The Goal: A Process of Ongoing Improvement, page 10
So the way to express the goal is this?
Increase throughput while simultaneously reducing both inventory and operating expense.
That means if the robots have made throughput go up and the other two go down, they’ve made money for the system. But what’s really happened since they started working?
I don’t know what effect, if any, they’ve had on throughput. But off the top of my head, I know inventories have generally increased over the past six or seven months, although I can’t say for sure if the robots are to blame. The robots have increased our depreciation, because they’re new equipment, but they haven’t directly taken away any jobs from the plant; we simply shifted people around. Which means the robots had to increase operational expense.
Okay, but efficiencies have gone up because of the robots. So maybe that’s been our salvation. When efficiencies go up, the cost-per-part has to come down.
But did the cost really come down? How could the cost-perpart go down if operational expense went up?
By the time I make it to the plant, it’s one o’clock, and I still haven’t thought of a satisfactory answer. I’m still thinking about it as I walk through the office doors. The first thing I do is stop by Lou’s office.
"Have you got a couple minutes?’’ I ask.
"Are you kidding?’’ he says. "I’ve been looking for you all morning.’’
He reaches for a pile of paper on the corner of his desk. I know it’s got to be the report he has to send up to division.
"No, I don’t want to talk about that right now,’’ I tell him. "I’ve got something more important on my mind.’’
I watch his eyebrows go up.
"More important than this report for Peach?’’
"Infinitely more important than that,’’ I tell him.
Lou shakes his head as he leans back in his swivel chair and gestures for me to have a seat.
"What can I do for you?’’
"After those robots out on the floor came on line, and we got most of the bugs out and all that,’’ I say, "what happened to our sales?’’
Lou’s eyebrows come back down again; he’s leaning forward and squinting at me over his bifocals.
"What kind of question is that?’’ he asks.
"A smart one, I hope,’’ I say. "I need to know if the robots had any impact on our sales. And specifically if there was any increase after they came on line.’’
"Increase? Just about all of our sales have been level or in a downhill slide since last year.’’
I’m a little irritated.
"Well, would you mind just checking?’’ I ask.
He holds up his hands in surrender.
"Not at all. Got all the time in the world.’’
Lou turns to his computer, and after looking through some files, starts printing out handfuls of reports, charts, and graphs. We both start leafing through. But we find that in every case where a robot came on line, there was no increase in sales for any product for which they made parts, not even the slightest blip in the curve. For the heck of it, we also check the shipments made from the plant, but there was no increase there either. In fact, the only increase is in overdue shipments—they’ve grown rapidly over the last nine months.
Lou looks up at me from the graphs.
"Al, I don’t know what you’re trying to prove,’’ he says. "But if you want to broadcast some success story on how the robots are going to save the plant with increased sales, the evidence just doesn’t exist. The data practically say the opposite.’’
"That’s exactly what I was afraid of,’’ I say.
"What do you mean?’’
"I’ll explain it in a minute. Let’s look at inventories,’’ I tell him. "I want to find out what happened to our work-in-process on parts produced by the robots.’’
Lou gives up.
"I can’t help you there,’’ he says. "I don’t have anything on inventories by part number.’’
"Okay, let’s get Stacey in on this.’’
Stacey Potazenik manages inventory control for the plant. Lou makes a call and pulls her out of another meeting.
Stacey is a woman in her early 40’s. She’s tall, thin, and brisk in her manner. Her hair is black with strands of gray and she wears big, round glasses. She is always dressed in jackets and skirts; never have I seen her in a blouse with any kind of lace, ribbon or frill. I know almost nothing about her personal life. She wears a ring, but she’s never mentioned a husband. She rarely mentions anything about her life outside the plant. I do know she works hard.
When she comes in to see us, I ask her about work-in-process on those parts passing through the robot areas.
"Do you want exact numbers?’’ she asks.
"No, we just need to know the trends,’’ I say.
"Well, I can tell you without looking that inventories went up on those parts,’’ Stacey says.
"Recently?’’
"No, it’s been happening since late last summer, around the end of the third quarter,’’ she says. "And you can’t blame me for it—even though everyone always does—because I fought it every step of the way.’’
"What do you mean?’’
"You remember, don’t you? Or maybe you weren’t here then. But when the reports came in, we found the robots in welding were only running at something like thirty percent efficiency. And the other robots weren’t much better. Nobody would stand for that.’’
I look over at Lou.
