Bottleneck Busters Blog

One of the most futile efforts I have had the pleasure of working through in my career is the budget and headcount process in a large company.  This process is essentially a shaman's ritual  - gaze into the crystal ball and determine how much money and resources we will need for the next 12 months.  It's about as accurate as marketing's forecast for the next 12 months, except we have one piece of data - what was your budget and headcount last year?

Worse still is that budget’s and headcount are broken down to very small groups – a supervisor with 10 people will have a budget and headcount target.  The assumption is that going down to this level will be more accurate, and make the supervisor more responsible for the decisions impacting his group.

Now it seems fairly obvious that there is a tie in between headcount and budget.  The budget depends to a great extend, especially in engineering operations, on how many people you have in your department and group.  But this logic didn’t fly in one company I worked for, and they made no real attempt to keep the two in sync.  Why?  Because those two numbers have to be approved by two separate organizations in this large company: financial for budget approvals, and HR for headcount approvals.  To avoid excessive thrashing on this problem, they simple took last year’s budgets and headcounts and slashed them by a certain about (5-10%) from the previous year to determine this year’s budget.

That didn’t end the debate, however, since some groups end up with a legitimate reason to increase head count – safety, throughput, program-of-the-month, etc. Thus, you could get approval for a head count increase in HR, but due to budget limitations, end up not receiving any budget increase.  Thus, if you did not want to overrun your budget, you could not hire these two people. And over spending your budget in tough times was a sure way to have your own name end up on a cost saving list.

Likewise, when a manger ended up in charge of two groups that had been consolidated into one to reduce headcount, you could find yourself with a large budget, but with the total headcount significantly reduced.  Suddenly, in order to keep your budget for next year, you had to find a way to spend that money on something beside headcount. 

My first (and turns out, only) advice from the department financial person in the department where I was a manager was, “There are only two rules – 1. Don’t overspend your budget, and 2. Don’t under spend your budget.” This usually leads to the punch line of a Dilbert cartoon, like the one where the pointed-haired boss buys a giraffe at the end of the year to make sure his budget is consumed. For Consultants and contractors, this can be a boom time, since they usually (emphasize usually) end up with a bunch of contract work, since this expense had no impact on headcount.

In my case, I had contractors who worked for me for years, since I had budget for them, but not the headcount.  I am sure I paid for the equivalent of three employee salaries for every two contractors that I had, but it was the only feasible answer.  Even worse, since most of these contract engineers were young kids out of college, they somehow thought their great work (and much of it was great) would lead to an eventually hiring.  It did happen, when the fates allowed for a favorable change in the budget to headcount ratio, but it was pretty rare.  Still, it was those rare occurrences that keep the hope alive for these engineers.

Beside all of this chaos comes the constant battle between groups for people and headcount.  How do you get a 5% reduction in headcount when you have two groups each with 10 people.  Only one person has to go, but which supervisor will take the hit?  These two supervisors will begin to campaign to keep their headcount, and cast doubt on the effectiveness of the other supervisor’s ability to manage his people, the lower importance of the work the other group is doing, etc.  More conflict and chaos.

In the end, about half way through the year, the budget and headcount meetings will wind down, and the organization will pat itself on the back for slashing costs.  But like the previous choopchick of cost savings, the same problems apply here.  Because the organization has little clue of where the constraint is, they probably reduced the budget and headcount of the constraint department, which could lead to less revenue.   Net Profit, despite the company’s best effort, continues to go down.

Some thoughts on how to resolve could go in several directions.  My recent improved understanding of Viable Vision, however, makes me conclude that budget and headcount targets are choopchicks, and the company needs to figure out ways to increase revenues much quicker than operating expenses.  There is a much stronger impact on Net Profit by undertaking a Viable Vision than arguing about a few thousand dollars here, and an employee or two there.  Headcount and budgeting becomes trivial, and burning as much time as most companies do on this subject takes their focus often the more important elements of creating a competitive advantage and then being able to capitalize on it. 

So that makes the budgeting and headcount target process my next favorite choopchick – any comments?

Kevin

Posted by KevinAKohls at 12:47 AM | Permalink | Comments (0) | TrackBacks (0)

In The Haystack Syndrome, Eli Goldratt writes:

Identifying a constraint means that we already have some appreciation of the magnitude of its impact on the overall performance. Otherwise we might also have some trivialities in the list of constraints, or as I call them, some choopchicks.

Every now and then, I’ll blog on some of my “favorite” choopchicks, which usually appear not only with past clients, but seem to keep appearing with current clients.  Today’s blog will be on what I feel is perhaps the biggest choopchick:  cost cutting, or what a current client calls, the “War on Costs.”                     

I think cost cutting is the biggest choopchick because most of the companies who are on a cost cutting binge are frustrated that despite all their fine efforts, profits are not increasing.  Often, the company actually is losing more money that when they started the program!  If they are spending so much time on it, and it is yielding such poor results, then the actions may be focused on a “trival” cause and thus can be classified as a choopchick.

The cost measure is one management loves, because it looks to generate results quickly.  Cut a head here, slash a budget here, reduce inventory over there, sum up the total, and just like that, a manger has hit his cost cutting goal for the year.  In reality, most of these cost cutting actions have no significant effect on the bottom line, and many, especially if they impact the constraint, may actually have a negative impact on the bottom line.  The lost head may have been a problem solver on the throughput team, the budget was for a change to modify a bottleneck to reduce it’s downtime, the inventory was the buffer that was protecting the constraint from periodically running out of parts.  

