John, the new CEO of Acme Corporation, just heard a brilliant idea for making his numbers this quarter. He needed it. In his conference call with the financial press last month he made certain promises. If he can’t keep these promises, the stock will surely take a hit. And his options will be worth a lot less, too. Trouble is, John’s estimates assumed that Acme’s biggest customer, We Be Widgets, would place their usual large order for widget sub-assemblies. But, due to the sluggish economy, the order was smaller than expected. The result: below expected revenues and earnings for the quarter. A miss.
But Fiona, Acme’s CFO, had a suggestion that could save the day. “We have that order from Widget International scheduled for the next quarter.” Fiona observed. “If we produced it and shipped it early we could make this quarter’s numbers.” John smiled. “Let’s do it.” He said.
Fred, Acme’s Plant Manager, shook his head in dismay. He’d just received a large order prominently marked RUSH. It reminded Fred of the bad old days, the days before Acme became a Lean Six Sigma company. Expediting orders was the norm, then. There were piles of inventory everywhere, and Production Control Expediters running paperwork frantically from one workstation to another. Things had been different since implementing Lean Six Sigma. Everyone stayed busy, but the atmosphere was calm and things were orderly. The plant had been reorganized and cleaned up. The planned new factory was cancelled when inventory reduction freed up vast amounts of space. Build to schedule was replaced by pull systems. Acme went from the red to the black. Things were looking up.
The rush order signaled that the new CEO was old school. A batch-and-queue guy. A numbers guy, not a process guy. Fred bit his tongue as he announced the rush order in his staff meeting. The knowing glances told him that the symbolic significance of the order wasn’t lost on his people. Nor, Fred thought, will it be lost on the workers in the plant. It probably meant working a lot of OT, juggling other orders, changing setups, and a host of other inconveniences both big and small. It would be, Fred knew, a major setback for Lean Six Sigma. It would take a long time to rebuild confidence that the leaders of the company were still walking the talk.
Janice, Widget International’s Warehouse Manager, looked at the trucks waiting to unload at her dock. The trucks were filled with Widget sub-assemblies from Acme, their supplier. She wouldn’t need these for several weeks. And to make matters worse, it looked like Acme had shipped the entire next quarter’s worth of parts. Widget International was a Lean Six Sigma company that expected small lots to be delivered when they were needed. They didn’t have the room to store these parts for several weeks. Janice instructed the truckers to unhitch the trailers in the parking lot while she tried to figure out what to do with all of those widget sub-assemblies.
This story is fictional. But it isn’t far from a reality that occurs over and over again in the everyday world. It illustrates a violation of the fundamental lesson of management, namely
Consider the impact of every management decision not only on a single stakeholder in the short term, but on all stakeholders for both the short term and the long term.
John’s decision to juggle the orders so he could “make the numbers” in the current quarter might benefit stock holders in the short term, but it did so at the expense of Acme’s employees and customers. It is even likely that the short-term benefits stock holders will enjoy will be followed by negative long-term consequences to them as well. Next quarter’s numbers will be smaller because of the order shipped early. And long term sales might suffer as Acme’s customers look for more reliable suppliers.
Following the one lesson of management is something successful companies tend to do. Many years ago, while working with Dr. Deming at Ford, I heard a lunch table discussion among the executives. The topic was whether or not Ford would have their scheduled two-week shutdown that year. Ford had implemented the policy after learning that many quality problems were caused by workers who were replacing other workers who were on vacation. Although the replacement workers were trained, they were not as proficient at the job as the person they’d replaced. With a general vacation shutdown, the replacement worker problem was greatly reduced and quality improved. The shutdown was made easier by the fact that demand was down and there was slack in the system anyway.
However, as quality improved Ford’s sales also improved. The factories were running full-steam to deliver the cars. (These were the good old days.) Now a vacation shut down meant unfilled orders and lost sales at a rate of millions of dollars per day. But Ford’s leaders decided to go ahead with the shutdown anyway. One of the executives at the lunch table commented that the shutdown showed that Ford was putting its money where its mouth was. “Losing that money shows that we’re serious about quality.” He said. But another person at the table disagreed. “We didn’t lose money because of that decision,” he said. “The decision makes Ford money in the long term. We haven’t yet solved the problem of replacements creating quality problems. Quality problems are noticed by our customers and cost us customer loyalty. In the long run, this costs us customers and market share and we make less money. So until we solve the root cause of quality problems from replacement workers, shutting down for vacations is the best financial decision we can make.”
Exactly. Management in one lesson perfectly illustrated.
© 2009 Thomas Pyzdek. All Rights Reserved.