HOW TO SAVE A MILLION DOLLARS

Be careful what you wish for

Opportunities often exist because there are significant challenges ahead. But in this case at least going to work was interesting everyday.

SUMMARY

What follows is an account of dramatic events that occurred after being hired to straighten out a screwed up cost accounting system at a manufacturing company. For those not wanting to wade through all of the sordid details, here’s a summary.

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: The Wild West nature of the company had been allowed to fester for way too long. The company was leaking assets everywhere I looked. Quite a few of the marginal employees had to find new employment. At last it became a pleasant collaborative organization without internal strife or unexpected financial surprises. Annual inventory losses were brought to a level lower than industry standard and less than one percent of previous history.

THE DETAILS

After leaving the Navy and earning an MBA my first employment left me feeling underemployed. But I was confidant that I could fix that sooner or later. It came sooner. One day at work I got a call from a recruiter. Taking a call like this at work is risky but there was a recession on and my company was laying off a majority of the employees. As soon as the recruiter told me the job was in Seattle I flat out declined any interest. No way I wanted to move the family. But they persisted in selling the job, plus first class travel arrangements for the interview. Still I declined. Then they mentioned the pay target. Still no. But then they sweetened the pot by offering to cover all moving costs including selling the house, temporary housing, airline tickets back and forth, all such related costs, and a high degree of autonomy and authority. OK, now they had my attention. So I flew up and got chauffeured around in grand style.

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.

THE SETUP

My boss was the CFO of the total corporation, two thirds of which was located in Europe. He was gone a lot thus he needed someone that could operate independently. The U.S. division was losing a million dollars a year in inventory shrinkage. The computer systems were home grown and a complete mess. I discovered right away that all of the major departments were at each others throats and fought openly and vindictively. There was so much animosity. Many employees I met said something along the line of “good luck but you won’t last six months”. They had a point as I was preceded by five different individuals in the previous three years.

THE STAFF

The first order of business was to get a handle on my current set of employees. After describing how I worked and what I expected to the group, I interviewed each privately. The senior clerk was really sharp, had not worked anywhere else, and was working her way through night school. We had instant rapport and I wanted her on the team. She knew how things worked and all the players involved, but not how things should work. That I could teach her. She related to me later that my predecessor micromanaged everyone to an extreme level and would not let anyone answer questions either over the phone or otherwise. She had been fed up with it all and had been interviewing for positions outside the company. However after our little talk she decided to put aside her job search and see how things would turn out. I’m really glad she did.

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.

FIRST BLOOD

I was in charge of the company wide semiannual physical inventory which is like working in the middle of a hurricane. This was a huge and time pressured job but I knew how to tackle it. To the consternation of some I’m adept at spotting count problems. So I looked out across the truck parking area and saw a trailer with an inventory sticker attached specifying a load of finished goods. Having previously worked for a company that used trailers for inventory shenanigans I felt the need to verify the contents. I found the warehouse manager and told him I wanted to perform a test count. He said it’s full and all I have to do is measure the trailer to calculate how many pallets it held. I was not about to be put off the scent so I requested he get the key and open it up. He was pissed but complied. Sure enough it’s filled flush to the bumper but I cannot tell how full the front might be. I requested a ladder and flashlight. I received more pushback. I still could not see so I directed that he bring out a forklift and pull all the pallets out. He went volcanic and I had had enough of this clown. I got the facilities manager to bring me a lock and chain and I locked up the trailer so that I could get on with the rest of the inventory. Later I had a forklift driver pull the pallets out and…..the front third of the truck was empty, not full! I was extremely pressed for time and I concluded they were too lazy and erroneously assumed it was full. But during the night I had this nagging feeling that something was off. I decided to do a complete audit of that product. The next morning I gathered my staff and sent them to the credit department, shipping, and the warehouse to match paperwork to the inventory count only to run into a brick wall. None of the paperwork included serial number information. The shipping and warehouse managers refused to record that info saying they didn’t have the manpower to do it. It was not in the budget. There was an odor to this but I still could figure it.

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.

THE MESS IN MANUFACTURING AND HOW I GOT FIRED

As bad as the theft ring was, the mess in manufacturing was just as bad. But different. The computer systems were unintegrated making for lots of confusion, finger pointing, and outright subterfuge. It took time working with large piles of detailed reports to sort it out. The short story is that the manufacturing department had invented single entry bookkeeping and was consistently reporting very large positive material variances which turned them into a profit center on the books. One cannot make a car without a motor, or windshield, etc. so reporting less material used than required on the detailed job records was ludicrous. Under normal conditions the best that manufacturing can do is report zero material variances, but never positive. So I audited a few of the problem components which of course came up short in the storeroom, put together the documentation, and issued a memo that going forward positive material variances would not be recorded in monthly financial statements.