Since most companies have no idea where their constraint is, they are blissfully ignorant, and assumed all these pennies saved will eventually add up to dollars.  Worse, this negative effect is often not even perceived, since the actual undesirable effect of adversely impacting the bottleneck may not be seen for quite awhile, and the connection between cause and effect may not even be realized.

My favorite example is the case of a manufacturing company who was working with two suppliers to supply dies for a production operation.  Both suppliers must be used; because neither of the two has enough capacity to supply all of the large number of dies required. The names have been changed to protect the guilty.

I was part of a team that was asked to come in to this company and figure out why a particular line wasn't running up to design rates, which was causing a tremendous loss in revenue. We were confused at first, because the machines that appeared to be the constraint (look for the buffer) seemed to be running to their designed capacity. Also, the data that production and maintenance provided our team was confusing, because there did not appear to be enough "down" time to justify the loss in production.

We soon figured out that the lost time was due to a machine that was down waiting for a die.  It was not considered machine down time by maintenance or production, because there was nothing wrong with the machine.  It was not considered set up time by the die setters, because a set up was not actually underway.  It turned out that there was actually no die to put into the machine!  We tracked the issue back to Purchasing, who had not acquired enough dies from their suppliers. 

We eventually ended up talking to a purchasing agent with a huge award plaque on his back wall for his contributions to the "War on Costs."  It turns out he has squeezed most of his suppliers for first one 5% reduction, and then followed that up a few months later with a second 5% reduction. 

One of the two suppliers for the dies could no longer make a profit on the manufacturing of these dies, and complained about the mandatory price cuts.  Of course, Purchasing was upset about this pushback, and placed the supplier on the "black list," preventing other purchasing agents from using this supplier.

Meanwhile, the other die supplier did not have enough capacity to supply enough all the dies, even though they, by default, got all the work.  Pressuring them for improved performance proved fruitless, since the slim profits did not justify investing in extra capacity to make more dies.

Thus, for a 5% reduction of a die (less than a few thousand dollars), the company ended up with a shortage of dies, and that resulted in constraint machines sitting idle waiting for dies that would never be supplied.  The lack of parts from the bottleneck machine resulted in a lost of production - the revenue from each product turned out to be easily twice as much as the savings from the cost cutting effort.

But the purchasing agent had won an award, gotten a bonus, and the long deserved recognition of his superiors.  He was, needless to say, reluctant to reverse this decision and admit that he might have made an error. But the weight of the numbers and the crush of the crisis caused him to cave in.  The supplier was taken off the black list, the dies ended up in the bottleneck, and the throughput of the system significantly increased.

In the end, I wish I could say the company learned from this example, but the reality is that is was an extreme case.  Unless the cost cutting decision has disastrous results which can be traced both quickly and directly back to the decision, most cost cutting still stands, no matter how trivial.  The result is companies pushing cost cutting to the extreme limit – like requiring admins to dole out color printer sheets, or making employees empty their own waste baskets.  It should surprise no one with a TOC background that these efforts are “trivial,” and have no significant positive impact on the bottom line.  And any Jonah would predict that these companies still cannot figure out why all of their cost savings never really hit the bottom line.

What’s your favorite choopchick, and why?  Do you have an example and/or story you would like to share?  Let me know!

Kevin

Posted by KevinAKohls at 12:00 AM | Permalink | Comments (1) | TrackBacks (0)

At the TOCE Upgrade for Critical Chain Project Management this week (January 9, 2007) and some of the discussions after the class have reminded me of issues and problems that I had experienced in my “past life” at GM.  One of the terms we used there reflects a common problem seen in the CCPM world.  The term is “Mutually Assured Lateness.”

Mutually Assured Lateness dictates that no matter how early or late you submitted a task to a constraint (or a resource on the Critical Chain), it would be released late by that resource by a fairly constant amount.  In other words, if you delivered a task two weeks early to the resource or two weeks late, the task would always come out 4 weeks late.

The key to understanding why this occurs is the impact of multi-tasking.  The resource itself was reacting to how it was being measured, rewarded, and punished.  If the task came in early, then the resource reasoned that it could afford to wait, especially with the large number of tasks that it had to work on that were already late.  Calls from the project manager could be easily deflected: "I have a lot of work that is much later than your stuff – it will have to wait – unless you can convince another PM to give up their spot on my To Do list to you.  Which, by the way, has never happened since I took this job."

After this conversation, the project manager may elevate the issue.  But his boss faces the same issue when trying to resolve the problem: "Hey, if you want to give up some of the extra budget or headcount to help out the other department, let me know."  That’s a lose-lose scenario – if you had enough extra budget and/or headcount to begin with, you probably have been hiding that “fat”somewhere in your department, and can afford to lose even more in the future. 

More importantly, everyone now has a viable deflection shield: "Hey, the constraint can’t seem to run his area well, nor can his boss.  It’s not my fault if they can’t run their area as effectively as I can."  Thus, the early tasks end up waiting in the queue.

The late tasks are already in trouble, and how late they are gives them some leverage on the constrained resource.  Often the PM on this late project, since it has lasted several years, has already been replaced, with a professional “Squeaky Wheel,” who calls the resource every day (or more often) to get his or her work done.  While this task is not completed early, it probably ends up happening earlier that other late tasks.  The early task, if the PM is not as aggressive as the Squeaky Wheel, may just have been passed!

In the end, each of the tasks ends up being late by about the same amount – which resulted in the term – “mutually assured lateness.” 

Posted by KevinAKohls at 03:02 PM | Permalink | Comments (0) | TrackBacks (0)