How Do You Manage Your Shop--By Accounting or CPI?
I've talked to a number of major embroidery and screen contractors in recent months. I find they are divided into two camps. One camp emphasizes control through accounting. They rely on job costing for orders and other accounting techniques to evaluate their operation.
The second camp is much smaller. They emphasize control of processes. They use Continuous Process Improvement of either the formal variety, or their own equivalent.
What are the differences between the two approaches?
The traditional approach, used by American manufacturing for most of the nineteenth and twentieth centuries, is that of accounting controls. Accounting is detail oriented. It is backward looking--historical. It tracks and reviews results of past behavior.
Of course, accounting has its purposes. It provides the hard reality of numbers for financial reporting. It is necessary for control and audit purposes. It meets legal requirements. Because of its historical role, many owners and managers of decoration shops are convinced they are doing the "right thing" when they use accounting for running their businesses. Accounting gives them a "warm and fuzzy" feeling of knowing exactly where they stand.
Continuous Process Improvement (CPI) is something new. The formal CPI began with Edwards Deming, a Yale PhD who taught statistical control to Japanese business men starting in 1950. He taught that the traditional approach of quality control, which was inspection, never dealt with the root problems of quality in manufacturing. He taught that quality came through continuous improvement in the manufacturing process. Toyota latched on to these ideas the way only the Japanese could. They set up a four step process of PLAN, DO, CHECK and ACT (or ADJUST) and methodically did that 4 step process over and over for years.
In essence, CPI looks forward, asking the question, "How can we improve the process this next month to get better results than last month". Google a picture of a 1957 Toyota Corona to see where they started. Pure junk. But within a few years Toyota was making inroads in the American market and American automotive engineers by droves were flying to Japan to figure out how they were building better cars than Detroit. It was simple really. Detroit was still focused on cost accounting while Toyota had moved on to CPI. Detroit finally learned CPI (part of Lean Manufacturing) and now their cars are as well built as Toyotas.
(For more on Continuous Process Improvement, we recommend you start with Eliyahu M. Goldratt’s book The Goal: A Process of Ongoing Improvement. Also, YouTube has a wealth of videos on the subject).
When will Contract Decorators and others in the Decoration industry catch on?
At one time in the past, I was a Plant Cost Control Manager for a very large Fiberglas plant. We costed everything to the penny. Accounting does have its uses. But, we had a Process Control Department who lived and breathed continual Process Improvement. Guess which department made a greater contribution to financial results by the end of each year. You are right--not the bean counters that I led, but the Process Engineers. Most decorators can't afford a Cost Control Department or a group of Process Engineers. So what is to be done? The owner/manager needs to focus his/her very limited time on Continuous Process Improvement. Let the bookkeeper count the beans while you focus on improving the business a little bit each month.
One more thing. Of the two camps, which decorators were performing better? Those who focused on accounting results or those who focused on process improvement? Process Improvement, by a country mile! Their shops are continually revising and upgrading processes, from the workflow for order entry, to the best way to clean up a press at the end of the shift, to the most efficient way to produce a DTG product. Every element of every process is continually refined. The results of all their work show in the financial results, proving that the best way to a fast growing, financially prosperous decoration business is not through a focus on accounting, but a focus on process.