Tom Pyzdek  |  02/27/2009

Management in One Lesson

Like 3-D chess, decisions must be considered from several levels.

John, Acme Corp.’s new CEO, just heard a brilliant idea for making his numbers this quarter. He needed it. During a conference call with the financial press last month, he made certain promises. If he couldn’t keep them, the company’s stock would surely take a hit. The trouble is, John’s estimates assumed that Acme’s biggest customer, We Be Widgets, would place its usual large order for widget subassemblies. However, due to the sluggish economy, the order was smaller than expected. The result: revenues amiss and earnings below expectations for the quarter.

Fiona, Acme’s chief financial officer, had a suggestion that could save the day. “We have that order from Widget International for next quarter,” she observed. “If we fill and ship it early, we could make this quarter’s numbers.”

John smiled. “Let’s do it.”

Fred, Acme’s plant manager, shook his head in dismay when he received the large order prominently marked RUSH. It reminded him of the bad old days before Acme became a lean Six Sigma company. Expediting orders was the norm then. There were piles of inventory everywhere and frantic production-control expediters running paperwork from one workstation to another. Since implementing lean Six Sigma, everyone stayed busy, but the plant was calm and orderly. Build-to-schedule was replaced by pull systems. Acme’s ledger went from red ink to black.

The rush order signaled that the new CEO was old school--a numbers guy, not a process guy. As Fred announced the rush order in his staff meeting, the knowing glances told him the order’s symbolic significance wasn’t lost on his people. Neither, Fred thought, will it be lost on the plant workers. It probably meant a lot of overtime, juggling orders, changing setups, and a host of other inconveniences. It would be a major setback for their lean Six Sigma program.

As a result of the order, Janice, Widget International’s warehouse manager, was looking at trucks waiting to unload the Widget subassemblies from Acme. It looked like Acme had shipped enough parts for the entire next quarter. Widget International was a lean Six Sigma company that ordered small lots when needed. It didn’t have the room to store these parts, and she wouldn’t need them for several weeks. Janice instructed the truckers to unhitch the trailers in the parking lot while she tried to figure out what to do with the overstock.

This story is fictional, but it isn’t far from a reality that occurs repeatedly in everyday business transactions. It illustrates a violation of the fundamental lesson of management, namely: Consider the effect of every management decision not only on a single stakeholder in the short term, but also on all stakeholders for both the short and long terms.

John’s decision to juggle the orders so he could make the numbers for this quarter might benefit Acme’s stockholders in the short term, but it was at the expense of their employees and customers. These short-term benefits might be followed by negative long-term consequences as well. Next quarter’s numbers would be smaller because the order shipped early, and long-term sales might suffer as Acme’s customers look for more reliable suppliers.

Many years ago, while working with W. Edwards Deming at Ford Motor Co., I heard a lunch-table discussion among the executives. The topic was whether Ford would schedule a two-week vacation shutdown that year--a policy that Ford implemented after learning that many quality problems were caused by workers who temporarily replaced employees on vacation. They were trained but they weren’t as proficient as the regular employees. With a vacation shutdown, the replacement-worker problem was greatly reduced and quality improved.

As Ford’s quality improved, so did sales, and the factories were running full steam to deliver the cars. (These were the good old days.) A vacation shutdown meant unfilled orders and lost sales at a rate of millions of dollars per day. However, Ford’s leaders decided to go ahead with the shutdown.

One of the executives at the lunch table commented, “Losing that money shows that we’re serious about quality.”

Another person at the table disagreed. “We didn’t lose money because of that decision,” he said. “The decision makes Ford money in the long term. We haven’t yet found a solution to replacement workers creating quality problems. Quality problems are noticed by our customers and in the long run, this costs us customer loyalty and market share, and we make less money. So until we find the root cause of the quality problems created by replacement workers, shutting down for vacations is the best financial decision we can make.”

Exactly. Management in one lesson perfectly illustrated.


About The Author

Tom Pyzdek’s picture

Tom Pyzdek

Thomas Pyzdek’s career in business process improvement spans more than 50 years. He is the author more than 50 copyrighted works including The Six Sigma Handbook (McGraw-Hill, 2003). Through the Pyzdek Institute, he provides online certification and training in Six Sigma and Lean.