The other day I took a jab at managers who run purchasing guided by standard costs, describing how life might be if they were to run their homes by the same logic. The analogy has a little bit of history. I thought I'd follow up by sharing the following excerpt from Simple Excellence …
"You already know how to get people organized around a common cause for everyone's benefit. You do it every day as in your most important role – being a leader within your family. In just about every aspect, running the business is very much like leading your family and managing your home. In that regard, perhaps the title – Simple Excellence – is inaccurate because there is nothing simple about most families. However, it is something you know and execute based on simple principles: Make sure everyone is engaged, involved and working to their potential, make sure the cash gets managed and the finances are strong balancing short term and long term needs, do your level best to be sure that when your kids leave the nest you are sending the best quality product you and your spouse can conjure up out into society – young people with their heads screwed on straight who will be happy and successful and will do the family name proud.
You succeed at this family leadership challenge by working hard, assuring that everyone in the family shares the same goals; believes in the same principles; and by communicating well and often, making sure everyone knows the plan; and by being smart and disciplined with the family bank account. Mostly you do it with compassion and love – sometimes tough love – but always with an absolute commitment to each other. That also pretty well describes the founders of the great manufacturing businesses mentioned previously – not a lot of complicated management theory.
Management really is simple. Put all of the complex financial books away and focus on cash. Henry Ford said that all he needed to know about accounting was whether there is more money in the bank at the end of the week than there was at the beginning. That is pretty much the same way you gauge your family's financial condition and it is absolutely correct. No matter what the rest of the financial statements say, if you keep taking in more money than you are spending, things will work out very well. A whole lot of managers who thought otherwise learned a hard lesson over the last few years when the credit sources went up in smoke. The notion that cash is just another asset – no more important than inventory and accounts receivable – the ones who believed the DuPont ROI model had anything to do with reality – found out the hard way that there is a very real difference between actual money and a 'current assets' number on a financial statement.
The volumes written on human behavior and how to motivate, analyze, measure, whip into shape and otherwise manipulate people into doing what you want them to do should go into the dumpster. Managing people is no more complicated – and no easier – than the golden rule. Treat people with the same level of respect, honesty and fairness you want and you will be a very good manager. The manager who thinks he or she can fool anyone or manipulate people is about as successful as the husband, wife, parent or child who thinks he or she can fool their own family. They only fool themselves.
You cannot run the purchasing function in your business any different than you do at home and expect good results. Sourcing the core product you sell with the lowest bidder makes about as much sense as driving your kid all the way across town to a free clinic, bypassing dozens of better qualified doctors along the way in order to save the co-pay. The same is true of sending your core product to China. It is akin to sending your young children off to boarding school. A manufacturer outsourcing manufacturing and a parent outsourcing parenting, so they can focus on more important matters? What could possibly be more important? Selling? Managing the money? There won't be anything worthwhile to sell, or any money to manage when the product representing the very reason for the company's existence gets back to you and it is something different – inevitably worse than your expectations. Can you name a single company which was doing OK manufacturing in the United States whose fortunes have improved – their products are better and their business is growing – as a result of moving manufacturing to China?
Investment decisions are the same. Pay good money and buy the very best for the things that are important, and look on eBay for the things that are not. The labor cost is a minor consideration. The idea that every machine decision should be based on an analysis of cost reductions from the new machine compared to the old methods, with some hurdle rate or discounted cash flow triggering the go or no-go decision is silly. If that were the right way to make purchasing decisions no one would ever buy a new car. It could never be cost justified. When the old one gives out you should buy the cheapest wreck you can find and drive it into the ground. You don't do that because things like reliability and safety enter into the decision, as well as the quality of life. Just because the originators of ROI theory did not know how to put a value on such things does not mean they are any less relevant to the business decision than they are to your personal decisions."