"Of course, everybody knows that . And even if we didn't know it, the last few months have shown to what extent inventory is a liability. Do you think we could have pulled off this fast re- sponse to orders if the floor had been as jammed up as before? And haven't you noticed that quality has improved, and overtime has gone down-not to mention that we hardly ever have to ex- pedite today!"
"Yeah," he says, still looking at his papers. "Inventory is defi- nitely a liability, but under what heading are we forced to report it on the balance sheet?"
"Holy cow, Lou!" I jump to my feet. "I knew that the finan- cial measurements were remote from reality, but to that extent- to report liabilities under the heading of assets? I never realized the full implications... Tell me, what are the bottom line ramifications?"
"Bigger than you think, Alex. I've checked and rechecked it, but the numbers do talk. You see, we're evaluating inventory ac- cording to the cost to produce the goods. These costs include not only the money we pay for the raw materials, but also the value added in production.
"You know what we have done in the last few months. Dono- van has worked only on things that we have orders for. Stacey has released material accordingly. We've drained about fifty percent of the work in process from the plant, and about twenty-five per- cent from finished goods. We've saved a lot by not purchasing new materials to replace this excess inventory, and the cash fig- ures show it clearly. But on our books, the assets represented by inventory went down, since they were only partially compensated for by the cash we didn't have to pay out. In this period, when we were reducing inventory, all the difference between the product cost and the material cost of the reduced inventory showed up as a net loss."
I swallow hard. "Lou, you're telling me that we were penal- ized for doing the right thing? That reducing the excess inven- tory was interpreted by our books as a loss?"
"Yes," he replies, still looking at his papers.
"Well tell me, what was the impact-in numbers?"
"Our actual net profit was well over twenty percent in each of the last three months," he says flatly.
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I stare at him. I can't believe my ears.
"But look at the good side," he says sheepishly, "now that the inventory has stabilized at a new, low level, this effect won't dis- turb us any longer."
"Thank you very much," I say sarcastically and turn to leave.
When I reach the door I turn around and ask him, "When did you discover this phenomena? When did you find out that we were turning much more profit than the targeted fifteen per- cent?"
"A week ago."
"So why didn't you tell me? I could have used these facts very effectively in the plant review."
"No Alex, you couldn't have used them at all, it just would have confused your story. You see, everyone evaluates inventory this way, it's even required by the tax authorities. You didn't stand a chance. But I did discuss it at length with Ethan Frost; he understood it perfectly."
"So that's what happened, you fox. Now I understand why Ethan became so supportive," I say, sitting back down.
When we've finished grinning at each other, Lou says in a quiet voice, "Alex, I have another issue."
"Another bomb?"
"You might call it that, but it's sort of a personal matter. Ethan told me that he's going with Bill Peach to the group. I know that you will need a good divisional controller, someone who has experience in the more diverse subjects that are dealt with at the division level. I'm just one year from retirement; ev- erything that I know is old-fashioned. So..."
Here it comes, I say to myself. I must stop him before he states that he doesn't want to come with me. Once he says it, it'll be much harder to change his mind.
"Lou, wait," I interrupt him. "Look at the work that we've done in the last few months. Don't you think..."
"That's exactly what I was about to bring up," he interrupts me in turn. "Look at it from my point of view. All my life I've gathered numbers and compiled reports. I've seen myself as somebody who has to supply the data, as an impartial, objective observer. But the last few months have shown me to what extent I was wrong. I wasn't an objective observer; I was following, al- most blindly, some erroneous procedures without understanding the far-reaching, devastating ramifications.
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"I've given it a lot of thought lately. We need financial mea- surements for sure-but we don't need them for their own sake. We need them for two different reasons. One is control; knowing to what extent a company is achieving its goal of making money. The other reason is probably even more important; measure- ments should induce the parts to do what's good for the organiza- tion as a whole. What's become apparent to me is that neither of these two objectives is being met.
"For example, this conversation we just had. We knew very well that the plant had drastically improved, but the distorted measurements have almost condemned us. I'm submitting effi- ciency reports, product-cost reports, and now we both know to what extent they just lead workers and management alike to do what's bad for the company."
I've never heard Lou talk for so long. I agree with every- thing he just said, but I'm totally confused. I don't know what he's getting at.
"Alex, I can't stop here. I can't retire now. Do me a personal favor, take me with you. I want the opportunity to devise a new measurement system, one that'll correct the system we have now, so that it will do what we expect it to do. So that a controller can be proud of his job. I don't know if I'll succeed, but at least give me the chance."
What am I supposed to say? I stand up and stretch out my hand. "It's a deal."
Back at my desk I ask Fran to call Bob Donovan in. With Lou on one side and Bob on the other, I'll be free to concentrate on the two areas I know the least, engineering and marketing.
What am I going to do about marketing? The only person I appreciate in that department is Johnny Jons; no wonder Bill has decided to take him along.
The phone rings. It's Bob.
"Hey Al, I'm sitting with Stacey and Ralph, we're really cook- ing. Can you join us?"
"How long will it take?" I ask.
"No way to tell. Probably 'til the end of the day."
"In that case, I'll pass. But Bob, we need to talk. Can you get away for a few minutes?"
"Sure, no problem."
And in no time, he enters my office. "What's up, boss?"
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I decide to give it to him straight, "How'd you like to be responsible for all production of the division?"
The only thing he manages to say is a long "Wow." He puts his big body in a chair, looks at me, and doesn't say any more.
"Well, Bob, surprised?"
"You bet."
I go to pour us coffee and he starts to talk to my back. "Alex, I don't want that job. Not now. You know, a month ago I would have grabbed the offer with both hands. It's way beyond what I expected."
Puzzled, I turn around, a cup in each hand. "What's the matter Bob, afraid?"
"You know better than that."
"So what happened in the past month to change your per- spective?"
"Burnside."
"You mean he made you a better offer?"
He fills the room with his booming laughter. "No, Alex, nothing like that. What gave me a new perspective was the way we handled Burnside's urgent order. I learned so much from how we handled that case that I would rather stay in this plant and develop it further."