Heroic Accounting, Part 1

In 1989 my company, United Electric Controls  (UE), eliminated its central stockroom through application of pull systems and a more enlightened outlook on economic order quantity policies.  As most materials were relocated at or near their point of use, it became apparent that about a dozen or so stockroom employees no longer had jobs. 

Stockroom manager, Thom B., offered a solution:  For years, UE had been subcontracting assembly of one of its products to a manufacturer about forty miles to our north.  The telephone product line as we called it had previously been outsourced due to space constraints in our plant.  But now, due to reduction of production queues, we were swimming in space.   And, as Thom pointed out, he had the people to build the line.  His stockroom employees, persons already on our payroll, would build the telephone product line. 

Thom argued that bringing the product in-house would have other benefits:

  1. Time consumed to ship parts to and finished products from the subcontractor would be eliminated.  The time savings would be significant in shipping, receiving and purchasing.
  2. Finished goods inventories could be cut by 80% by producing one-by-one in-house. 
  3. Fill-rate of these products would hit 100%.  I don’t remember the exact fill rate at the time, but it had been low owing to our need to order to forecast.
  4. Cash outflow of about a half million dollars per year to the subcontractor would cease.

These were sufficiently compelling arguments to classify this idea as a no-brainer and to effect a speedy transition of telephone line production to our facility.  As that occurred, we discovered yet another reason for in-sourcing:  The telephone product line, out of sight and out of mind, was fraught with assembly problems, things that would have been fixed had we known.   And soon they were fixed. 

Altogether, the impact of in-sourcing was very positive.  After a short learning curve, former stockroom employees were producing products in small batches, fill rates approached 100%, and inventories dropped.  All of our predictions were realized.

Then the bomb dropped.   A couple of months into our brilliant idea I was invited to a meeting with the CEO and the sales manager for the telephone products.  The meeting began with this request:  “Bruce, can you please explain to Bob (the CEO) why we are shipping a $20 bill with every telephone product now?”  The sales manager had a computer report in hand and was pointing to the gross margin field for these products.  Based upon our standard cost measurement method it appeared that UE was now losing a lot of money on telephone products. 

“Oh,” I replied, “that report isn’t correct. We’re actually realizing a huge savings on these sales.”   There was silence.  From their facial expressions I surmised that both gentlemen were questioning my sanity.  This was a moment of truth, and my arguments were proving no match for the glaring cost variance. 

In desperation I suggested we include the subject matter expert in our discussion, Brian H, our VP of Finance.  Brian had been to the floor (the real floor, not the virtual one I described a couple blogs back) and knew exactly why the in-sourcing was a good idea.  Speaking in a language completely intelligible only to him (accountingese) Brian explained how and why standard costs were updated only once a year and that application of overhead in this case to product cost was double dipping – burdening labor twice.  Brian also noted the real savings in inventory cost (previously paid to the subcontractor) as well as the improved inventory turns.  What he explained however was not so important.  The important thing was that Brian validated the change.  Our CEO, Bob, nodded in agreement with Brian and the meeting was over. 

How differently that meeting would have gone without the intervention of the expert!   And how fortunate that the expert had been to the floor rather than just reading the variance report.  Brian probably thought he was just doing his job, but for me his willingness to grasp the real situation was heroic.  He probably saved a dozen jobs that day, perhaps including mine, not to mention all of the improvements that might have otherwise been undone.  

Can you think of similar examples where direct observation by top managers made this kind of difference?  Please join in.

6 thoughts on “Heroic Accounting, Part 1

  1. Gary H. Lucas

    I find your blogs interesting. On Tuesday of this week I became the manager of our manufacturing shop building waste water treatment systems. I’ve been here 6-1/2 years watching a train wreck from a position in engineering. I guess I can give the owner credit for replacing his own son with someone who isn’t even family. This is going to be tough, and fun. I’ve been here before, taking over a failing operation and turning it around. It always amazes me that people somehow think their business is “different” and I’ve been able to fix it mostly by applying age old process principles.

  2. Bruce Hamilton

    Thanks for your valuable response, Gary. There is definitely a bit of heroics on the part of your owner. Take that baton that’s been passed to you and run with it – and please stay tuned to Old Lean Dude. Bruce

  3. Francis Abraham

    Hi ‘Old Lean Dude’ (Bruce),
    What a great find!! I’ve just read your blog and want to add that Brian H is still walking the floor here along with Our Director of Operations, Mark T and others only now we call it Gemba walks… Brian was instrumental with his (accountingese) in helping me to replace two 12ft long barfeeds with 2 short loader barfeeds on a couple of existing CNC Machines. This allows us to run lights out and enjoy $K of savings by bringing in previously outsourced parts and run them for ‘free’. Without the support of top management and their Gemba walks we would have been hard pressed trying to explain how we plan to run machines unattended overnight making parts for ‘Free’.

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