The Goal: A Process of Ongoing Improvement, page 7
That’s a weird thought.
Can I assume that making people work and making money are the same thing? We’ve tended to do that in the past. The basic rule has been just keep everybody and everything out here working all the time; keep pushing that product out the door. And when there isn’t any work to do, make some. And when we can’t make work, shift people around. And when you still can’t make them work, lay them off.
I look around and most people are working. Idle people in here are the exception. Just about everybody is working nearly all the time. And we’re not making money.
Some stairs zig-zag up one of the walls, access to one of the overhead cranes. I climb them until I am halfway to the roof and can look out over the plant from one of the landings.
Every moment, lots and lots of things are happening down there. Practically everything I’m seeing is a variable. The complexity in this plant—in any manufacturing plant—is mind-boggling if you contemplate it. Situations on the floor are always changing. How can I possibly control what goes on? How the hell am I supposed to know if any action in the plant is productive or non-productive toward making money?
The answer is supposed to be in my briefcase, which is heavy in my hand. It’s filled with all those reports and printouts and stuff that Lou gave me for the meeting.
We do have lots of measurements that are supposed to tell us if we’re productive. But what they really tell us are things like whether somebody down there "worked’’ for all the hours we paid him or her to work. They tell us whether the output per hour met our standard for the job. They tell us the "cost of products,’’ they tell us "direct labor variances,’’ all that stuff. But how do I really know if what happens here is making money for us, or whether we’re just playing accounting games? There must be a connection, but how do I define it?
I shuffle back down the stairs.
Maybe I should just dash off a blistering memo on the evil of reading newspapers on the job. Think that’ll put us back in the black?
By the time I finally set foot inside my office, it is past five o’clock and most of the people who might have been waiting for me are gone. Fran was probably one of the first ones out the door. But she has left me all their messages. I can barely see the phone under them. Half of the messages seem to be from Bill Peach. I guess he caught my disappearing act.
With reluctance, I pick up the phone and dial his number. But God is merciful. It rings for a straight two minutes; no answer. I breathe quietly and hang up.
Sitting back in my chair, looking out at the reddish-gold of late afternoon, I keep thinking about measurements, about all the ways we use to evaluate performance: meeting schedules and due dates, inventory turns, total sales, total expenses. Is there a simplified way to know if we’re making money?
There is a soft knock at the door.
I turn. It’s Lou.
As I mentioned earlier, Lou is the plant controller. He’s a
paunchy, older man who is about two years away from retirement. In the best accountants’ tradition, he wears horn-rimmed bifocal glasses. Even though he dresses in expensive suits, somehow he always seems to look a little frumpled. He came here from corporate about twenty years ago. His hair is snow white. I think his reason for living is to go to the CPA conventions and bust loose. Most of the time, he’s very mild-mannered—until you try to put something over on him. Then he turns into Godzilla.
"Hi,’’ he says from the door.
I roll my hand, motioning him to come in.
"Just wanted to mention to you that Bill Peach called this afternoon,’’ says Lou. "Weren’t you supposed to be in a meeting with him today?’’
"What did Bill want?’’ I ask, ignoring the question.
"He needed some updates on some figures,’’ he says. "He seemed kind of miffed that you weren’t here.’’
"Did you get him what he needed?’’ I ask.
"Yeah, most of it,’’ Lou says. "I sent it to him; he should get it in the morning. Most of it was like the stuff I gave you.’’
"What about the rest?’’
"Just a few things I have to pull together,’’ he says. "I should have it sometime tomorrow.’’
"Let me see it before it goes, okay?’’ I say. "Just so I know.’’
"Oh, sure,’’ says Lou.
"Hey, you got a minute?’’
"Yeah, what’s up?’’ he asks, probably expecting me to give him the rundown on what’s going on between me and Peach.
"Sit down,’’ I tell him.
Lou pulls up a chair.
I think for a second, trying to phrase this correctly. Lou waits expectantly.
"This is just a simple, fundamental question,’’ I say.
Lou smiles. "Those are the kind I like.’’
"Would you say the goal of this company is to make money?’’
He bursts out laughing.
"Are you kidding?’’ he asks. "Is this a trick question?’’
"No, just tell me.’’
"Of course it’s to make money!’’ he says.
I repeat it to him: "So the goal of the company is to make money, right?’’
"Yeah,’’ he says. "We have to produce products, too.’’
"Okay, now wait a minute,’’ I tell him. "Producing products is just a means to achieve the goal.’’
