It's Not Luck (17 page)

“And what about the cost accounting distortion that translates reduction of inventories into a huge artificial loss? Do you know that because of that distortion I contemplated reversing Bob’s implementation?”

“I don’t blame you,” Brandon says. “This morning I was very close to suggesting it myself.”

“If you agree with this, what do you think about the following? Let me start with a generic statement: ‘For every mode of operation, managers develop suitable measurements.’ ” When they naturally agree, I continue, “If, ‘Managers are trying to run their companies by striving to achieve local optima,’ and ‘For every mode of operation managers develop suitable measurements,’ then ‘There are important measurements that focus on local optima, e.g., cost accounting based measurements.’ Do you agree?”

“At last!” Jim exclaims.

And Brandon explains, “We were warned that before the end of the trip you would fill our ears with fierce attacks on cost accounting. Some even say that you call cost accounting ‘enemy number one of productivity.’ ”

“This is not a joke.” I’m irritated. “All the improvements that I initiated in production and engineering were flying in the face of all cost accounting measurements. Efficiency; variance; product cost; you name it, I had to violate it. It was the only way to improve the companies. Let me tell you, more than once, I was sailing too close to the wind. If it was not for the speed with which our changes improved the bottom line, I wouldn’t be sitting here now with you.”

“Carry on,” Brandon pats me on my shoulder. “We fully agree.”

Still a little irritated, I decide to return to the tree. “Here is another facet of the same thing: ‘Many actions that are needed for improving lead-time, reliability, quality, response time and service do not save cost, and/or increase cost in the short run.’ Before you ask, let me make it clear that I mean ‘cost’ in the traditional sense. The way it is measured by cost accountants in the plants.”

“Unfortunately, we don’t have any quarrel with you,” Brandon assures me. “We examined very closely what you have done in your previous division and we must agree. You did violate every local measurement and at the same time, everything you implemented made perfect sense. Our only problem is the painfully slow pace with which your improvements are picked up by others in UniCo. But carry on, let’s see where you intend to take it.”

“Now it’s just a matter of putting all of it together. If ‘There are important measurements that focus on local optima, e.g., cost accounting based measurements,’ and ‘Many actions that are needed for improving lead-time, reliability, quality, response time and service do not save cost and/or increase cost in the short run,’ then ‘Production and distribution do not improve fast/significantly enough,’ and also ‘Engineering is unable to deliver new products fast and reliably enough.’ My dilemma is how to derive from it the third member of the same group, ‘Companies don’t come up with sufficient innovative ideas in marketing.’ My hunch is that it’s somehow connected.”

“I think that you are right,” Jim agrees. “And I think that UDE number three is somehow involved in the connection.”

I check the list to see what UDE number three is. It is ‘In more and more cases the price the market is willing to pay doesn’t leave enough margin.’ He has a point; what is the difference between margin and product cost? One is just price minus the other. If the concept of product cost is misleading in operations, it might be that the concept of margin is as harmful in marketing.

We play with it for a while but don’t reach any firm conclusions.

It’s almost twelve and four UDEs are still not connected:

UDE #3: In more and more cases the price the market is willing to pay doesn’t leave enough margin.

UDE #4: More than ever the market punishes suppliers who don’t perform according to expectation.

UDE #10: Most new outlets and most new/improved products eat into the sales of existing outlets/products.

UDE #11: A large percent of the existing sales force lacks sufficient sales skills.

Brandon stands up and stretches. “Shall we call it a day?”

“Yes,” I hurry to agree.

“Alex,” Jim still wants something from me, “tomorrow you have to join us only for the noon meeting. Are you going to continue to work on it in the morning?”

“Sure thing,” I sigh. “I did promise that before we return to the States, I will find the core problem that is the cause for all the UDEs.”

“Yes, you did. And now I believe that you might succeed.”

Back in my room I try to continue, but I’m too tired. It’s after midnight, which means that it’s after 7:00
PM
at home. Julie won’t be home yet, but since I’ve been here I haven’t talked with the kids. I place the call.

It was a very brief call. How many times can you ask, “Everything all right? How do you feel? How is everything? What’s new?” Once I’m back home I’m going to develop something to talk about with my kids. This is ridiculous.

16

Traffic is like a sales forecast, you can never predict it accurately. Knowing that London is even more congested than New York, we hurried through the last meeting; no one wants to risk missing his flight back home. So now we are stuck at Heathrow with more than three hours to spare.

The first class lounge in Terminal 4 is the best I’ve ever been in. A large variety of drinks, an impressive assortment of small, nicely cut sandwiches, delicious-looking cakes, and it’s all free.

So why am I complaining? Do I prefer to be still stuck in traffic jams? People are strange. If reality doesn’t mimic their expectations, if the precaution that they took turns out to be unnecessary, they feel disappointed. I even know people who complain about never collecting on their own life insurance.

I think that people deserve what they get. Just now, we got a real reason to complain—they announced that our flight is delayed because of a mechanical problem. They will tell us more in one hour. Yeah, sure, I’ve been here before, it’s how the worst delays usually start.

Julie claims that you can always turn a problem into an opportunity. Well, not this one. Actually, I can. I’m unhappy with the gift that I bought her. It’s a nice cashmere sweater but I couldn’t find a color that will do justice to her complexion. I had planned to roam the shops this morning, but instead I worked on Jim’s tree. Now I have some time, and they say that there are nice jewelry stores in this terminal. Maybe I can find something that will scream, “buy me.”

