STORIESHow to save a million dollars
How crazy is it to be a Navy pilot?
My first and only water landing
Squeezing in a successful landing
Thanks for visiting.
— Ted Henry
The first task involved hiring and training a new staff. Finding knowledgeable cost accounting people is always difficult and I usually found that it was easier to just hire smart people regardless of experience and then train them on the job. Then it was on to discovering how the company was losing a million dollars in inventory annually.Briefly here are the outcomes of my departments actions:
Before I knew much about the local situation, as soon as I said I knew how a good cost accounting system should be set up and that hiring and training was something I’m good at, I could see his demeanor warm right up. He had made a decision. They needed someone that could straighten out their cost accounting system, build and train a staff, solve their inventory loss problem, and operate independently. To that end I would have generous budgetary control to hire and purchase necessary equipment and supplies. I got on well with the CFO and was excited by the prospects.
I had a junior accountant that was problematic and needed immediate improvement to keep his job. It appeared he had a drug problem which made him useless in the morning, and he did not get along well with females having superior positions. I got IR to work with him on both issues. He turned it around enough that he at least met the requirements for the job, but never was a superstar.
One of the clerks who really was more comfortable being spoon fed simple repetitive tasks found an accounts payable clerk job elsewhere and quickly departed. Another was found to be inaccurate and slow and so I let her go as there was nothing I could assign with any confidence it would get done. Since she was still within the 90 day probationary period and I sensed she knew she was in over her head, I don’t think she was at all surprised.
At that point I got ahold of my superstar Cost Accounting clerk who I had hired to work for me in Portland and she was happy to move to Seattle. My boss raised his eyebrows at this but once he saw the quality of her work he often pulled her away for his own number crunching needs. He was impressed with her too. I felt little remorse for having gutted my previous employers of their in-house cost accounting skills. They consistently treated their employees poorly, especially during the recession, so it felt good to get out of there and bring a good person with me. I heard they were a bit miffed.
And finally I hired a very assertive cost accountant that was not shy about getting after things. She was like a heat seeking missile when on the hunt and we had a lot of hunting to do.
In the end we had a great group that enjoyed each others company. It was a team in the true sense of the word. We often gathered around a table to brainstorm and decide on strategies. We were in the flow like combat platoon. I feel honored to have had this team.
So I hatched a plan. After giving a heads up to my boss I hired in secret some help to come in at night and serialize duplicate sales documents for a month. Just before my boss headed off to Europe I made a shocking discovery. The company had been issuing cash refunds for returned goods that were never sold in the first place. I let my boss know that all hell might break loose while he was gone and it might be a good idea if I had the president’s home phone number just in case.
I didn’t know how this was being pulled off but I had a hunch. I decided to sit in my car after hours hidden behind a dumpster near the loading dock to see what might happen. Astoundingly on the very first night, I had only been there an hour when an unmarked truck with no front license backed up to the dock. The driver got out and entered a door that was supposed to be locked. I grabbed a tire iron and went in to see what was up. At first I could not see anything untoward in the gloom but eventually I heard some small noises farther in. Investigating I came face to face with the truck driver pulling a pallet jack of boxes. When he saw me he bolted without hesitation, blasted out the door, and roared off in the truck. I had no chance to get a license number.
So what should I do? Call the police or call the president? I decided on the president who I caught at home. After a brief description he said to hang on, his was on his way. And don’t call the police just yet! He came rolling in with his executive secretary at which time I gave him a complete explanation of what was going on (right under his nose). The basic essence of it was that it takes three people to make a scheme like this work; the credit manager, warehouse manager, and shipping manager, and possibly the facilities manager. I had no suspicions of the facilities manager, and the credit manager was new and a very nice lady, but dumber than a box of rocks. The other two however, were slippery and generally uncooperative. He asked for recommendations which I had prepared while waiting for his arrival. He whined about the cost of locked cages for finished goods but I countered that the cost was not a million dollars a year expensive. Included in the recommendations were serializing the invoices, locked cages for finished goods with limited access, changing all of the door locks, and weekly finished goods inventory counts and reconciliation with the sales data. With that done the three of us sat down and drafted a letter from the president to all employees specifying all of the changes to take place immediately. Then we split up to make copies and place them on every desk, mail slot, and bulletin board. The president then asked if that covered it. I answered “not exactly”! This was a rare chance to have his undivided attention with no interruptions so I gave him a quick rundown on the creative accounting taking place in manufacturing making a certain VP look like a hero but saddling the company with unexpected inventory losses, how Marketing was stealing finished goods at night to augment their income, how Engineering took whatever they wanted off the manufacturing floor without paperwork thus causing material shortages, and how inefficient and expensive it is to pick kits short of a complete materials list and then paying warehouse rent to store those kits off site. I was still working on these issues and they were not ready for publication. I told him I would be wrapping these up as soon as I was done with the physical inventory so he said “fine”. But he did want to know more about the Marketing thing so I related how I observed one of the sales people training a new employee how to take what she wanted off the floor after hours. She was fired by noon the next day. He said something about how I had just turned his world upside down. I reminded him that he had asked me personally to please help and stop these disastrous (to net income) inventory losses. It was a mission accomplished sort of moment but now he had a problem which explains why he did not want to prosecute the offenders or call the police. Look at it from a board of directors viewpoint. Here is a man in charge of a company whose officers fight and bicker with each other in public, whose manufacturing is a total mess, and the company is leaking assets everywhere I look. I could see how he would not want the board to see how poorly things were going. We finished up in the wee hours and I went home for a nap. We were all pretty tired.
