- THE MAGAZINE
American business schools generally teach a body of universally accepted business principles. They are very logical, they are seldom questioned, and they seem to make lots of sense. Unfortunately, they are largely wrong, and they can lead to some serious problems.
Some Management FallaciesManagement by Accounting. In virtually every manufacturing or service company, cost cutting programs have been put in place. The logic is inescapable: Every dollar saved by cost cutting ends up as a dollar in profit on the bottom line. Right? It would be nice if that were always true, but too often it is not.
For example, in the ceramic industry, there is constant pressure to cut costs by buying cheaper raw materials or to pressure raw material suppliers to supply the same quality at a reduced price. The results can be disastrous. Cheaper raw materials are usually of poorer quality, resulting downstream in higher losses, more rework and degraded product quality. If quality suffers and customers are lost, accounting tools cannot correlate the decrease in sales with the original cost cutting measures. Additionally, if the same raw material quality is delivered at lower and lower prices, margins get too slim and suppliers disappear or merge.
If costs are cut by postponing needed investments in equipment, training or maintenance, similar problems occur. If staff is downsized to save money, critical functions don’t occur on a timely basis, and the results are the same—poorer quality, higher losses, lost customers and a demoralized workforce.
Management by Objectives. Conventional wisdom in management suggests that employees need only do a better job, work harder and be more conscientious in order to maximize results and profits. This is based on the logical assumption that the overall manufacturing system will be maximized if the performance of each of its individual parts (employees, departments, divisions, etc.) is maximized. That might be true, except for one important fact. All the parts are interconnected, and using conventional measurements of performance (accounting-based) can result in very unexpected and undesirable results.
We set goals (objectives) for each person or department to meet. We reward those who meet those goals and do not reward, or sometimes even punish, those who do not. So the people in charge of raw materials, batching and body preparation cut costs and make themselves look good by buying cheaper materials, laying off a technician or two, spending less time on housekeeping, and stretching out maintenance on equipment. Batching and body preparation are checked less frequently, but they are able to produce as much material as before at lower cost. They are heroes!
Of course, the quality of the casting slip or spray dried powder suffers. Those in the forming department take similar cost-cutting measures, but they have to work with poorer materials. The people running the kilns may be doing a great job. The firing curves are consistent, the temperature uniformity is closely controlled, the burners are kept adjusted to minimize fuel use, kiln draft is kept uniform and dust filters are changed regularly. But losses at the kiln exit end are increasing. No matter how hard they try, and no matter what they do, losses don’t improve. They are hauled onto the carpet, told they need to do a better job, and blamed for the higher firing losses. Well, guess what—they aren’t to blame. The management system is to blame. There is no way they can improve things by working harder or being more conscientious.
The net result is that competition between individuals or departments is often established, to the detriment of the needs of the organization. Maximizing the performance of the parts does not necessarily maximize overall results.
Manage For QualityWhat we really need to do is to manage in such a way that we maximize overall results. We need to manage to improve quality and yields, even if that means increasing raw material costs, personnel costs, maintenance and housekeeping costs, and overall investment. We need to do those things wisely, of course. Then we will minimize total real costs.
Forget managing for profits. Forget short-term results. Forget tomorrow’s stock price. Profits will follow naturally if we consistently manage for quality. Statistical process control (SPC) can be an important tool for doing that, but we also need to invest in our people by giving them the tools and training they need. Most of all, we need to give them a management system that promotes long-term business health.