The Accounting Chains on American Industry
I just finished Bill Wadell and Norman Bodek's Rebirth of American Industry. As usual, I feel I have to get the negative parts out of the way. First, the title is misleading, since the book isn't really a story about how American Industry is bouncing back, but rather about what needs to happen in order to be reborn. Second, the book is not aesthetically appealing, with text that goes too far into the spine, low quality illustrations (at least one figure looks like it was printed on a dot matrix printer), and sidebars that would have worked much better in a larger format. Third, the book has some strange editing errors, including inexplicable line breaks and the like. I didn't pay for it, so I cannot say whether it merited the $47 cover price. In fact, after a cursory glance, I decided I wasn't interested.
[NOTE: I was reading a preliminary, pre-production edition, so the aesthetics will likely be different than what will be for sale.]
After hearing my wife make a "hmm.." noise a few times while she was reading it, I decided it might be worthwhile, so I finally read it. I'm glad I did. Although the authors claim it is not a history book, it does in fact shed light on a very important aspect of American corporate history: the imposition of the DuPont definition of profit, the Sloan management method, and the Brown accounting method onto American industry. In fact, Sloan and Brown were picked by DuPont and their methods reflect his definition of profitability, so all the evil essentially flowed from one man. At the end of World War II, with Ford Motor Company having faltered as Henry lost his mind, the DuPont/Sloan/Brown system stood at the pinnacle of the most important industry in the only country in the world left relatively unscathed by the war. Their system was adopted by every other American business for this bit of luck, not because of any inherent merit.
The Sloan system (the common, short-form name) essentially transformed manufacturers into marketing companies with a manufacturing function. The authors argue that the definition of profit is the most important aspect to consider: for DuPont, profit meant Return on Investment (ROI). The accounting system that counted inventory as an asset and people as a cost followed from that principle. No wonder GM treated its workers and suppliers (and suppliers' workers) so poorly, no wonder the UAW felt so strongly, and no wonder they are both so screwed up today. In fact, you can clearly see why GM would push problems (what most would call business risk and employees) out the door to suppliers. Once you have decided on that strategy, you have declared that you are no longer a manufacturer with a sales office, you are a marketing firm for product manufactured by someone (you are indifferent as to who manufactures).
On the other side of Pacific, and previously at Ford on this side, the definition of profit had been cash flow. In Ford's terms, it was when you had more money in the safe at the end of the week than the beginning. In Ohno's terms, the Toyota system was to try to cut the time between receipt of order and receipt of pay for that order. In such a system, inventory is no asset, but well-trained people and process speed (and therefore quality) are.
To put it in terms of the SIPOC model, Suppliers contribute Inputs to the Process. If you want that process to be fast, the inputs better be good. That means that the Suppliers better be good and getting better. Customer focus means speed implies both profit and quality. That's win-win-win thinking (investors, employees and suppliers, customers).
I don't agree with Bill about the necessity of manufacturing or the balance with service. At the beginning of last century, America was mostly an agricultural and natural resource extraction economy, yet Americans were relatively prosperous. In the middle of the century, the balance shifted toward manufacturing, and Americans were more prosperous. At the beginning of this century, the balance has shifted toward services, and Americans are even more prosperous. People tend to forget that the "services" industries include research scientists, chemists, engineers, architects, lawyers, financiers, doctors, nurses, and so on. These aren't low-pay jobs, and they all contribute to higher productivity and standards of living by people who are engaged in the traditional non-service sectors: construction, extraction, agriculture, and manufacture.
However, I do agree with Bill and Norman about the problem of trying to become lean with a Brownian accounting system. That, like the "management by numbers" stupidity of Sloan "management", serves only the near-sighted and non-manufacturing-minded DuPont definition of profit. Deming was right: the idea that someone could graduate with an MBA and step into the front office of a manufacturer without ever having spent time on the factory floor is a fraud. It was a fraud allowed to flourish in a time when Sloan companies were competing against other Sloan companies: marketing vs. marketing. Once a Manufacturer stepped into the ring, they were doomed to fail. Unless they change their definition of profitability and the management and accounting systems that support that, the Sloan companies are not going to compete with a Toyota.
I'm not an accountant and I don't know much about GM or Sloan. This book was exciting to me because of an interest I have had lately: the question posed by the Austrian Economists blog, "Does Management Science have anything to say that Economics doesn't know?" The common answer is that they don't; that this would be like physicist learning something from engineering, which is applied physics. I disagree: physicists are looking at impersonal, inanimate objects and forces, while economists are looking at human beings and their choices. A corporation isn't a deterministic black box; it is filled with non-deterministic beings trying to figure out the best methods for uncertain and perhaps conflicting ends. The economist may assume that corporations exist to generate profits for the owners, and everything follows from that. Shouldn't the economist consider how the corporation defines "profit"? Because it appears to matter.
