Finding Common Ground Between CFO and COO–Part 5

[Continuation]

A New Management Paradigm

Toyota’s success—despite Japan’s own significant recession in recent years—is attributable to management paradigms that differ significantly from traditional management practices in the U.S. Some of these are likely recognizable to you in the following table:

	Traditional Paradigm	New Paradigm
Customer requirements	Quantity	Quality – improved experience and results
Quality [1] improvement	Generally costly and tend to reduce productivity	Saves money while increasing throughput
Internal competition (through reward systems)	Produces conflict – a few win, but many lose	System-thinking eliminates internal competition leading to improved performance
Cooperation	Too frequently leads to reduced competitiveness	Brings improvement where many win – maybe, everybody wins
Management	Command and control	Creating a work environment that supports top performance of the system and ongoing improvement
Workers	Seek to satisfy or, at least, appease management	Work together with management to satisfy the customers’ demand for constantly improving quality
Worker evaluations and incentives [2]	Increases internal competition and produces little long-term improvement	Encourages better performance and ongoing improvement
Purchasing	Buy almost entirely based on cost metrics	Buy based on the system’s performance and build relationships with key vendors

Note: This table was adapted from work originally done by W. Edwards Deming.

[1] In the table above, we are employing the term “quality” just as it is described in the text [see Part 4]. However, the term “customer” may be an internal or an external customer. Work to improve quality coming from a vendor is an effort that improves the firm’s experience and results. Similarly, improving quality coming from operation ‘A', which hands off to operation ‘B’, improves the experience and the result of operation ‘B’ as the “customer” of operation ‘A’.

[2] With regard to “evaluations and incentives,” we are referencing the traditional individual performance metrics taken within silos of operations, rather than on the performance of the system as a whole.

All Profit Lies Outside Your Organization

Inside the four walls of your business, everything over which the CFO and COO have direct control can contribute nothing but cost or expense to the bottom-line. Every opportunity for making money lies outside the organization and, therefore, outside the direct control of management and executives.

You can make more money by buying smarter—raw materials, services, et cetera—thus reducing truly variable costs (TVC) and increasing throughput. And you can make more money tomorrow than you are making today by selling smarter to existing customers, new customers or both.

These actions can have other affects, as well. The affects are depicted in the figure below.

 

A side-affect of buying smarter—what you buy, from whom you buy, how (delivery terms) you buy, and when you buy—is reducing inventory. The wonderful side-affects of reducing inventories—when done wisely as a result of system-thinking—are improved profits, higher ROI, and faster cash velocity.

You probably recognize all of these factors as improvements—improvements you would like to see, perhaps.

The new management paradigm unifies the CFO and COO by turning the organization from it navel-gazing introspection to a recognition that the customer is the most important part of the production line. No matter how you fine-tune your company’s internals, if the internals are not focused on the externals as the only source of profits, you are far more likely to create internal friction and heat without actually lighting a fire that will produce increased throughput and profit.

One of the advantages of the accompanying figure is the systemic clarity—the inherent simplicity—it delivers. It helps CFO and COO begin easily translate financial goals (i.e., net profit, ROI, and cash flow) into day-to-day actions (i.e., increasing throughput, reducing inventories and reduce or hold the line on operating expenses while support significant growth in throughput). [Note: For organizations that don’t have to deal with inventories, per se, the “inventory” may be broadened into “investment” or demand for capital investment. For example, if it is possible to reduce, defer or eliminate the need for an investment in new office space, then that would qualify as a “reduction” in the demand for new investment.]

[To be continued…]