The Goal

Still more good news is that inventories are at their lowest ever in the plant. It's almost shocking to walk out into the plant now. Those stacks and piles of parts and sub-assemblies have shrunk to half their former size. It's as if a fleet of trucks had come and hauled everything away. Which is, in fact, about what happened. We've shipped the excess inventory as finished prod- uct. Of course, the notable part of the story is that we haven't

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filled the plant back up again by dumping new work-in-process on the floor. The only work-in-process out there now is for cur- rent demand.

But then there's the bad news. Which is what I'm thinking about when I hear footsteps on the carpet behind me in the dark

'Al?'

'Yeah.'

'How come you're out here in the dark?'

'Can't sleep.'

'What's wrong?'

'Nothing.'

'Then why don't you come back to bed?'

'I'm just thinking about some things.'

It's quiet for a second. For a moment, I think she's gone away. Then I feel her beside me.

'Is it the plant?' she asks.

'Yeah.'

'But I thought everything was getting better,' she says. 'What's wrong?'

'It has to do with our cost measurement,' I tell her.

She sits down beside me.

'Why don't you tell me about it,' she says.

'Sure you want to hear about it?' I ask.

'Yes, I do.'

So I tell her: the cost of parts looks as though it's gone up because of the additional setups necessitated by the smaller batch sizes.

'Oh,' she says. 'I guess that's bad, right?'

'Politically speaking, yes,' I tell her. 'Financially speaking, it doesn't make a damn bit of difference.'

'How come?' she asks.

'Well... do you know why it looks like the cost has gone up?' I ask her.

'No, not at all,' she says.

I get up to switch on a lamp and find a piece of paper and pencil.

I tell her, 'Okay, I'll give you an example. Suppose we have a batch of 100 parts. The time to set up the machine is 2 hours, or 120 minutes. And the process time per part is 5 minutes. So we've invested per part 5 minutes plus 2 hours of set-up divided by 100. It comes to 1.2 minutes of set-up per part. According to the ac-

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countants, the cost of the part is based upon direct labor of 6.2 minutes.

'Now if we cut the batch in half, we still have the same amount of set-up time. But it's spread over 50 parts instead of 100. So now we've got 5 minutes of process time, plus 2.4 minutes of set-up for a grand total of 7.4 minutes of direct labor. And the calculations are all based on the cost of direct labor.'

Then I explain the way costs are calculated. First, there is the raw material cost. Then there is the cost of direct labor. And finally there is 'burden,' which essentially works out to be cost of the direct labor multiplied by a factor, in our case, of about three. So on paper, if the direct labor goes up, the burden also goes up.

'So with more set-ups, the cost of making parts goes up,' says Julie.

'It looks that way,' I tell her, 'but in fact it hasn't really done anything to our actual expenses. We haven't added more people to the payroll. We haven't added any additional cost by doing more set-ups. In fact, the cost of parts has gone down since we began the smaller batch sizes.'

'Down? How come?'

'Because we've reduced inventory and increased the amount of money we're bringing in through sales,' I explain. 'So the same burden, the same direct labor cost is now spread over more product. By making and selling more product for the same cost, our operating expense has gone down, not up.'

'How could the measurement be wrong?' she asks.

I say, 'The measurement assumes that all of the workers in the plant are always going to be fully occupied, and therefore, in order to do more set-ups, you have to hire more people. That isn't true.'

'What are you going to do?' she asks me.

I look up at the window. The sun is now over the roof of my neighbor's house. I reach over for her hand.

'What am I going to do? I'm going to take you out to break- fast.'

When I get to the office, Lou walks in. 'More bad news for me?' I joke.

He says, 'Look... I think I can help you out on this cost of products thing.'

'Yeah? Like how?'

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'I can change the base we're using for determining the cost of parts. Instead of using the cost factor of the past twelve months, which is what I'm supposed to be doing, we can use the past two months. That will help us, because for the past two months, we've had big increases in throughput.'

'Yeah,' I say, sensing the possibilities. 'Yeah, that might work. And actually the past two months are a lot more represen- tative of what's really going on here than what happened last year.'

Lou leans from side to side. He says, 'We-l-l-l, yes, that's true. But according to accounting policy, it's not valid.'

'Okay, but we have a good excuse,' I say. 'The plant is different now. We're really a hell of a lot better than we were.'

'Al, the problem is Ethan Frost will never buy it,' says Lou.

'Then why did you suggest it?'

'Frost won't buy it if he knows about it,' says Lou.

I nod slowly. 'I see.'

'I can give you something that will slide through on the first glance,' says Lou. 'But if Frost and his assistants at division do any checking, they'll see through it in no time.'

'You're saying we could end up in very hot water,' I say.

'Yeah, but if you want to take a chance...' says Lou.

'It could give us a couple more months to really show what we can do,' I say, finishing the thought for him.

I get up and walk around for a minute turning this over in my mind.