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.

A MANUFACTURING REVOLUTION

Not long after I revealed my findings to the President on that fateful night, he was sitting in an airport bar relating his tale to a guy (I will call Mark for this story) sitting next to him and they struck up an intense conversation. It turns out Mark was a production manager for a large Japanese manufacturing plant and highly versed in Just-in-time (JIT) and Kanban Japanese manufacturing and inventory management techniques. He sold the President on these ideas and the President hired him on the spot. It seemed too fast to have performed a reasonable amount of due diligence on Mark, but it all worked out and Mark and I worked well together. There was much to do.

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).

FORMALIZED AUDIT POWER

I had two other much smaller areas of concern remaining but had experienced resistance to any auditing of certain physical assets. So I asked for a formal memo to authorize me to audit any asset that was on the company books. My boss looked at me funny and said he supposed I already had some targets in mind. Yep, I sure did. I soon received a letter signed by the President. It was not like I really needed the letter but I hoped it would improve clarity and remove a few hurdles.

MINING GOLD

It had been a small issue but there was an individual in charge of physically issuing the gold electronics contacts to manufacturing, but he was also in charge of the records and purchasing. He always had some kind of excuse why I could not audit his parts during the physical inventory. Eventually I had to get the facilities manager to open the cabinet and a significant shortage was discovered. I enlisted some help (from purchasing and legal) and it was discovered where he was selling the missing gold. The employee was then fired and procedures changed to ensure separation of duties to prevent this kind of temptation.

THE LAST BATTLE

Well, compared to everything else maybe this was not a battle but a skirmish. The sales force had persistently taken advantage of the company by acquiring way more demo units than they needed which they traded away for favors like free weekends at resorts. I knew they were doing it and they knew I knew, but continually thumbed their collective noses at me for trying to rein it in. Requests for physical counts were persistently ignored. I decided on the brute force approach of withholding expense account checks for those not complying, which was all of them. Of course they really did not possess most of the demo inventory on the books which put them between a rock and a hard place. Eventually my boss showed up in the doorway and said that withholding the checks was not going to fly and to find a different way. Now that I had their attention I notified the Marketing Department that all physical inventory counts not returned on time would result in the inventory being written off to the Marketing Department budget. Then they could explain the budget variance to the President who had become acutely sensitive to inventory abuses. But I wasn’t done. Part of the problem was the obscure nature of knowing what had been issued. Going forward I put out a monthly list available to the whole company identifying what units had been issued to each sales person and what units had been declared lost and written off. With that info now out in front of everyone this sudden transparency put an immediate halt to the abuse.

HOW IT ALL FELL APART

The storm clouds of recession were threatening. I came to understand that German and Austrian employee regulations are very strict, so the U.S. division was used as a shock absorber. Design, marketing, and initial manufacturing were performed in the U.S., but it became distressingly clear that as soon as a product became a hit, the manufacturing was sent to Europe in order to keep them busy. That left the U.S. with a bunch of marginal products and persistent financial losses. This was disastrous during the recession causing deep cuts to employee numbers. Morale tanked. Clearly I would not get the programming resources needed to finish integrating the systems let alone keep all of my staff. When I saw the writing on the wall I met with them and explained what I knew. I suggested finding a new job before they got laid off was their best move and they all found new positions PDQ. I hired some new staff but my heart wasn’t in it. The whole thing was eating away at me. Since my boss had known about this arrangement all along, I felt violated. There was no visible future. Then one day I got a ferocious sore throat which evolved into a really bad case of the flu, followed by pneumonia and hospitalization. During my lengthy recuperation I realized I had to change things so I gave notice and vowed to find a less stressful job.

FINAL COMMENTS

With all of the conflict described above you might think this job was a totally negative three year experience, but it wasn’t. Yes, in the beginning it was like clearing out a rat infestation, but once into the cleanup phase the constant jumps in progress kept things looking up. Working with my crew was rewarding and once manufacturing changed leaders, the resulting collaboration to facilitate implementing JIT was enjoyable. Progress was constant. We were doing things that mattered. Our status in the company continued to rise and people respected us. Well, except for the previously mentioned rats. I was on the path to working myself out of a job (again), but I get bored if I’m not building something anyway. Unfortunately it ended a bit short of the natural progression of things. C’est la vie.

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.

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Thanks for visiting.

— Ted Henry