No Slack

Is There Limited or NO Slack (waste & inefficiency)?

Slack occurs in a venture where the size of the pie is reduced through the actions of economic actors in the "vertical" relationship with the firm. Vertical relationships are the production/distribution relationships. Vertical relationships usually consist of the supplier-firm relationship on one hand, and the customer-firm relationship, on the other. Suppliers and customers are the two main types of market actor that can "jump your claim" and cut down the overall size of your pie.

Generally, the size of the pie available to all parties in the vertical relationship is larger or smaller, depending upon the amount of waste in the production and distribution process. Where production and distribution has little inefficiency (low scrap, rework, waste etc.) there is little slack. Where scrap, rework, and waste are high, then slack is large and the pie thereby shrinks.

Thus, when a customer mis-specifies an order, and you have to "eat" the correction costs, slack increases. When a supplier wastes material or labor through mismanagement, slack increases. When your advertising department runs ads that don't bring in business, slack increases. When people within the firm waste time, materials or funds, slack increases.

How does one cut slack? The answer lies in the alignment of incentives. That is, where it is in the interest of the players in the production/distribution game to cut slack, then slack is generally low.

Hence, programs that link employee pay to low slack, reduce appropriability. Programs that link supplier rewards to timeliness and quality of component deliveries, reduce appropriability. Programs that emphasize safety, thereby reducing lost-time accidents, reduce appropriability. Programs that cut scrap and rework, reduce appropriability. These reductions occur because, where waste is low, the pie is larger.

So, where the incentive alignments are put in place to reduce slack, then the answer to the sub-question: Is there limited slack?, can be yes. If not, then the answer to Question E: Is it non-appropriable? is NO--which implies DON'T GO ON with a new venture until you resolve this.

If you are trying to reduce appropriability in an ongoing business, look for the opportunity to reward actors in the vertical relationship for low slack conditions. Begin by looking at your reward systems and then move on to consider the incentives that you offer both suppliers and buyers to eliminate slack.