I returned just before lunch and the whole place was in a dither. My staff asked me where the heck had I been. So I related how I interrupted a burglary last night and spent much of the night with the President and his secretary to create that letter now in your hands. About that time one them said “look, there goes the warehouse manager walking towards his car”. The shipping manager was not far behind. Both disappeared permanently and would not answer their phone or the door to their respective homes. They were in the wind. Then another of the staff came in and said she saw what’s her name in marketing who worked next door to us carrying her personal belongings to her car and crying. So I said, yeah she got fired for stealing company property. Little did I intuit how many heads would roll in the coming months.
Shortly after the memo came out the Manufacturing VP came roaring in waving my memo saying I cannot do this. I explained that I was responsible for writing an accurate monthly cost of sales journal entry and that yes, that was what I was going to do. He then told me that I was fired and to clear out within the hour. I replied evenly that I don’t work for him so if he feels that strongly he can take up the issue with my boss, the CFO. Of course my boss knows and supports what I’m doing and I have a recent ally in the Presidents office. So the angry man says I should start packing and stomps out. Some of my staff looked concerned but I told them not to worry about it. Soon I got a call from from my boss asking me to step into his office. He calmly asked for my summary of the situation (which he knows already) and then turned to the VP and said “Well, Ted is going to do what Ted is going to do”. Meaning tough beans, you have to live with it. Well, angry man headed off to the Presidents office. That was a bad move because the President then fired him on the spot. However I believe that was just a catalyst for moving up the time table. After previously relating to the President how I thought manufacturing was screwed up and that the evidence suggested the cagy VP was rigging the system to get a big bonus, his days were numbered. What I did not know was a new person to run manufacturing had already been hired.
Mark came by my office to get acquainted and I filled him in on my recent discoveries of theft and mismanagement. That got his attention. Then I explained some things about his department he might not know, and because we had been working with his material control employees a lot we had a good reading on who was worthless. What do you mean worthless he said. I said come over to my window and look down and across the courtyard at that person with his feet on the desk reading a newspaper. He’s one of yours. I dialed that person’s phone and we could both see the blinking red light, but said person never moved to pick up the phone. Mark roars out of my office around the corridors to the paper reader, came zooming into view and snatched the paper from his hands. At that point I wish I could read lips.
When Mark returned I then talked about another employee issue. His material control lead grew up working there so she does not know how a top notch department should work. But she was good and could be a valuable person. However, she was sleeping with the IT head which affected programming priorities in a department short on programmers. Interfering with programming priorities had to stop but please don’t fire her. The company really needed to focus on integrating their computer systems and having someone unfamiliar with how the system should function messing with priorities was far from optimal.
Next I suggested he ride with me over to the off-site warehouse for shorted kits. He was not that interested just then but I said he REALLY needs to see it. It will change his whole agenda. I could also explain a bunch of other things during the drive. We walked into the very large warehouse and he asked how much of this is his? It’s all yours I said and he looked dumbfounded. The rental cost of this warehouse and the extra employees to manage this mess all comes out of your budget. Take a walk and look at the dates. A lot of this stuff is old and obsolete. It would take a huge effort to figure out what can be used. All of this was on the books as an asset, but most of it was unrecoverable and needed to be written off. (Note - I had already told the President to expect write-offs.) Doing so will be a hit to your budget so I suggested that he get out in front of the problem immediately. I correctly guessed that several material control employees would be surplussed by shutting down this facility and by ceasing the issuing shorted kits (I.e. only issuing parts to the manufacturing floor for assembly when all the parts have become available). The reader should know that JIT does not issue partially complete material lists to be manufactured, so I could already guess some his next steps. The warehouse was closed really soon after that and massive changes to manufacturing were made to bring it in line with JIT techniques. It worked really well.
Part of JIT is installing a good cycle count program and doing away with annual physical inventory counts. This is what Mark thought he could do but I explained that I had already floated that idea but our German overlords were unyielding and would continue to require the annual inventory. Please understand that a good cycle count program could have prevented much of the abuses already discovered. Of course, at the time I didn’t know we had a warehouse manager who had no interest in a cycle count program because he was stealing inventory.
On our way back I suggested we take a walk through the Engineering spaces. I pointed out numerous assemblies on desks and in boxes and cabinets. I told him assembly people had complained to me about Engineering taking items off the manufacturing floor without paperwork. I could tell Mark was having a rough day and was getting steamed.
Later we went back in the face of considerable resistance and removed all inventory in the Engineering spaces (every desk, drawer, cabinet, locker, closet, etc.) that did not have accompanying paperwork. We found more than I could have imagined and I booked it all to the Engineering department budget within the month. Later I found out that the V.P. of Engineering had tried to get me fired. He had to find new employment within the month. I guess the President was putting his foot down on infighting but there might have been other reasons, like resisting moving the engineers from their cushy offices to the production floor (as is normal under JIT methods).
Editorial alert. How is it possible that a certain large auditing firm could certify our books as being accurate and representative of the truth when large positive material variances were consistently being reported? Or that huge unexplainable inventory shortages kept happening? Any first year business school student should know this is a giant red flag indicating something was amiss. I could easily go on a long winded rant about the incestuous relationship of auditing firms and their clients, but I will save it for another time.
The next job was yet another department turnaround but it remained a good place to work for several years until the company was purchase for its assets. But that is a different story. Maybe I will write about it someday.