"Well, I can tell you without looking that inventories went up
on those parts," Stacey says.
"Recently?"
"No, it's been happening since late last summer, around the
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end of the third quarter," she says . "And you can't blame me for it—even though everyone always does—because I fought it every
step of the way."
"What do you mean?"
"You remember, don't you? Or maybe you weren't here
then. But when the reports came in, we found the robots in weld-
ing were only running at something like thirty percent efficiency.
And the other robots weren't much better. Nobody would stand
for that."
I look over at Lou.
"We had to do something," he says. "Frost would have had
my head if I hadn't spoken up. Those things were brand new and
very expensive. They'd never pay for themselves in the projected
time if we kept them at thirty percent."
"Okay, hold on a minute," I tell him. I turn back to Stacey.
"What did you do then?"
She says, "What could I do? I had to release more materials to the floor in all the areas feeding the robots. Giving the robots
more to produce increased their efficiencies. But ever since then,
we've been ending each month with a surplus of those parts."
"But the important thing was that efficiencies did go up,"
says Lou, trying to add a bright note. "Nobody can find fault with
us on that."
"I'm not sure of that at all any more," I say. "Stacey, why are we getting that surplus? How come we aren't consuming those
parts?"
"Well, in a lot of cases, we don't have any orders to fill at
present which would call for those parts," she says. "And in the cases where we do have orders, we just can't seem to get enough
of the other parts we need."
"How come?"
"You'd have to ask Bob Donovan about that," Stacey says.
"Lou, let's have Bob paged," I say.
Bob comes into the office with a smear of grease on his white
shirt over the bulge of his beer gut, and he's talking nonstop
about what's going on with the breakdown of the automatic test-
ing machines.
"Bob," I tell him, "forget about that for now."
"Something else wrong?" he asks.
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"Yes, there is. We've just been talking about our local celebri-
ties, the robots," I say.
Bob glances from side to side, wondering, I suppose, what
we've been saying.
"What are you worried about them for?" he asks. "The ro-
bots work pretty good now."
"We're not so sure about that," I say. "Stacey tells me we've got an excess of parts built by the robots. But in some instances
we can't get enough of certain other parts to assemble and ship
our orders."
Bob says, "It isn't that we can't get enough parts—it's more that we can't seem to get them when we need them. That's true
even with a lot of the robot parts. We'll have a pile of something
like, say, a CD-50 sit around for months waiting for control boxes.
Then we'll get the control boxes, but we won't have something
else. Finally we get the something else, and we build the order
and ship it. Next thing you know, you're looking around for a
CD-50 and you can't find any. We'll have tons of CD-45's and
80's, but no 50's. So we wait. And by the time we get the 50's
again, all the control boxes are gone."
"And so on, and so on, and so on," says Stacey.
"But, Stacey, you said the robots were producing a lot of
parts for which we don't have product orders," I say. "That
means we're producing parts we don't need."
"Everybody tells me we'll use them eventually," she says.
Then she adds, "Look, it's the same game everybody plays.
Whenever efficiencies take a drop, everybody draws against the
future forecast to keep busy. We build inventory. If the forecast
doesn't hold up, there's hell to pay. Well, that's what's happening
now. We've been building inventory for the better part of a year,
and the market hasn't helped us one damn bit."
"I know, Stacey, I know," I tell her. "And I'm not blaming
you or anybody. I'm just trying to figure this out."
Restless, I get up and pace.
I say, "So the bottom line is this: to give the robots more to
do, we released more materials."
"Which, in turn, increased inventories," says Stacey.
"Which has increased our costs," I add.
"But the cost of those parts went down," says Lou.
"Did it?" I ask. "What about the added carrying cost of in-
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ventory? That's operational expense. And if that went up, how
could the cost of parts go down?"
"Look, it depends on volume," says Lou.
"Exactly," I say. "Sales volume . . . that's what matters. And when we've got parts that can't be assembled into a product and
sold because we don't have the other components, or because we
don't have the orders, then we're increasing our costs."
"Al," says Bob, "are you trying to tell us we got screwed by the robots?"
I sit down again.
"We haven't been managing according to the goal," I mut-
ter.
Lou squints. "The goal? You mean our objectives for the
month?"
I look around at them.
"I think I need to explain a few things."
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10
An hour and a half later, I've gone over it all with them.