"We had to do something,’’ he says. "Frost would have had my head if I hadn’t spoken up. Those things were brand new and very expensive. They’d never pay for themselves in the projected time if we kept them at thirty percent.’’
"Okay, hold on a minute,’’ I tell him. I turn back to Stacey. "What did you do then?’’
She says, "What could I do? I had to release more materials to the floor in all the areas feeding the robots. Giving the robots more to produce increased their efficiencies. But ever since then, we’ve been ending each month with a surplus of those parts.’’
"But the important thing was that efficiencies did go up,’’ says Lou, trying to add a bright note. "Nobody can find fault with us on that.’’
"I’m not sure of that at all any more,’’ I say. "Stacey, why are we getting that surplus? How come we aren’t consuming those parts?’’
"Well, in a lot of cases, we don’t have any orders to fill at present which would call for those parts,’’ she says. "And in the cases where we do have orders, we just can’t seem to get enough of the other parts we need.’’
"How come?’’
"You’d have to ask Bob Donovan about that,’’ Stacey says.
"Lou, let’s have Bob paged,’’ I say.
Bob comes into the office with a smear of grease on his white shirt over the bulge of his beer gut, and he’s talking nonstop about what’s going on with the breakdown of the automatic testing machines.
"Bob,’’ I tell him, "forget about that for now.’’
"Something else wrong?’’ he asks.
"Yes, there is. We’ve just been talking about our local celebrities, the robots,’’ I say.
Bob glances from side to side, wondering, I suppose, what we’ve been saying.
"What are you worried about them for?’’ he asks. "The robots work pretty good now.’’
"We’re not so sure about that,’’ I say. "Stacey tells me we’ve got an excess of parts built by the robots. But in some instances we can’t get enough of certain other parts to assemble and ship our orders.’’
Bob says, "It isn’t that we can’t get enough parts—it’s more that we can’t seem to get them when we need them. That’s true even with a lot of the robot parts. We’ll have a pile of something like, say, a CD-50 sit around for months waiting for control boxes. Then we’ll get the control boxes, but we won’t have something else. Finally we get the something else, and we build the order and ship it. Next thing you know, you’re looking around for a CD-50 and you can’t find any. We’ll have tons of CD-45’s and 80’s, but no 50’s. So we wait. And by the time we get the 50’s again, all the control boxes are gone.’’
"And so on, and so on, and so on,’’ says Stacey.
"But, Stacey, you said the robots were producing a lot of parts for which we don’t have product orders,’’ I say. "That means we’re producing parts we don’t need.’’
"Everybody tells me we’ll use them eventually,’’ she says. Then she adds, "Look, it’s the same game everybody plays. Whenever efficiencies take a drop, everybody draws against the future forecast to keep busy. We build inventory. If the forecast doesn’t hold up, there’s hell to pay. Well, that’s what’s happening now. We’ve been building inventory for the better part of a year, and the market hasn’t helped us one damn bit.’’
"I know, Stacey, I know,’’ I tell her. "And I’m not blaming you or anybody. I’m just trying to figure this out.’’
Restless, I get up and pace.
I say, "So the bottom line is this: to give the robots more to do, we released more materials.’’
"Which, in turn, increased inventories,’’ says Stacey.
"Which has increased our costs,’’ I add.
"But the cost of those parts went down,’’ says Lou.
"Did it?’’ I ask. "What about the added carrying cost of inventory? That’s operational expense. And if that went up, how could the cost of parts go down?’’
"Look, it depends on volume,’’ says Lou.
"Exactly,’’ I say. "Sales volume... that’s what matters. And when we’ve got parts that can’t be assembled into a product and sold because we don’t have the other components, or because we don’t have the orders, then we’re increasing our costs.’’ "Al,’’ says Bob, "are you trying to tell us we got screwed by the robots?’’
I sit down again.
"We haven’t been managing according to the goal,’’ I mutter.
Lou squints. "The goal? You mean our objectives for the month?’’
I look around at them.
"I think I need to explain a few things.’’
10
An hour and a half later, I’ve gone over it all with them. We’re in the conference room, which I’ve commandeered because it has a whiteboard. On that whiteboard, I’ve drawn a diagram of the goal. Just now I’ve written out the definitions of the three measurements.
All of them are quiet. Finally, Lou speaks up and says, "Where the heck did you get these definitions anyway?’’
"My old physics teacher gave them to me.’’
"Who?’’ asks Bob.
"Your old physics teacher?’’ asks Lou.
"Yeah,’’ I say defensively. "What about it?’’
"So what’s his name?’’ asks Bob.
