Some idiot phoned in a bomb threat to Solitaire Homes, a manufactured housing company in Deming, New Mexico the other day. The plant had to be evacuated and everyone sent home for the day while the local sheriff looked around for a bomb that wasn’t there. Use this event as a primer in how accounting and managers who believe their numbers screw up manufacturing.
Of course, when everyone was sent home, that meant that the hourly folks in production lost a day’s pay. Managers, who are on salary, did not lose any pay. This is just the way it is because everyone who took an accounting class in school knows for a fact that management is a fixed cost and direct labor is a variable cost.
General Manager David Krull was probably sincere when he said, "For the company, yes it was bad. But it’s worse for the employees. It hurts them… there are people who may live paycheck to paycheck." Whether he was sincere or not, he certainly was accurate.
According to Krull, the 210 hourly employees lost out on $12,000 worth of wages. At eight hours apiece, the workers average just a shade over $7 an hour. At that income level, taking fifty bucks out of everyone’s pocket had to hurt.
Then the company further reported that the shut down caused them to miss shipments of two manufactured homes. The company called this a "$101,000 production loss". Only someone so twisted up in accounting that they have completely parted company with reality would see a number like this as meaningful. The actual loss to the company was nothing – just some vague number someday, perhaps, somehow. Their labor cost for the day was zero. The material that went into making the homes was still there when they all came back to work. They are left with a bunch of fixed indirect overheads that may or may not ultimately be spread over ample production volumes depending on their capacity situation and whether they catch up to their schedule without incurring overtime. Even those were minimal since I presume someone had the sense to turn off the lights when they were done looking for the bomb.
In terms of real money – hard cash the company laid out because of the bomb threat that they would not have otherwise spent – the actual cost was somewhere between nothing and pocket change. At least it would have been had not the company decided to offer a $10,000 reward for anyone who helps them catch the guy who called in the threat.
So what is the final outcome of the bomb debacle? Deming has a population of less than 15,000. The cops are going to catch the guy – in fact everyone at the local bowling alley probably knew who did it within an hour of the call being made. So the company will spend $10,000 for nothing in response to a non-existent $101,000 loss and the hourly employees will be out of luck.
If Mr. Krull knew the difference between money and accounting, actually had the concern he expressed for the people who work in the plant, and used just a little bit of common sense, he would have handled things a whole lot differently.
He would have kept the reward money, trusting the Luna County Sheriff to do his job and recognizing that, unless they have a serial bomb threatener on their hands in Deming who is going to do it again, it makes no difference to the company whether the guy gets caught or not.
He then would have called the employees together and told them that they were all going to be paid for the day they were sent home. And he would have told them that the criminal had created a problem for some customers who would not get their homes on time, and that he really needed the guys in the plant to hump extra hard for a few days to get caught up.
How hard can the choice between spending $10,000 on a reward versus spending $12,000 to demonstrate compassion for employees be? For someone gullible enough to believe a $101,000 loss number, I guess the answer to that question is not as clear as it appears to the rest of us.
With competition like this, does anyone wonder why Toyota thinks there is money to be made in the house manufacturing business?
When I peer into my crystal ball, the future looks like this: Toyota enters the U.S. market with a plant in New Mexico – Solitaire Homes loses business and loses money – Solitaire Homes announces that in the global economy the only way to compete in house manufacturing is with cheap labor in spite of the fact that Toyota is hammering them with New Mexico labor rates – Solitaire closes the Deming plant and moves 50 miles south into Mexico where people will work for $1.50 an hour – Solitaire still can’t compete and goes under – Toyota wins – Professor at New Mexico State University publishes white paper explaining why Solitaire should have moved to China instead of Mexico.
Micheal Gardner says
“Toyota thinks there is money to be made in the house manufacturing business.”
Really? Is there a Toyota Homes on the horizon? I had not heard about that.
Richard Veryard says
Deming huh? W. Edwards Deming must be turning in his grave.
Andy Wagner says
Bring everybody in on Saturday for time and a half and your loss is a meager $6k, and the employees are even happier. (They’ll probably call in bomb threats every week).
Bill Waddell says
The only problem with your suggestion, Andy, is that guys who manage like this are not about to pay overtime premiums in order to ship on time. I am sure Mr. Krull thinks the customers can just wait if they have to in order for him to make his budget. First things first, you know.
Karl McCracken says
How deeply frightening. I often have this kind of discussion with firms’ managers – trying to get them to realise that their shop floor staff are a heck of a lot closer to being an ‘overhead’ rather than ‘variable’ cost.
The fact is that unless you can actually fire the staff (rather than this miserly sending ’em home minus a day’s pay) and then re-hire them *whenever you feel like it*, they’re a fixed cost. The higher up the skills chain you move, the more this is the case.
The thing is of course, that its companies who take this variable costs approach who’re finding it difficult to motivate their staff, hard to make productivity improvements, and damned near impossible to achieve any kind of long term competitive advantage.
Bill Waddell says
It should be ‘deeply frightening’ but this kind of thinking is so commonplace that no one notices.
To your point, I have long thought it ironic that studies show that, depending on the industry, it takes anywhere from 90 days to a year or more to have a newly hired production person fully productive. You can hire an accountant and have him fully productive in a week or two.
If an accountant is a whole lot easier to replace than a capable production worker, shouldn’t the accountant be the variable cost person to let go first when there is a need for short term savings?