Pulling Apart (Part 3)

ISN'T it funny how the things we write about are also the ones that invariably turn up soon after in our own work situations? It almost feels a bit like imagining a song in your head, only to hear someone close to you start singing exactly the same tune.

In the last couple of weeks, we have been looking at a common problem that plagues most businesses today — that of their component parts striving to achieve improvement in their own little areas of responsibility but failing to better the plight of their entire organizations in the process.

This past week, one of the country managers of the region I look after excitedly asked me to his office. He started talking about how our costing routines don’t properly reflect the true cost of making products in our factories. Without commenting on his epiphany, I just let him continue. He went on about how the way we allocate costs to products are not applicable to our other factories in the region, and therefore we do not really know which place produces things more economically than another.

Right that instant, I heard the song I was singing in my head being loudly sung in front of me. Here was a person, looking after the commercial health and viability of an enterprise, saying exactly the same things which we said were problematic in terms of trying to better manage an organization. Here it was, and there was precious little I could do about it, at least in the short term.

There were a few things not quite right with his observations, for a start. The costing system he was talking about, though adequate for valuing the cost of inventory, never stood the chance of being remotely useful in providing comparative information that allowed for comparisons with anywhere else. For a start, the costs it produced did not even reflect the “economic value” of products made in its own factory, let alone provide any meaningful benchmarks with another business.

The factory he was referring to was still allocating non-variable costs to products by means of a single plant-wide driver — direct labor hours. How does that give any indication of value when shifting people around could easily cause such wide fluctuations in the “profitability” of products? The answer — it does not.

An even greater problem that relates to our immediate subject matter was the desire to “improve” the quality of our costing system, by looking at better allocations of costs to our products. Apparently, doing something wrong better makes it right? Or perhaps I was missing a point here?

There were no points I missed, of course. Everything I heard was consistent with what we were saying all along – the fact that many organizations believe that creating little improvements everywhere in their organization eventually translates into benefits for the whole.

Granted that the costing system was accurate — which it wasn’t — non-variable costs were still minuscule in relation to the total in any case — no more than seven percent of total product costs were “fixed.”

So why concentrate time and effort on “properly allocating” the seven percent to the rest of the 93 percent? What fvalue does this add to our understanding of the business?

Something is surely at fault here. That something is preventing (or at least not helping) organizations focus on their real issues, and spend their time and resources where the results matter most.

Published in the Sun Star Daily, Saturday, March 10, 2007 (http://www.sunstar.com.ph/static/ceb/2007/03/10/bus/batuhan.pulling.apart.(part.3).html)