"Or what’s ‘her’ name,’’ says Stacey.
"His name is Jonah. He’s from Israel.’’
Bob says, "Well, what I want to know is, how come in throughput he says ‘sales’? We’re manufacturing. We’ve got nothing to do with sales; that’s marketing.’’
I shrug. After all, I asked the same question over the phone. Jonah said the definitions were precise, but I don’t know how to answer Bob. I turn toward the window. Then I see what I should have remembered.
"Come here,’’ I say to Bob.
He lumbers over. I put a hand on his shoulder and point out the window. "What are those?’’ I ask him.
"Warehouses,’’ he says.
"For what?’’
"Finished goods.’’
"Would the company stay in business if all it did was manufacture products to fill those warehouses?’’
"Okay, okay,’’ Bob says sheepishly, seeing the meaning now. "So we got to sell the stuff to make money.’’
Lou is still staring at the board.
"Interesting, isn’t it, that each one of those definitions contains the word money,’’ he says. "Throughput is the money coming in. Inventory is the money currently inside the system. And operational expense is the money we have to pay out to make throughput happen. One measurement for the incoming money, one for the money still stuck inside, and one for the money going out.’’
"Well, if you think about all the investment represented by what we’ve got sitting out there on the floor, you know for sure that inventory is money,’’ says Stacey. "But what bothers me is that I don’t see how he’s treating value added to materials by direct labor.’’
"I wondered the same thing, and I can only tell you what he told me,’’ I say.
"Which is?’’
"He said he thinks that it’s just better if value added isn’t taken into account. He said that it gets rid of the ‘confusion’ about what’s an investment and what’s an expense, I say.
Stacey and the rest of us think about this for a minute. The room gets quiet again.
Then Stacey says, "Maybe Jonah feels direct labor shouldn’t be a part of inventory because the time of the employees isn’t what we’re really selling. We ‘buy’ time from our employees, in a sense, but we don’t sell that time to a customer—unless we’re talking about service.’’
"Hey, hold it,’’ says Bob. "Now look here: if we’re selling the product, aren’t we also selling the time invested in that product?’’
"Okay, but what about idle time?’’ I ask.
Lou butts in to settle it, saying, "All this is, if I understand it correctly, is a different way of doing the accounting. All employee time—whether it’s direct or indirect, idle time or operating time, or whatever—is operational expense, according to Jonah. You’re still accounting for it. It’s just that his way is simpler, and you don’t have to play as many games.’’
Bob puffs out his chest. "Games? We, in operations, are honest, hard-working folk who do not have time for games.’’
"Yeah, you’re too busy turning idle time into process time with the stroke of a pen,’’ says Lou.
"Or turning process time into more piles of inventory,’’ says Stacey.
They go on bantering about this for a minute. Meanwhile, I’m thinking there might be something more to this besides simplification. Jonah mentioned confusion between investment and expense; are we confused enough now to be doing something we shouldn’t? Then I hear Stacey talking.
"But how do we know the value of our finished goods?’’ she asks.
"First of all, the market determines the value of the product,’’ says Lou. "And in order for the corporation to make money, the value of the product—and the price we’re charging—has to be greater than the combination of the investment in inventory and the total operational expense per unit of what we sell.’’
I see by the look on Bob’s face that he’s very skeptical. I ask him what’s bothering him.
"Hey, man, this is crazy,’’ Bob grumbles.
"Why?’’ asks Lou.
"It won’t work!’’ says Bob. "How can you account for everything in the whole damn system with three lousy measurements?’’
"Well,’’ says Lou as he ponders the board. "Name something that won’t fit in one of those three.’’
"Tooling, machines...’’ Bob counts them on with his fingers. "This building, the whole plant!’’
"Those are in there,’’ says Lou.
"Where?’’ asks Bob.
Lou turns to him. "Look, those things are part one and part the other. If you’ve got a machine, the depreciation on that machine is operational expense. Whatever portion of the investment still remains in the machine, which could be sold, is inventory.’’
"Inventory? I thought inventory was products, and parts and so on,’’ says Bob. "You know, the stuff we’re going to sell.’’
Lou smiles. "Bob, the whole plant is an investment which can be sold—for the right price and under the right circumstances.’’
And maybe sooner than we’d like, I think.
Stacey says, "So investment is the same thing as inventory.’’
"What about lubricating oil for the machines?’’ asks Bob.
"It’s operational expense,’’ I tell him. "We’re not going to sell that oil to a customer.’’
