MARKETING MATTERSCEO JOURNAL


Here We Go Again A


few years ago, a weary CEO admitted to me that he and his team were working too hard


and had too little to show for it, profit- wise. “Tere has to be a better way” was his entreaty, and so we embarked on a journey together to teach and learn that better way. Te results were stun- ning and totally predictable: In around 10 months, his business went from a perennial profit minimalist (0% to 5% pre-tax) to a cash generating machine and hot acquisition candidate not infrequently achieving pre-tax profit- ability in excess of 15%. So what caused the profit turn-


around? One simple way to answer that question is to say he and his team were convinced to aban- don accounting-driven manage- ment and embrace profit-driven management. Unfortunately, it now appears that accounting- driven management is making a comeback and the battle for the company’s future profitability must be fought anew. Well, here we go again. Priority one is to refocus


everyone on the bottom line; all the talk lately has been about the top line, and this is where accounting-driv- en management makes its first and big- gest mistake. A fixation with top-line sales emanates from the indisputably false belief that cost absorption is the key driver of profitability, and it ignores what has already been conclusively proven at this company and many others: Superior profitability is rooted in compatibility and its profoundly important profit and loss implications. Instead of working to enhance


compatibility, the interest these days is in expanding the product offering, hiring more sales people, developing a new website, increasing quoting activ- ity, and all the other accoutrements and manifestations of accounting-driven management. Tis resurgent top-line fixation, I fear, will lead the company right back to the bad old profitless days via misguided account selection, non- compatible jobs, lower prices, higher


DAN MARCUS, TDC CONSULTING INC., AMHERST, WISCONSIN


scrap and manufacturing costs, a larger top line and, sadly, a smaller bottom line. Here we go again. Priority two is to stem the increas- ing tide of efficiency-oriented capital projects. Accounting-driven manage- ment makes its second big mistake by operating as if job costs are real and the efficiencies they imply have an equally real impact on profitability. In point of fact, and as this company increasingly seems to be forgetting, neither of these assertions is true. On the one hand, job costs are not real because they are contrived through any number of impossible account- ing assumptions and cost allocation


If they are to help the


bottom line, investments must eliminate actual payroll and other real profit and loss costs.


schemes, so much so that even the Institute of Management Accountants admitted years ago that traditional job costs and job costing should be aban- doned. On the other hand, job costs show up nowhere on the P&L and so, no matter how much an invest- ment purports to lower them, doing so cannot reduce real costs or otherwise improve the bottom line. It seems this company must be


reminded that investments aimed at efficiencies and other job cost “savings” alone actually will hurt profitability. If they are to help the bottom line, investments must eliminate actual payroll and other real P&L costs. A guy I know says it well: “If you want to justify an investment by pointing to efficiencies and cost savings, show me the bodies.” Accounting-driven man- agement often leads to bad decisions based on unreal job-level efficien- cies, while profit-driven management


insists payroll costs and other real P&L savings pay for investments in efficiency. Here we go again. Priority three is to end the practice of human resources reporting to the finance department. Accounting-driv- en HR management tends to be about maintaining the status quo, appeas- ing the labor force and running the numbers (e.g., benefits costs, grievance counts, injury rates, etc.), but this ap- proach is anything but best practice. It’s time to restart the conversation about building a high performance organization, having the HR Director report to the CEO and shifting the department’s emphasis from the HR equivalent of bean counting to professional development, train- ing and wellness (among other things). Here we go again. For eons, metalcasters have


allowed, even encouraged, ac- countants to define the terms and tactics of profit-making. And I came fresh from college with my accounting degree in hand, full of enthusiasm for all of that dogma. But hard lessons and an open mind


convinced me the path to business prosperity required abandoning accounting-driven management and helped develop the profit-driven ap- proach this company and others have employed to achieve levels of success they never imagined possible. CEOs must be fully mindful of


the profound differences between accounting-driven and profit-driven management. Tose new to this real- ization should act boldly to move past the ancient assumptions and profit- killing practices of so-called manage- ment accounting. CEOs who have embraced true profit-driven manage- ment must act steadfastly to prevent what seems to be happening at this company and, in so doing, avoid one day having to look back and lament: “Here we go again.”


Keep the conversation going. Reach the author at tdcmetal@wi-net.com to comment on this or any CEO Journal column or to suggest future topics.


December 2013 MODERN CASTING | 49


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60  |  Page 61  |  Page 62  |  Page 63  |  Page 64  |  Page 65  |  Page 66  |  Page 67  |  Page 68