Companies can’t be faulted entirely for missing important costs. It is human nature to measure what is easily measured, and to optimize that which is measured. Admittedly, that’s like the drunk looking for his wallet under the street light, instead of where he actually lost it, because the light is better under the street light. The important costs may not always be the obvious ones, however. The savvy manager who understands human nature will look more deeply into costs and find hidden opportunities. I will discuss the nature of costs and give some examples of hidden costs and the mishandling of cost information.
Cost measurement is generally attractive to management for good reasons. If you measure something you can see if you improved it or if it got worse. (Human nature dictates that if it improved it was our/my fault, but if it got worse it was because of someone/something else.) Logically, some cost measurements will be much more meaningful and important than others, but the difference will not be intuitively obvious, and the relative ease of learning the costs will vary greatly.
Measuring the hard-to-quantify costs is, by definition, difficult, but those costs can reveal a lot of detail about the organization and a lot of opportunities for improvement. Often the small costs that seem to affect few people may actually be quite large. A company I worked for never looked at their process for tracking parts, as it was assumed that information in a computer was almost without cost. They had started with a database on a mainframe computer back in the early 1970’s, with a small herd of COBOL programmers keeping the thing alive and trying to improve it. When I got there I was told that the database had over 200 screens with which to view and modify it, but that no living person knew how to use more than two dozen of them. I knew immediately that this was a bad sign.
The total cost of a system is more than just hardware and immediate maintenance costs. What they failed to analyze was the cost, not just of putting the information into the computer, but of the life cycle of a part number: all the times a person had to change that information, approve it, prepare reports about it, back it up, or just look at it. They knew what they were paying for the mainframe and its maintenance, and for the staff to keep it running and make changes in it. Unfortunately, nobody ever measured the real cost of a part number, and the system ran amuck for years, becoming increasingly huge and unwieldy. Given the few costs they measured and the system’s importance to the company, it was impossible to justify the cost of replacing it. It lived on for decades after it should have been obsolete, with many software “band-aids” applied to make it at least a little easier to use and access, and cost the company many millions in unquantified cost. I believe it is still in use today, sometimes masked by overlying software interfaces, and the company will probably require COBOL programmers for many years to come just to keep the enterprise going. I don’t know that the cost of training each user, and of the time each user spends struggling to move from screen to screen, managing data, preparing reports, etc., was never examined, let alone the cost of the software “band-aids”. There is also the cost of errors that accumulate in the data, as much from the difficulty of working with it as anything else. That could be estimated …
As we learned in the 1980’s (and many apparently forgot), the best people to measure the cost of business processes are the people closest to them. I once found myself walking what seemed like a long way to get to the printer at a company where I worked. I was moved to analyze the time use of engineers in the department. There was one printer for about two dozen engineers, and it was at one end of the large room in which most of them worked. It took, on average, about thirty seconds for an engineer to walk to the printer and back to his cube or office (I timed it), and, on average, each engineer went to the printer about 15 times per day, for a total cost of 15 minutes per day. That doesn’t seem like a big deal, as it was only costing the company 24 x 15 = 360 minutes or 6 hours per day, or 6 x 250 days = 1500 hours per year. If the average engineer was paid $30 per hour travel time to that printer was costing the company $45,000 per year. A second printer at the other end of the room could cut that travel time in half, and would cost about $1600 (this was 1994) plus a few hundred for any wiring and setup that was needed. Could anyone convince the management that a new printer was warranted? I couldn’t. They saw the engineer’s time as a sunk cost, saying “we’re going to be paying them anyway”. It’s clueless and frustrating, but this is not an isolated circumstance — this sort of thing happens ALL THE TIME.
Here is another story of costs misunderstood or mishandled. I had an assistant (Karen) who, as part of her work, had to crease and fold 11 x 17″ mechanical drawings for inclusion in ring-bound manuals. When I took the documentation supervisor job I saw that she was not only doing this, but also punching the holes in the pages, which took even more time. The first thing I did was order 11 x 17″ paper that was pre-punched, a standard office supply commodity that cost no more than plain paper, thus saving her a half hour a day immediately. Then I spent a half hour researching the options and found that a simple machine existed that would fold the paper quickly and reliably. Karen was spending about an hour a day just folding and creasing paper, or (at $15/hour), generating about 250 days/year x 1 hour x $15 = $3750 per year in total cost. The folding machine I found would cost about $1200 and had an expected service life of at least three years. I presented a small spreadsheet showing the cost comparison to the engineering manager and he saw a “winner” at once. Unfortunately, the way this company was run, any expense over $1000 had to have the approval of the CEO. The CEO happened to be coming to our plant a few weeks later, and I was standing behind the engineering manager when he presented the purchase order and my spreadsheet. The CEO looked over the documents, looked at the engineering manager, and said “What’s Karen going to do with that extra hour a day? Sit on her ass? I’m not signing this.” This was obviously a very distrusting man. Unfortunately, he lost our respect that day, the engineering manager left within a few months, and I left some months after that. The cost was real, and I had taken the time to measure it and come up with an effective remedy, but the opportunity was missed.
Waste can be analyzed and reduced best by the people in direct contact with it. A savvy manager will listen to the people in the trenches, trust that everyone who is of sound mind wants to do the best work they can, and authorize and encourage the more difficult cost measurements that have the greatest potential to enable improvements in company operations. The fact that a cost is easy to know doesn’t mean it’s the most important one. Important costs can often be found by listening to the expressions of pain by those in the trenches. A savvy manager understands the nature of cost, listens, and acts appropriately.
As always, I welcome your comments.