I have had more inquiries about scheduling one of my 1 Day Assessments in the first three work days of 2010 than got in the entire month of December of 2009. This is not because of any marketing effort on my part, or any big change in the competitive landscape among my potential clients. For the most part, they seem to be coming from companies that wanted to schedule one quite a while ago but had to wait until the new year because they had used up their 2009 consulting or training budget. How ridiculous is that?
The arbitrary and often destructive practice of managing manufacturing – or just about any business for that matter - with an annual budget is one of the first things to go when a company converts to a lean accounting, lean enterprise approach. Annual budgeting is one of the relics from the past that never did make sense. In the crazy and uncertain business environment we currently face, it is downright absurd.
Manufacturing is a continuous, ongoing process and breaking it into arbitrary chunks based on a calendar is just plain silly. Your results today have precious little to do with what you are doing today, but are driven much more by the decisions you made last week, last month and last year. The cost of your manufactured products was about 90% determined when it leaves the design stage long ago - purchasing and production execution merely tweak it up or down a tad. The amount of non-value adding waste in your business and support processes is driven by the management structures and processes someone put in place long ago.
Today's results are a function of yesterday's decisions. It follows, then, that tomorrow's results are a function of today's decisions. Seeking to optimize profits today by complying with a budget some Nostradamus wannabes devised months ago does little more than to assure that profits are in trouble later – when the chickens from today's decisions come home to roost.
Breaking the business into time chunks and thinking that making sure each chunk is profitable and that adding up the chunks will result in long term success leads to all sorts of dumb things – deferring machine maintenance, putting investments in developing people and continuous improvements in business processes on hold, driving people to use vacation and sick days under 'use it or lose it' schemes, cutting product development and R&D costs, and on and on.
Failing to spend money on things that are in the best long term interests of the business because the expense was not predicted a year ago is silly. Measuring performance by tracking a dizzying array of variance types – volume variances, mix variances, spending variances, purchase price variances – against a budget is hopelessly outdated is even sillier. Paying people performance bonuses for their skill at mastering the budget game is silliest of all. It is the intellectual equivalent of knowing you took the wrong road, but continuing on it anyway so long as you are making good time and getting good gas mileage.
The SOFP process – Sales & Operations Financial Planning – is essential to restoring sanity and driving continuous improvement. It is based on having the cross functional value stream management group always looking at continuously improving short term execution on a rolling basis. What is spent is not a function of some hokey decision made a year ago, but on what it takes to assure that the future is always as good as, or better, than the past in a manner that keeps everyone focused on the same view of reality. The fact that a new year just rolled into the horizon changes nothing.
Continuous improvement is a product of continuous management, and annual budgeting is anything but continuous thinking. It is little more than attempting to navigate by looking only at the rear view mirror. Dumping annual budgeting and managing by SOFP is assuring that everyone is looking ahead, making constant little course corrections, and making sure that you are making good time and getting good gas mileage while going in the right direction.