Jean could tell there was going to be trouble as soon as he walked into the office. The door to his, the manager’s, office had a big window in it, and through the window, Jean could see Sarah and Nigel glaring at each other. Nigel was head of the accounting department and was always trying to get Sarah to cut costs; Sarah was in charge of operations and always said that fulfilling the promises that got made to customers should take priority. The same argument had been going on for as long as Jean had been at this branch of Fibreglass Fabrications, and now it looked like Jean was going to get dragged into it. He sighed and pushed the door open.
Sarah turned, looking pleased to see him. “At last! Jean, can you talk some sense into this guy? He wants me to cut my overtime budget at a time when we’re running at full capacity just to keep up with sales!”
Nigel sniffed. “Yes, I am. That’s because your labour costs are 30% over budget already, and I’ll be very surprised if they don’t hit 40% by the end of the month. Corporate is already harassing me for an explanation, and I’m not going to cover up your inability to control costs.”
“Well, what am I supposed to do?” Sarah shot back. “Just not start jobs? Maybe not deliver them instead? How much will corporate like that?”
Jean held up his hand and sat down behind his desk. “Calm down, both of you. Now, I know you’ve been over this dozens of times before, but I’m not familiar with the details. Talk me through this, please. What’s the argument actually about?”
Sarah and Nigel both started talking at once, and Jean held up his hand again. “Nigel, you first. Sarah, you’ll get your turn when Nigel has finished. Now, Nigel, explain it to me like I’m five years old, please.”
Nigel took a deep breath before speaking. “Thank you, Jean. And don’t worry, this is actually very simple: the problem is that operations is spending so much money that some of our products yield a margin of $0, or worse! It’s clear that the way operations is spending money on overtime is going to get worse, we must intervene now! They’re so concerned with meeting deadlines or whatever that they’re throwing overtime at everything. They have far too much inventory, enough for days or weeks of normal operations. To make matters worse, as soon as it looks like an order might not ship on time, someone—“ he glared at Sarah “—authorises overtime like it’s going out of fashion. Costs are going up so much that they’re consuming all the income, which is absolutely ridiculous! We have to start making decisions based on what they’ll cost, not some vague benefits to customers.”
Sarah looked like she was about to explode, so Jean nodded to Nigel. “Thank you for explaining that. Sarah, it looks like—“
“I’ve got plenty to say about that!” Sarah fumed.
“This… this… this bean-counter doesn’t understand what happens when we do that! Sure, we can try to trim some of the costs – keep lower stocks of materials, batch jobs together, and so on. But demand isn’t static, sales is always coming up with some scheme for selling left-handed screwdrivers or whatever and not telling us until the last minute. And if anything, anything at all goes wrong, we’re stuffed! We have to wait until the batch finishes or more materials arrive or for the next shift to begin, or whatever it is, and in that time, customers get angry because they don’t have their order.”
Sarah slumped back in her chair. “We lose responsiveness is what I’m saying. Yes, overtime is expensive. So is keeping stocks of key materials so we don’t run out, and so are all the other things we do. I don’t really disagree with Nigel about that. But what he’s not seeing is that we have to do it anyway, because if we lose that flexibility then our delivery performance to customers goes down the toilet, so we don’t have a choice: we have to accept higher costs.”
Nigel sniffed and looked away from Sarah, who was staring glumly at the floor.
“OK, Sarah, I can see what you’re saying.” Jean sighed and thought for a moment. “Sarah, you feel the need to protect customer-facing performance, so you’re saying we should use measurements of that when we’re making decisions. And Nigel, you’re trying to keep costs under control, so you’re saying we should be looking at cost-based measures instead. Am I understanding this right?”
“Yeah…” Sarah muttered, and Nigel, not wanting to concede the point, nodded reluctantly.
“OK,” Jean said again. “Now, the fact that you two have been arguing about this over and over again tells me that you’ve tried all the obvious stuff. Anything that looked easy or practical didn’t work, or we wouldn’t be here. So, are there any non-obvious ways out of this? Give me a solution, something out-of-the-box, but so crazy it just might work. Get creative, is what I’m saying.”
Both Sarah and Nigel thought hard for a moment, but it was Nigel who raised his head first. It was strange to see a smile creeping over Nigel’s face under these circumstances, but Jean was encouraged to see it.
“I think I’ve got something, Jean,” Nigel announced proudly. “Outsourcing.”
“Outsourcing?” Sarah looked like she was about to explode again. “That’s more expensive per item than making them here! I only do that when I’m desperate, and every time I do you complain that it costs too much! How is it suddenly going to be cheaper?”
“Through some accounting magic,” Nigel grinned. “See, Sarah, it doesn’t matter to you in operations, but in accounting terms, this factory is technically running as a cost recovery service provider. Corporate holds the revenues and pays cost recovery to operations for services to deliver the order stream. If your operations department is doing a job then the costs of any outsourcing for that job have to be allocated to our division, which is what blows out the budget. But if we outsource everything – not just the bits you don’t have the capacity to do, but everything – then the costs don’t get allocated to you, because you’re not doing the jobs. The costs would be allocated back to corporate instead.”
Nigel spread his hands proudly. “All of us at this division come out of this looking good! Our costs are controlled nicely, the jobs get done, and Jean here has solved one of our longest-standing problems!”
Sarah was staring at Nigel, looking shocked. Jean, meanwhile, was staring with his mouth open. It was like a lightbulb had just gone on behind his eyes; for a moment everything was blinding. This had to be one of the most surreal conversations he had ever been involved in. Jean shook his head, then looked back at Nigel.
“Nigel…” he said gently. “Do you know how this sounds? You’re saying that having the entire operations department stand around idle, while we pay twice as much to get all our jobs outsourced, would make our costs look better than they’ve ever been before.”
