have more input to process.
• Delays in getting urgent work done, since there is no slack in the system to handle occasional spikes, resulting from natural statistical variations.
• More work being stuck at bottlenecks.
• Increasing demand artificially on up-stream processes, since this demand is not driven by the needs of the market or the ultimate customers.
• Increasing demand on resources required to maintain the high efficiency.
• The process of optimization itself will consume resources. The overall gain may not exceed the cost.

Local efficiency, then, is a waste. One has to look for alignment with the system's goals to define what, where, how, and how much to optimize, weighing costs against benefits.

"But wait," you may remark, "how about local optimization at bottlenecks?", which is, granted, a nice try. But this will have to wait for another post.