I run through the basic line of reasoning with him. He listens. He’s a fairly bright guy, Lou. You don’t have to explain every little thing to him. At the end of it all, he agrees with me.
"So what are you driving at?’’
"How do we know if we’re making money?’’
"Well, there are a lot of ways,’’ he says.
For the next few minutes, Lou goes on about total sales, and market share, and profitability, and dividends paid to stockholders, and so on. Finally, I hold up my hand.
"Let me put it this way,’’ I say. "Suppose you’re going to rewrite the textbooks. Suppose you don’t have all those terms and you have to make them up as you go along. What would be the minimum number of measurements you would need in order to know if we are making money?’’
Lou puts a finger alongside his face and squints through his bifocals at his shoe.
"Well, you’d have to have some kind of absolute measurement,’’ he says. "Something to tell you in dollars or yen or whatever just how much money you’ve made.’’
"Something like net profit, right?’’ I ask.
"Yeah, net profit,’’ he says. "But you’d need more than just that. Because an absolute measurement isn’t going to tell you much.’’
"Oh yeah?’’ I say. "If I know how much money I’ve made, why do I need to know anything else? You follow me? If I add up what I’ve made, and I subtract my expenses, and I get my net profit—what else do I need to know? I’ve made, say, $10 million, or $20 million, or whatever.’’
For a fraction of a second, Lou gets a glint in his eye like I’m real dumb.
"All right,’’ he says. "Let’s say you figure it out and you come up with $10 million net profit . . . an absolute measurement. Offhand, that sounds like a lot of money, like you really raked it in. But how much did you start with?’’
He pauses for effect.
"You see? How much did it take to make that $10 million? Was it just a million dollars? Then you made ten times more money than you invested. Ten to one. That’s pretty goddamned good. But let’s say you invested a billion dollars. And you only made a lousy ten million bucks? That’s pretty bad.’’
"Okay, okay,’’ I say. "I was just asking to be sure.’’
"So you need a relative measurement, too,’’ Lou continues. "You need something like return on investment... ROI, some comparison of the money made relative to the money invested.’’
"All right, but with those two, we ought to be able to tell how well the company is doing overall, shouldn’t we?’’ I ask.
Lou nearly nods, then he gets a faraway look.
"Well....’’ he says.
I think about it too.
"You know,’’ he says, "it is possible for a company to show net profit and a good ROI and still go bankrupt.’’
"You mean if it runs out of cash,’’ I say.
"Exactly,’’ he says. "Bad cash flow is what kills most of the businesses that go under.’’
"So you have to count cash flow as a third measurement?’’ He nods.
"Yeah, but suppose you’ve got enough cash coming in every month to meet expenses for a year,’’ I tell him. "If you’ve got enough of it, then cash flow doesn’t matter.’’
"But if you don’t, nothing else matters,’’ says Lou. "It’s a measure of survival: stay above the line and you’re okay; go below and you’re dead.’’
We look each other in the eye.
"It’s happening to us, isn’t it?’’ Lou asks.
I nod.
Lou looks away. He’s quiet.
Then he says, "I knew it was coming. Just a matter of time.’’
He pauses. He looks back to me.
"What about us?’’ he asks. "Did Peach say anything?’’
"They’re thinking about closing us down.’’
"Will there be a consolidation?’’ he asks.
What he’s really asking is whether he’ll have a job.
"I honestly don’t know, Lou,’’ I tell him. "I imagine some people might be transferred to other plants or other divisions, but we didn’t get into those kinds of specifics.’’
Lou takes a cigarette out of the pack in his shirt pocket. I watch him stamp the end of it repeatedly on the arm of his chair.
"Two lousy years to go before retirement,’’ he mutters.
"Hey, Lou,’’ I say, trying to lift him out of despair, "the worst it would probably mean for you would be an early retirement.’’
"Dammit!’’ he says. "I don’t want an early retirement!’’
We’re both quiet for some time. Lou lights his cigarette. We sit there.
Finally I say, "Look, I haven’t given up yet.’’
"Al, if Peach says we’re finished—’’
"He didn’t say that. We’ve still got time.’’
"How much?’’ he asks.
"Three months,’’ I say.
He all but laughs. "Forget it, Al. We’ll never make it.’’
"I said I’m not giving up. Okay?’’
For a minute, he doesn’t say anything. I sit there knowing I’m not sure if I’m telling him the truth. All I’ve been able to do so far is figure out that we have to make the plant make money. Fine, Rogo, now how do we do it? I hear Lou blow a heavy breath of smoke.
With resignation in his voice, he says, "Okay, Al. I’ll give you all the help I can. But....’’
