Don't Let Finance Run the Factory

William A. Levinson

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Why should you attend?

John Bunyan's The Holy War, as quoted by Rudyard Kipling, depicts perfectly this presentation's theme: "For here lay the excellent wisdom of him that built Mansoul, that the walls could never be broken down nor hurt by the most mighty adverse potentate unless the townsmen gave consent thereto." Regardless of how strong an organization's financial strength, personnel, capital, and technology might be, dysfunctional financial performance metrics can undermine it to the extent that it goes out of business. Tom Peters' Thriving on Chaos includes the quote, " "Cost accounting is the number one enemy of productivity" while the title of Industry Week's Patricia Panchak's article "Did Finance Gut Manufacturing?" speaks for itself. Henry Ford added, "…it is control by finance that breaks up service because it looks to the immediate dollar."

While generally accepted accounting procedures must be used to prepare financial statements and tax returns, traditional cost accounting is indeed totally unsuited to managerial decision making and can drive dysfunctional behavior such as generation of unsaleable inventory to "absorb overhead." Cost accounting treats inventory as an asset, which it might indeed be on paper, but it ties up money, increases cycle times, and gives quality problems a place to hide. This presentation will show how to use relevant metrics for effective decision processes.

Areas Covered in the Session:

  • Traditional cost accounting methods are mandatory for tax and financial reporting, but their application to managerial decision processes can make them more destructive to organizational performance than many forms of poor quality.
  • ·Suzanne Berger's "How Finance Gutted Manufacturing." Boston Review, April 1, 2014 describes how investors broke up Timken, a major manufacturing firm. Henry Ford, in contrast, rightly bought out his stockholders because he did not want them to dictate how he ran his business. Ford added, "And that is the danger of having bankers in business. They think solely in terms of money. They think of a factory as making money, not goods. They want to watch the money, not the efficiency of production. …The banker is, as I have noted, by training and because of his position, totally unsuited to the conduct of industry."
  • Dysfunctional financial incentives to give credit to every customer, regardless of whether he or she was creditworthy, ruined the giant retail chain W.T. Grant.
  • Allocation of overhead, which is actually a sunk cost, to the product can encourage a company to offshore American jobs and lose money in the bargain.
  • Dysfunctional performance metrics encourage purchasing managers to buy large quantities of inputs that are not immediately needed. Benjamin Franklin wrote of this more than 200 years ago, "You call them goods; but, if you do not take care, they will prove evils to some of you. You expect they will be sold cheap, and, perhaps, they may for less than they cost; but, if you have no occasion for them, they must be dear to you." Henry Ford put this into practice by buying only what he needed when he needed it.
  • Inventory is Not an Asset (even if must be treated by one by the accounting system). It ties up capital, increases cycle time, and gives defects a place to hide.
  •  Variable costs often aren't. Labor is, unless overtime is being paid, a fixed cost regardless of what the cost accounting system calls it. Treatment of labor (and, even worse, overhead costs) as variable costs could easily result in the decision to turn down marginally profitable work—that is, the revenue from each item sold exceeds the cost of making it—because it would generate a loss on paper.
  • Marginal profit equals marginal revenue minus marginal cost—that is, the money realized from the sale of one additional item minus the out of pocket cost of making the item in question. If we are paying people for eight hours a day, the marginal labor cost is actually zero and the marginal overhead cost also is zero.
  • Book value is a dangerous illusion. Henry Ford said that (again despite what the cost accounting system might require) an asset is worth exactly what we can do with it.
  • Use Henry Ford's key performance indicators for managerial decisions. These are simply (1) waste of the time of things, (2) waste of the time of people, (3) waste of material, and (4) waste of energy. Their suppression will improve productivity and profitability, along with the bottom line results we want the cost accounting system to report.


Who will benefit:

  • Manufacturing and quality professionals and practitioners; people with responsibility for continual improvement and lean manufacturing
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Speaker: William A. Levinson,

William A. Levinson, P.E., is the principal of Levinson Productivity Systems, P.C. He is an ASQ Fellow, Certified Quality Engineer, Quality Auditor, Quality Manager, Reliability Engineer, and Six Sigma Black Belt. He is also the author of numerous books on quality, productivity, and management.

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