"My old physics teacher gave them to me."
"Who?" asks Bob.
"Your old physics teacher?" asks Lou.
"Yeah," I say defensively. "What about it?"
"So what's his name?" asks Bob.
"Or what's 'her' name," says Stacey.
"His name is Jonah. He's from Israel."
Bob says, "Well, what I want to know is, how come in throughput he says 'sales'? We're manufacturing. We've got noth- ing to do with sales; that's marketing."
I shrug. After all, I asked the same question over the phone. Jonah said the definitions were precise, but I don't know how to answer Bob. I turn toward the window. Then I see what I should have remembered.
"Come here," I say to Bob.
He lumbers over. I put a hand on his shoulder and point out the window. "What are those?" I ask him.
"Warehouses," he says.
"For what?"
"Finished goods."
"Would the company stay in business if all it did was manu- facture products to fill those warehouses?"
"Okay, okay," Bob says sheepishly, seeing the meaning now. "So we got to sell the stuff to make money."
Lou is still staring at the board.
"Interesting, isn't it, that each one of those definitions con- tains the word money," he says. "Throughput is the money coming in. Inventory is the money currently inside the system. And oper- ational expense is the money we have to pay out to make
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throughput happen. One measurement for the incoming money, one for the money still stuck inside, and one for the money going out."
"Well, if you think about all the investment represented by what we've got sitting out there on the floor, you know for sure that inventory is money," says Stacey. "But what bothers me is that I don't see how he's treating value added to materials by direct labor."
"I wondered the same thing, and I can only tell you what he told me," I say.
"Which is?"
"He said he thinks that it's just better if value added isn't taken into account. He said that it gets rid of the 'confusion' about what's an investment and what's an expense, I say.
Stacey and the rest of us think about this for a minute. The room gets quiet again.
Then Stacey says, "Maybe Jonah feels direct labor shouldn't be a part of inventory because the time of the employees isn't what we're really selling. We 'buy' time from our employees, in a sense, but we don't sell that time to a customer-unless we're talking about service."
"Hey, hold it," says Bob. "Now look here: if we're selling the product, aren't we also selling the time invested in that product?" "Okay, but what about idle time?" I ask. Lou butts in to settle it, saying, "All this is, if I understand it correctly, is a different way of doing the accounting. All employee time-whether it's direct or indirect, idle time or operating time, or whatever-is operational expense, according to Jonah. You're still accounting for it. It's just that his way is simpler, and you don't have to play as many games."
Bob puffs out his chest. "Games? We, in operations, are hon- est, hard-working folk who do not have time for games."
"Yeah, you're too busy turning idle time into process time with the stroke of a pen," says Lou.
"Or turning process time into more piles of inventory," says Stacey.
They go on bantering about this for a minute. Meanwhile, I'm thinking there might be something more to this besides sim- plification. Jonah mentioned confusion between investment and expense; are we confused enough now to be doing something we shouldn't? Then I hear Stacey talking.
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"But how do we know the value of our finished goods?" she asks.
"First of all, the market determines the value of the prod- uct," says Lou. "And in order for the corporation to make money, the value of the product-and the price we're charging-has to be greater than the combination of the investment in inventory and the total operational expense per unit of what we sell."
I see by the look on Bob's face that he's very skeptical. I ask him what's bothering him.
"Hey, man, this is crazy," Bob grumbles.
"Why?" asks Lou.
"It won't work!" says Bob. "How can you account for every- thing in the whole damn system with three lousy measurements?"
"Well," says Lou as he ponders the board. "Name something that won't fit in one of those three."
"Tooling, machines..." Bob counts them on with his fin- gers. "This building, the whole plant!"
"Those are in there," says Lou.
"Where?" asks Bob.
Lou turns to him. "Look, those things are part one and part the other. If you've got a machine, the depreciation on that ma- chine is operational expense. Whatever portion of the investment still remains in the machine, which could be sold, is inventory."
"Inventory? I thought inventory was products, and parts and so on," says Bob. "You know, the stuff we're going to sell."
Lou smiles. "Bob, the whole plant is an investment which can be sold-for the right price and under the right circumstances."
And maybe sooner than we'd like, I think.
Stacey says, "So investment is the same thing as inventory."
"What about lubricating oil for the machines?" asks Bob.
"It's operational expense," I tell him. "We're not going to sell that oil to a customer."
"How about scrap?" he asks.
"That's operational expense, too."
"Yeah? What about what we sell to the scrap dealer?"
"Okay, then it's the same as a machine," says Lou. "Any money we've lost is operational expense; any investment that we can sell is inventory."
"The carrying costs have to be operational expense, don't they?" asks Stacey.
Lou and I both nod.
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Then I think about the "soft" things in business, things like knowledge-knowledge from consultants, knowledge gained from our own research and development. I throw it out to them to see how they think those things should be classified.
Money for knowledge has us stumped for a while. Then we decide it depends, quite simply, upon what the knowledge is used for. If it's knowledge, say, which gives us a new manufacturing process, something that helps turn inventory into throughput, then the knowledge is operational expense. If we intend to sell the knowledge, as in the case of a patent or a technology license, then it's inventory. But if the knowledge pertains to a product which UniCo itself will build, it's like a machine-an investment to make money which will depreciate in value as time goes on. And, again, the investment that can be sold is inventory; the de- preciation is operational expense.
"I got one for you," says Bob. "Here's one that doesn't fit: Granby's chauffeur."
"What?"
"You know, the old boy in the black suit who drives J. Bart Granby's limo for him," says Bob.
"He's operational expense," says Lou.
"Like hell he is! You tell me how Granby's chauffeur turns inventory into throughput," says Bob, and looks around as if he's really got us on this one. "I bet his chauffeur doesn't even know that inventory and throughput exist."
"Unfortunately, neither do some of our secretaries," says Stacey.
I say, "You don't have to have your hands on the product in order to turn inventory into throughput. Every day, Bob, you're out there helping to turn inventory into throughput. But to the people on the floor, it probably looks like all you do is walk around and make life complicated for everyone."
"Yeah, no appreciation from nobody," Bob pouts, "but you still haven't told me how the chauffeur fits in."
"Well, maybe the chauffeur helps Granby have more time to think and deal with customers, etc., while he's commuting here and there," I suggest.
"Bob, why don't you ask Mr. Granby next time you two have lunch," says Stacey.
"That's not as funny as you think," I say. "I just heard this