We're in the conference room, which I've commandeered be-
cause it has a whiteboard. On that whiteboard, I've drawn a dia-
gram of the goal. Just now I've written out the definitions of the
three measurements.
All of them are quiet. Finally, Lou speaks up and says,
"Where the heck did you get these definitions anyway?"
"My old physics teacher gave them to me."
"Who?" asks Bob.
"Your old physics teacher?" asks Lou.
"Yeah," I say defensively. "What about it?"
"So what's his name?" asks Bob.
"Or what's 'her' name," says Stacey.
"His name is Jonah. He's from Israel."
Bob says, "Well, what I want to know is, how come in
throughput he says 'sales'? We're manufacturing. We've got noth-
ing to do with sales; that's marketing."
I shrug. After all, I asked the same question over the phone.
Jonah said the definitions were precise, but I don't know how to
answer Bob. I turn toward the window. Then I see what I should
have remembered.
"Come here," I say to Bob.
He lumbers over. I put a hand on his shoulder and point out
the window. "What are those?" I ask him.
"Warehouses," he says.
"For what?"
"Finished goods."
"Would the company stay in business
if all it did was manu-
facture products to fill those warehouses?"
"Okay, okay," Bob says sheepishly, seeing the meaning now.
"So we got to sell the stuff to make money."
Lou is still staring at the board.
"Interesting, isn't it, that each one of those definitions con-
tains the word money," he says. "Throughput is the money coming in. Inventory is the money currently inside the system. And operational expense is the money we have to pay out to make
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throughput happen. One measurement for the incoming money,
one for the money still stuck inside, and one for the money going
out."
"Well, if you think about all the investment represented by
what we've got sitting out there on the floor, you know for sure
that inventory is money," says Stacey. "But what bothers me is
that I don't see how he's treating value added to materials by
direct labor."
"I wondered the same thing, and I can only tell you what he
told me," I say.
"Which is?"
"He said he thinks that it's just better if value added isn't
taken into account. He said that it gets rid of the 'confusion'
about what's an investment and what's an expense, I say.
Stacey and the rest of us think about this for a minute. The
room gets quiet again.
Then Stacey says, "Maybe Jonah feels direct labor shouldn't
be a part of inventory because the time of the employees isn't
what we're really selling. We 'buy' time from our employees, in a
sense, but we don't sell that time to a customer—unless we're
talking about service."
"Hey, hold it," says Bob. "Now look here: if we're selling the product, aren't we also selling the time invested in that product?"
"Okay, but what about idle time?" I ask.
Lou butts in to settle it, saying, "All this is, if I understand it
correctly, is a different way of doing the accounting. All employee
time—whether it's direct or indirect, idle time or operating time,
or whatever—is operational expense, according to Jonah. You're still accounting for it. It's just that his way is simpler, and you don't
have to play as many games."
Bob puffs out his chest. "Games? We, in operations, are hon-
est, hard-working folk who do not have time for games."
"Yeah, you're too busy turning idle time into process time
with the stroke of a pen," says Lou.
"Or turning process time into more piles of inventory," says
Stacey.
They go on bantering about this for a minute. Meanwhile,
I'm thinking there might be something more to this besides sim-
plification. Jonah mentioned confusion between investment and
expense; are we confused enough now to be doing something we
shouldn't? Then I hear Stacey talking.
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"But how do we know the value of our finished goods?" she
asks.
"First of all, the market determines the value of the prod-
uct," says Lou. "And in order for the corporation to make money, the value of the product—and the price we're charging—has to
be greater than the combination of the investment in inventory
and the total operational expense per unit of what we sell."
I see by the look on Bob's face that he's very skeptical. I ask
him what's bothering him.
"Hey, man, this is crazy," Bob grumbles.
"Why?" asks Lou.
"It won't work!" says Bob. "How can you account for every-
thing in the whole damn system with three lousy measurements?"
"Well," says Lou as he ponders the board. "Name something
that won't fit in one of those three."
"Tooling, machines . . ." Bob counts them on with his fin-
gers. "This building, the whole plant!"
"Those are in there," says Lou.
"Where?" asks Bob.
Lou turns to him. "Look, those things are part one and part
the other. If you've got a machine, the depreciation on that ma-
chine is operational expense. Whatever portion of the investment
still remains in the machine, which could be sold, is inventory."