[NOTE: I was reading a preliminary, pre-production edition, so the aesthetics will likely be different than what will be for sale.]
After hearing my wife make a "hmm.." noise a few times while she was reading it, I decided it might be worthwhile, so I finally read it. I'm glad I did. Although the authors claim it is not a history book, it does in fact shed light on a very important aspect of American corporate history: the imposition of the DuPont definition of profit, the Sloan management method, and the Brown accounting method onto American industry. In fact, Sloan and Brown were picked by DuPont and their methods reflect his definition of profitability, so all the evil essentially flowed from one man. At the end of World War II, with Ford Motor Company having faltered as Henry lost his mind, the DuPont/Sloan/Brown system stood at the pinnacle of the most important industry in the only country in the world left relatively unscathed by the war. Their system was adopted by every other American business for this bit of luck, not because of any inherent merit.
The Sloan system (the common, short-form name) essentially transformed manufacturers into marketing companies with a manufacturing function. The authors argue that the definition of profit is the most important aspect to consider: for DuPont, profit meant Return on Investment (ROI). The accounting system that counted inventory as an asset and people as a cost followed from that principle. No wonder GM treated its workers and suppliers (and suppliers' workers) so poorly, no wonder the UAW felt so strongly, and no wonder they are both so screwed up today. In fact, you can clearly see why GM would push problems (what most would call business risk and employees) out the door to suppliers. Once you have decided on that strategy, you have declared that you are no longer a manufacturer with a sales office, you are a marketing firm for product manufactured by someone (you are indifferent as to who manufactures).
On the other side of Pacific, and previously at Ford on this side, the definition of profit had been cash flow. In Ford's terms, it was when you had more money in the safe at the end of the week than the beginning. In Ohno's terms, the Toyota system was to try to cut the time between receipt of order and receipt of pay for that order. In such a system, inventory is no asset, but well-trained people and process speed (and therefore quality) are.
To put it in terms of the SIPOC model, Suppliers contribute Inputs to the Process. If you want that process to be fast, the inputs better be good. That means that the Suppliers better be good and getting better. Customer focus means speed implies both profit and quality. That's win-win-win thinking (investors, employees and suppliers, customers).
I don't agree with Bill about the necessity of manufacturing or the balance with service. At the beginning of last century, America was mostly an agricultural and natural resource extraction economy, yet Americans were relatively prosperous. In the middle of the century, the balance shifted toward manufacturing, and Americans were more prosperous. At the beginning of this century, the balance has shifted toward services, and Americans are even more prosperous. People tend to forget that the "services" industries include research scientists, chemists, engineers, architects, lawyers, financiers, doctors, nurses, and so on. These aren't low-pay jobs, and they all contribute to higher productivity and standards of living by people who are engaged in the traditional non-service sectors: construction, extraction, agriculture, and manufacture.
However, I do agree with Bill and Norman about the problem of trying to become lean with a Brownian accounting system. That, like the "management by numbers" stupidity of Sloan "management", serves only the near-sighted and non-manufacturing-minded DuPont definition of profit. Deming was right: the idea that someone could graduate with an MBA and step into the front office of a manufacturer without ever having spent time on the factory floor is a fraud. It was a fraud allowed to flourish in a time when Sloan companies were competing against other Sloan companies: marketing vs. marketing. Once a Manufacturer stepped into the ring, they were doomed to fail. Unless they change their definition of profitability and the management and accounting systems that support that, the Sloan companies are not going to compete with a Toyota.
I'm not an accountant and I don't know much about GM or Sloan. This book was exciting to me because of an interest I have had lately: the question posed by the Austrian Economists blog, "Does Management Science have anything to say that Economics doesn't know?" The common answer is that they don't; that this would be like physicist learning something from engineering, which is applied physics. I disagree: physicists are looking at impersonal, inanimate objects and forces, while economists are looking at human beings and their choices. A corporation isn't a deterministic black box; it is filled with non-deterministic beings trying to figure out the best methods for uncertain and perhaps conflicting ends. The economist may assume that corporations exist to generate profits for the owners, and everything follows from that. Shouldn't the economist consider how the corporation defines "profit"? Because it appears to matter.
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