He leaves the sentence unfinished, waves his hand in the air.
"I’m going to need that help, Lou,’’ I tell him. "And the first thing I need from you is to keep all this to yourself for the time being. If the word gets out, we won’t be able to get anyone to lift a finger around here.’’
"Okay, but you know this won’t stay a secret for long,’’ he says.
I know he’s right.
"So how do you plan on saving this place?’’ Lou asks.
"The first thing I’m trying to do is get a clear picture of what we have to do to stay in business,’’ I say.
"Oh, so that’s what all this stuff with the measurements is about,’’ he says. "Listen, Al, don’t waste your time with all that. The system is the system. You want to know what’s wrong? I’ll tell you what the problem is.’’
And he does. For about an hour. Most of it I’ve heard before, it’s the kind of thing everybody’s heard: It’s all the union’s fault; if everybody would just work harder; nobody gives a damn about quality; look at foreign labor—we can’t compete on costs alone; and so on, and so on. He even tells me what sorts of selfflagellation we should administer in order to chasten ourselves. Mostly Lou is blowing off steam. That’s why I let him talk.
But I sit there wondering. Lou actually is a bright guy. We’re all fairly bright; UniCo has lots of bright, well-educated people on the payroll. And I sit here listening to Lou pronounce his opinions, which all sound good as they roll off his tongue, and I wonder why it is that we’re slipping minute by minute toward oblivion, if we’re really so smart.
Sometime after the sun has set, Lou decides to go home. I stay. After Lou has gone, I sit there at my desk with a pad of paper in front of me. On the paper, I write down the three measurements which Lou and I agreed are central to knowing if the company is making money: net profit, ROI and cash flow.
I try to figure out if there is one of those three measurements which can be favored at the expense of the other two and allow me to pursue the goal. From experience, I happen to know there are a lot of games the people at the top can play. They can make the organization deliver a bigger net profit this year at the expense of net profit in years to come (don’t fund any R&D, for instance; that kind of thing). They can make a bunch of no-risk decisions and have any one of those measurements look great while the others stink. Aside from that, the ratios between the three might have to vary according to the needs of the business.
But then I sit back.
If I were J. Bart Granby III sitting high atop my company’s corporate tower, and if my control over the company were secure, I wouldn’t want to play any of those games. I wouldn’t want to see one measurement increase while the other two were ignored. I would want to see increases in net profit and return on investment and cash flow—all three of them. And I would want to see all three of them increase all the time.
Man, think of it. We’d really be making money if we could have all of the measurements go up simultaneously and forever.
So this is the goal:
To make money by increasing net profit, while simultaneously increasing return on investment, and simultaneously increasing cash flow.
I write that down in front of me.
I feel like I’m on a roll now. The pieces seem to be fitting together. I have found one clear-cut goal. I’ve worked out three related measurements to evaluate progress toward the goal. And I have come to the conclusion that simultaneous increases in all three measurements are what we ought to be trying to achieve. Not bad for a day’s work. I think Jonah would be proud of me.
Now then, I ask myself, how do I build a direct connection between the three measurements and what goes on in my plant? If I can find some logical relationship between our daily operations and the overall performance of the company then I’ll have a basis for knowing if something is productive or non-productive . . . moving toward the goal or away from it.
I go to the window and stare into the blackness.
Half an hour later, it is as dark in my mind as it is outside the window.
Running through my head are ideas about profit margins and capital investments and direct labor content, and it’s all very conventional. It’s the same basic line of thinking everyone has been following for a hundred years. If I follow it, I’ll come to the same conclusions as everyone else and that means I’ll have no truer understanding of what’s going on than I do now.
I’m stuck.
I turn away from the window. Behind my desk is a bookcase; I pull out a textbook, flip through it, put it back, pull out another, flip through it, put it back.
Finally, I’ve had it. It’s late.
I check my watch—and I’m shocked. It’s past ten o’clock. All of a sudden, I realize I never called Julie to let her know I wasn’t going to be home for dinner. She’s really going to be pissed off at me; she always is when I don’t call.
I pick up the phone and dial. Julie answers.
"Hi,’’ I say. "Guess who had a rotten day.’’
"Oh? So what else is new?’’ she says. "It so happens my day wasn’t too hot either.’’
"Okay, then we both had rotten days,’’ I tell her. "Sorry I didn’t call before. I got wrapped up in something.’’
Long pause.
"Well, I couldn’t get a babysitter anyway,’’ she says.
Then it dawns on me; our postponed night out was supposed to be tonight.
