I'm driving back from headquarters with Lou. We've been doing this every day for the last two weeks. We are not in what one might call a cheerful mood. Now we know every little detail of what's going on in the division, and the picture doesn't look good at all. The only bright spot is my plant. No, I should get used to the fact that it's Donovan's plant. And it's not a bright spot, that's a gross understatement. It's the real savior.
Donovan succeeded getting everything under control before the clients had any reason to complain. It will take him some time to regain the confidence of our sales people, but with me pressing from the other side it will not take long before it will be okay.
This plant is so good that Lou and I were led astray for some time. The reports on the division gave us the impression that the situation is quite good. Only when we went through the elaborate work of separating out Donovan's plant was the real picture ex- posed. And it's not pretty. It's actually quite disastrous.
'Lou, I think we did the exact thing that we knew we shouldn't do.'
'What are you talking about?' he says. 'We haven't done anything yet.'
'We have gathered data, tons of data.'
'Yes, and there's a problem with the data,' he says. 'Frankly, I've never seen such a sloppy place. Every report is missing at least back-up details. You know what I found today? They don't even have a report on late receivables. The information is there but-can you believe-it's scattered in at least three different places. How can they operate this way?'
'Lou, you're missing the point.'
'Am I? Do you know that with proper attention we can re- duce the open receivables by at least four days?'
'And that will save the division,' I say sarcastically.
'No,' he grins. 'But it will help.'
'Will it?'
When Lou doesn't answer I continue, 'Do you really believe it will help? Look Lou, what have we learned? What did you yourself say when you asked for the job? Do you still remember?'
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Irritated he says, 'I don't know what you're talking about. Don't you want me to correct things which are obviously wrong?'
How am I going to explain it to him? I try again.
'Lou, suppose that you do succeed in collecting four days out of the open receivables. By how much will throughput, inven- tory, and operating expense be improved?'
'They'll all be slightly improved,' he says. 'But the major impact will be on cash. You shouldn't sneeze at four days' cash. Besides, improving the division requires many small steps. If ev- eryone does his share, together we can lift it.'
I drive silently. What Lou said makes sense, but somehow I know that he is wrong. Deadly wrong.
'Lou, help me here. I know that improving the division will require many small improvements, but...'
'But what?' he says. 'Alex, you are too impatient. You know what they say, Rome was not built in a day.'
'We don't have hundreds of years.'
Lou is right, I am impatient. But shouldn't I be? Did we save our plant by being patient? And then I see it. Yes, many small actions are needed, but that doesn't mean that we can afford to be satisfied with actions that improve the situation. We must care- fully choose which ones to concentrate on, otherwise...
'Lou, let me ask you. How much time will it take you to change, for internal purposes only, the way that we evaluate in- ventory?'
'The mechanical work is not a real problem, that won't take more than a few days. But if you're referring to the work it'll take to explain the ramifications, to explain to managers how this af- fects their day-to-day decisions, that's a different story. With con- centrated effort, I'd say it'll take weeks.'
Now I'm on solid ground.
'What, do you think, is the impact of the way we currently evaluate inventory on the levels of finished stocks that the divi- sion currently holds.'
'Significant,' he says.
'How significant,' I press. 'Can you give me a number?'
'I'm afraid not. Not even a meaningful evaluation.'
'Let's try to do it together,' I say. 'Have you noticed the increase in finished goods that the division is holding?'
'Yes, I have,' he answers. 'But why are you surprised? It's exactly what should be expected. Sales are down and the pres-
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sure to show profits is up, so they build finished goods inventory to generate fictitious inventory profits. I see what you mean. We can take the increase in finished goods as an indicator of the impact of the way we value inventory. Wow, it's about seventy days!'
'Lovely,' I say. 'Compare it to your four days of receivables. On what should you work? Moreover,' I keep on hammering, 'what is the impact on throughput?'
'I don't see any,' he answers. 'I see very clearly the impact on cash, on inventory, and on operating expense, but not on throughput.'
'Don't you?' I say mercilessly. 'What was the reason that they gave us for not introducing the new models? Can you re- call?'
'Yes,' he says slowly. 'They are convinced that introducing the new models will force them to declare all the old ones they're holding in stock as obsolete. That would cause a major blow to the bottom line.'
'So, we continue to offer the old stuff rather than the new. We continue to lose market share, but it's better than to bite the bullet of write-offs. Do you understand now the impact it has on throughput?'
'Yes, I do. You are right. But Alex, you know what? With some extra effort I think that I can handle them both. I can work on the problem of the way we value inventory and at the same time arrange for more attention to the receivables.'
He still doesn't get it but now I think I know how to handle it.
'What about the plant indicators?' I ask him.
'That's a real Pandora's box,' he sighs.
'What is the damage there? Slightly bigger than four days? And what about the fact that sales continue to judge opportuni- ties according to the formal 'product cost' and desirable margins. Or even worse, that they will look for anything they can sell above variable cost. What's the damage there? And what about the transfer prices between us and the other divisions; that's a real killer. Do you want more?'
'Stop, stop,' he raised his hands. 'You made your point. I guess I was inclined to deal with the open receivables issue just because there I know what to do, while in all the others...'
'Afraid?' I ask.
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