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Still Crazy After All These Years O


ne of our industry’s most intractable (yet eminently solvable) problems is that,

for far too many metalcasters, the accounting department retains a monopoly on the hows and whys of profit-making. In other words, CEOs at these companies accept traditional accounting’s understand- ing of how profit is made and how much profit the business can earn. Ideally, those CEOs would

closely question their accounting departments’ assumptions about profit-making, push the inquiry into the realm of Lean Accounting and other contemporary approaches and ultimately come to their own, inde- pendent understanding of all that’s possible at the bottom line and what is actually important when manag- ing for profit maximization. Such a process would free CEOs and their income statements from the limitations of long outdated accounting dogma. It’s been awhile since I

wrote about this opportunity, and I wasn’t planning to write about it this month, but two recent events all but forced my hand. Te first occurred while I was sitting with the management team of a steel casting facility and suggested, as politely as I could, that the company’s prices were too low. As is typically the case, this comment was greeted with accusations that I don’t understand their business. I do. As is typically the case, I was accused of gouging valued customers. Not true. I just want my clients’ prices to be competitive with those of the in- dustry’s profit leaders. As is typically the case, I was told that increasing prices would mean the loss of signifi- cant business. Also untrue. Experi- ence indicates that almost all of the business will stay even in the wake of properly managed double-digit price increases. And, as is typically the case, the comment elicited defen-

42 | MODERN CASTING April 2016

siveness from the guy responsible for pricing. As it should. In the midst of all that backing

and forthing, the controller interrupt- ed by saying, “Wait a minute. Tis is good. It means we’re underpricing our competitors and should be able to get lots of new business.” Even now it’s hard for me not to laugh off this spectacularly wrong-headed notion, but the unhappy truth is many in our industry agree with that guy. To their business’s detriment. Te fact is, he and they are trapped by two of the oldest and most destructive of tradi- tional accounting’s assumptions—that “more volume” is always good and “cost absorption” is the key to profit- ability. Tey’re not. Obsolete assumptions about profit- making not only limit the bottom line potential of individual businesses like

CEOs need to do some serious pruning of

ductivity.” I call them “Public enemy No. 1 of profitability.” No doubt this course remains in the

accounting-oriented ideas about profit-making.

that steel casting facility, they have consequences across the manufactur- ing sector as well. And that brings me to the second event which compelled this column into existence—receiving a manufacturing management associa- tion’s course offering which included a course on Product Cost Estimating. Like me, this same course has been around seemingly forever, and relies on accounting principles born in the 19th century and largely repudiated by the accounting profession in the 20th century. Ellie Goldratt, the father of Troughput Accounting and the Teory of Constraints, called those principles “Public enemy No. 1 of pro-

curriculum because many U.S. manu- facturing firms still use product costing and their employees still attend. And therein lies the rub, as attendance at such a course reflects traditional accounting’s grip on the tools and techniques promoted to those re- sponsible for improving profitability. Fortunately, far better accounting tools exist, including those which flow from Lean Accounting and Troughput Ac- counting. As to our industry specifi- cally, I discussed 21st century tools for metalcasters at a recent Marketing and Selling of Castings conference in a session titled “Te Truth About Cost.” In addition to promoting such contemporary profit-making principles and tools, long dead wood, like courses on product costing, need to be pruned from manage- ment education curricula. Likewise, metalcasting CEOs need to do some seri- ous pruning of traditional, accounting-oriented profit- making concepts. Tese be- gan as 19th century conve- niences for tallying revenues and expenses and, at bottom, there they remain to- day—passive score-keeping tools that have been overly

expanded and misapplied to the active practice of profit-making. As the old are discarded, 21st century account- ing and profit-making concepts and tools should take their place, as these have been specifically developed with world-class manufacturing and profit maximization in mind. Unless and until this transition is complete, keenly interested observers of the manufac- turing landscape like me will continue to shake their heads and lament: still crazy after all these years.

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