“Well, you asked for a creative solution,” Nigel pointed out reasonably. “It’s not my fault if it sounds a bit… innovative.” Jean had to take a moment to decide how to respond. Nigel didn’t seem to realise it, but he’d just shown Jean that their entire cost accounting system seemed to involve an element of fiction. It was all funny money, going round and round and jumping through hoops, a poor representation of what was actually happening in his Fibreglass Fabrications factory!
“All right,” Jean said eventually. “We’re going to try something different. Nigel, your input has been essential, but we’re not going to outsource everything and leave Sarah wondering what to do with her people. Let’s start by getting an idea of what performance considerations really are more important than cost. We also can’t have constant fights over what interventions are going to be positive and who is allowed to authorise them. Whatever process we come up with, it has to produce decisions that our managers and head office largely agree with.”
Sarah frowned. “OK, but… how are we going to do that? As long as we’re looking at costs, it seems like we’re going to end up in the same argument.” “I agree,” Jean said, “which is why we’re not going to be looking at costs.” Nigel started to say something, but Jean cut him off. “Nigel, looking at costs in isolation has ended up with keeping our entire factory idle looking like a sensible decision. That is, to be honest, ridiculous. We can’t keep looking at cost minimisation. Instead, let’s start thinking in terms of throughput, inventory, and expenses. We want to maximise throughput from this division – the amount of money we make over time – and minimise the money-draining effects of expenditure on inventory and operating expenses.”
Sarah nodded slowly. “That makes sense, I guess… but you haven’t answered my question. How do we do that?”
“It’s going to be a three-part process,” Jean explained, “and I want you and Nigel to work together on this. Start by choosing some recent decisions that ended up being made in favour of performance instead of cost, say five or so. For each of them, explain why the performance benefit was more important than the cost, and what the real or potential damage to sales or margins would have been if we’d focused on cost.
After you’ve done that, use that information to come up with a set of rules people can follow when they’re trying to make decisions about a performance spend. Once you’ve got that bit working, I want us to harvest the throughput as early as we can, preferably before we incur the spend. So, add some other rules if you can about firming up the throughput, and reducing or deferring the inventory or expense costs.”
“This is all very theoretical,” Nigel protested. “These rules aren’t going to cover everything, and maybe not even most things!”
Jean nodded firmly. “You’re right,” he said, “which is why we’re going to test and tweak the rules. Keep on doing that – tweak the rules, test them on upcoming decisions, and tweak them again if needed – until the rules work for most decisions, most of the time. 80% or so, let’s say. They won’t be perfect, but they don’t need to be perfect: they just need to be faster and better than the situation we have now, which can fairly be described as antagonistic chaos.”
Jean stared firmly at both Sarah and Nigel until they both nodded. “Good. Now, get out of here. Work together on this and come back in a month and tell me how it’s working out.”
Jean had never been a schoolteacher, but a month later he was feeling a lot like one as Nigel and Sarah sat in his office once again. They weren’t even looking at each other, for all the world they looked like two naughty kids that had been sent to the principal’s office.
“Well?” Jean said. “Did you get the worksheet, uh, working?” Nigel looked like he’d bitten into a lemon, but he nodded. “Yes,” he admitted grudgingly. “It works. Costs have stabilised, and it feels like Sarah is more in control of operational spending.”
Sarah rolled her eyes at that, but then she sighed and nodded too. “Yeah… I agree with Nigel. It feels like we have more control. It used to feel like we had to panic and throw everything at an order that looked like it might be late. Now, we’ve got a process to work through that tells us how much we should panic.”
Even Nigel managed a smile at that, and Jean started to hope that this might actually end up OK. “And the decisions make sense to everyone?” he asked.
Both Nigel and Sarah nodded, more firmly this time. “Yes,” Nigel said. “I have to admit that I can’t argue with how the decisions are made. If an operational spend gets made, it’s usually for a good reason.”
“And it works both ways,” Sarah added. “There have been times that the decision has gone against my initial impulses… but I can accept that there was a good reason for it.
Jean exhaled in relief. “Good. It sounds like this is working.”
Nigel looked thoughtful. “Actually… I think it might be a bit better than that. I’ve been looking at some of the performance metrics myself lately, and I think our divisional performance might actually have improved a bit, even with these performance-to-customer measurements. Sarah, have you noticed that?”
Sarah thought hard for a moment, then nodded again. “Yeah… I think it has. It goes back to that worksheet and it limiting how much we can panic, you know? We can sort of take a step back from the immediate situation and make a decision that’s better in general. I think that has improved output – sorry, throughput – on its own. We can still make local optimisations here and there, but we are now more confident they won’t come at the expense of divisional performance.”
“Interesting… so, you think that this is a better system overall? Would you go back to how things were?” Jean asked. Nigel looked shocked. “Oh no. No, not at all! We’re finally in a situation where what makes sense to operations makes sense to those of us in accounting too, and the other way around as well. No, I don’t want to lose that!”
Sarah shook her head firmly too. “No, this is better. We’ve got more control, things are going more smoothly, and… I think we understand the business as a whole better, too. Once we started using those rules, it turns out that there are some issues where throwing overtime at them doesn’t actually make any difference, but there are also a few areas where it makes a lot of difference to overall output. We can take a more focused approach to our spending approval requests, I guess that’s what I’m saying.”
“Good,” Jean said happily. “I’m glad that’s settled, then.”
As he watched Sarah and Nigel leave his office, Jean wondered if any other branches of Fibreglass Fabrications had run into similar problems. Maybe it would be worth having a quick chat with his friends at corporate about this…