Back in the lounge, with a unique platinum bracelet and a dent in my bank account, I’m relaxing over a bottle of cold beer. Over all, this trip went much better than I expected. I definitely scored big with Brandon and Jim. The negotiations for Bob’s company are going better than I could have hoped; we are probably going to get a good price for it. The situation with Stacey’s division is unclear, but the best thing happened with Pete’s company. We didn’t even discuss it, and we are not going to, until the dust clears.

What’s going on there? This morning Pete was supposed to have a meeting with one of his buyers. I wonder if his optimism is justified. I wonder if he correctly read the initial response. I wonder if it wasn’t just a polite way to tell him that his offer was not understood.

“Is Pete back in?” I ask his secretary.

“Yes, Mister Rogo, just a minute.”

“Hello, Alex, how is it going on the other side of the pond?” Pete sounds cheerful . . . but that’s how he sounds when he has to cover up for a big disappointment.

“Pete, how did your meeting go?”

“Better than expected.”

I feel my muscles relax. Only now I consciously realize how much I’ve risked. If it had turned out that Pete’s marketing idea was nothing but hot air I would have been in a terrible bind. Brandon and Jim would, no doubt, believe that I invented it to deliberately sabotage the sale. I shiver.

Calmly, I ask for more details.

“We went in. We went over the details. I gave a concession of another twenty-two thousand, and he signed the deal.” Pete sounds as if he does such things at least three times a day.

It’s okay. Everyone is entitled to show off a bit. Especially when it is well justified.

“Are you going to tell me how big the order is?”

“We signed the contract based on estimations of all his needs for the remainder of the year. It is six hundred thirty-four thousand, plus additions for every new design. But on those I had to promise a five-day turnaround. That was the last nail in the . . . marriage chariot.”

“Are you going to have any problem meeting such fast response?”

“Not according to my prep room manager. He claims that he can meet four days without any hassle.”

“Great.” But I have to continue to ask, “What about the other buyer, the one you’re supposed to meet tomorrow? Any news on that front?”

“Well, we are constantly on the phone,” he answers. “Every few hours he calls to add some more stuff to the quote. He had probably involved his marketing department in it. He’s driving us crazy, but I’m not complaining. Not at all.”

Neither do I. “Pete, remember, we don’t want to be in the hands of a few big clients.”

“Yes, we are discussing that right now. It’s important, it determines which prospects we should go after. As it stands now, with our ‘Mafia offer,’ we can get anyone we want.”

He is flying. In his place I would be too. Next week I’d better pay him a visit. With such success he might overlook some snake in the grass. As long as the sale is hanging over our heads we can’t afford any slip-ups.

Nice. It is really nice. I update Brandon and Jim. They are as pleased as I am. We raise a toast to Pete and his team.

“Are you ready to hear what happened to our tree?” I take out the big folded sheet and spread it over the table.

“More good news?” Brandon moves his chair closer to mine.

“I think so, but you be the judge.” I am proud of what I constructed this morning. Really proud.

“Where do we start?” Jim is all business.

“From bottom, up,” I answer. “That way it’s easy to follow the logic.”

Brandon volunteers to read. “If, ‘Managers try to run their companies by striving to achieve local optima,’ and ‘For every mode of operation managers develop suitable measurements,’ then ‘There are important measurements that focus on local optima, e.g., cost accounting based measurements.’ Yes, that’s what we wrote yesterday. Oh, I see, here is the new stuff. If, ‘Managers try to run their companies by striving to achieve local optima,’ then, ‘Most managers’ perception of value of a product is heavily influenced by the local efforts required to design, produce, sell and deliver the product.’ I don’t know if I agree with this last conclusion.”

“Yes, you do,” Jim is decisive. “You yourself don’t believe that’s how we should regard the value of a product, but you must agree that this is the perception of most managers.”

“You are right. Sorry, Alex.”

“Keep going,” I encourage him, “read the additional entity.” I’m anxious to see their response.

Brandon doesn’t need any encouragement, “ ‘The essence of cost accounting is to calculate the product cost.’ Hmm . . . I’m not sure, but before I object, let’s see what you are going to do with this statement.”

He takes a deep breath and continues, “If, ‘There are important measurements that focus on local optima, e.g., cost accounting based measurements,’ and ‘The essence of cost accounting is to calculate the product cost,’ and ‘Most managers perception of the value of a product is heavily influenced by the local efforts required to design, produce, sell and deliver the product,’ then, ‘Most managers believe that product cost is something real that quantifies the efforts absorbed by the product.’ Whoa, that was long, let me read it again.”

I wait for them while they digest this last mouthful.

At last Jim says, “No problem, I buy it.”

Brandon agrees.

I can’t control my impatience, “You see the unavoidable conclusion? It means that . . .” I’m looking for the precise verbalization written on my tree. “It means that ‘Most managers believe that the product price should be equal to product cost plus reasonable margin.’ ”

They don’t get it, rather, Jim is quick to conclude,

“The key word is ‘should’, ‘. . . it should be equal . . .’ I see, you’re going to connect it to one of our UDEs. The one that states that, ‘In more and more cases the price that the market is willing to pay doesn’t leave enough margin.’ ”