"Inventory? I thought inventory was products, and parts
and so on," says Bob. "You know, the stuff we're going to sell."
Lou smiles. "Bob, the whole plant is an investment which can
be sold—for the right price and under the right circumstances."
And maybe sooner than we'd like, I think.
Stacey says, "So investment is the same thing as inventory."
"What about lubricating oil for the machines?" asks Bob.
"It's operational expense," I tell him. "We're not going to sell that oil to a customer."
"How about scrap?" he asks.
"That's operational expense, too."
"Yeah? What about what we sell to the scrap dealer?"
"Okay, then it's the same as a machine," says Lou. "Any
money we've lost is operational expense; any investment that we
can sell is inventory."
"The carrying costs have to be operational expense, don't
they?" asks Stacey.
Lou and I both nod.
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Then I think about the "soft" things in business, things like
knowledge—knowledge from consultants, knowledge gained
from our own research and development. I throw it out to them
to see how they think those things should be classified.
Money for knowledge has us stumped for a while. Then we
decide it depends, quite simply, upon what the knowledge is used
for. If it's knowledge, say, which gives us a new manufacturing
process, something that helps turn inventory into throughput,
then the knowledge is operational expense. If we intend to sell
the knowledge, as in the case of a patent or a technology license,
then it's inventory. But if the knowledge pertains to a product
which UniCo itself will build, it's like a machine—an investment
to make money which will depreciate in value as time goes on.
And, again, the investment that can be sold is inventory; the de-
preciation is operational expense.
"I got one for you," says Bob. "Here's one that doesn't fit: Granby's chauffeur."
"What?"
"You know, the old boy in the black suit who drives J. Bart
Granby's limo for him," says Bob.
"He's operational expense," says Lou.
"Like hell he is! You tell me how Granby's chauffeur turns
inventory into throughput," says Bob, and looks around as if he's
really got us on this one. "I bet his chauffeur doesn't even know
that inventory and throughput exist."
"Unfortunately, neither do some of our secretaries," says
Stacey.
I say, "You don't have to have your hands on the product in
order to turn inventory into throughput. Every day, Bob, you're
out there helping to turn inventory into throughput. But to the
people on the floor, it probably looks like all you do is walk
around and make life complicated for everyone."
&
nbsp; "Yeah, no appreciation from nobody," Bob pouts, "but you
still haven't told me how the chauffeur fits in."
"Well, maybe the chauffeur helps Granby have more time to
think and deal with customers, etc., while he's commuting here
and there," I suggest.
"Bob, why don't you ask Mr. Granby next time you two have
lunch," says Stacey.
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morning that Granby may be coming here to make a video tape
on robots."
"Granby's coming here?" asks Bob.
"And if Granby's coming, you can bet Bill Peach and all the
others will be tagging along," says Stacey.
"Just what we need," grumbles Lou.
Stacey turns to Bob. "You see now why Al's asking questions
about the robots. We've got to look good for Granby."
"We do look good," says Lou. "The efficiencies there are
quite acceptable; Granby will not be embarrassed by appearing
with the robots on tape."
But I say, "Dammit, I don't care about Granby and his video-
tape. In fact, I will lay odds that the tape will never be shot here
anyway, but that's beside the point. The problem is that every-
body—including me until now—has thought these robots have
been a big productivity improvement. And we just learned that
they're not productive in terms of the goal. The way we've been
using them, they're actually co u n te r-productive."
Everyone is silent.
Finally, Stacey has the courage to say, "Okay, so somehow
we've got to make the robots productive in terms of the goal."
"We've got to do more than that," I say. I turn to Bob and
Stacey. "Listen, I've already told Lou, and I guess this is as good a time as any to tell the both of you. I know you'll hear it eventually
anyhow."
"Hear what?" asks Bob.
"We've been given an ultimatum by Peach—three months to
turn the plant around or he closes us down for good," I say.
Both of them are stunned for a few moments. Then they're
both firing questions at me. I take a few minutes and tell them
A hat I know—avoiding the news about the division; I don't want
to send them into panic.
Finally, I say, "I know it doesn't seem like a lot of time. It
isn't. But until they kick me out of here, I'm not giving up. What
vou decide to do is your own business, but if you want out, I
suggest you leave now. Because for the next three months, I'm
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