The Great Game of Business – Chapter 6 section 2 (part 10 of 17)

How We Calculate Our Batting Average

Every business should have its own counterparts to the batting average. We have several. One of the best is the overhead absorption rate. This is the number people on the shop floor use to determine how much overhead they cover, or “absorb,” when they spend their time working “on prime,” that is, working on products. … When I talk to executives from other companies, they find this hard to swallow. They can’t believe that our hourly people know, or care, what they are doing to cover overhead. … If we don’t absorb all the overhead we have budgeted, we have to pay the difference out of profits, and that cuts into our bonuses, not to mention the value of our stock.

Tip #4: Find Sources That Can Help You Develop Standards

No matter what business you’re in, there are benchmarks and standards, and the chances are that someone has already calculated them. You can usually find them out by digging around. Suppose you have to buy workers’ compensation insurance for a new business. You need a way to measure safety. Well, the federal government has developed formulas for measuring safety, and the insurance companies use those formulas to set premiums. You can use the formulas as well to monitor your own safety in order to establish your own benchmarks. The better you do, the lower your insurance costs. Then you can use that to educate your people about their impact on overhead, to show them how they reduce overhead by improving safety.

How We Developed Standards on a New Product

When we decided to start remanufacturing automobile engines in 1985, the first thing we did was to look for the best automotive remanufacturer in the world. We talked to all the machine tool manufacturers, asking them, “Who remanufactures automobile engines faster than anybody else, and how fast do they do it?” Three or four sources told us, “Dealers in Minnesota. Ten hours per engine.” So then we had to find out what the Dealers did to make engines that fast – what equipment they had, what their overhead rates were, how much they paid their people, and so on.

We started by calling up Dealers. They had moved to another state. It turned out they had a strong union in the Minnesota plant. They were paying $14 an hour for assemblers. That told us right away why they had a ten-hour standard: it was the only way to compensate for their high direct labor costs. If they were paying that much for assembly, they had to come up with the most efficient processes for cutting down the number of hours they put into the engine block. That give us a tremendous advantage right off the bat. Our automotive assembly plant was in an area where the going rate was $4.50 an hour. We reason that if we could build an engine in ten hours with workers making $4.50 an hour, we could establish a solid foundation for the business. Over time, we were able to increase the labor rate to as much as $10 an hour and create a standard of living that people could live with.

HOW STANDARDS CAN BRING OUT THE BEST IN PEOPLE

Moral: You need standards to show people the real world. You can’t just go out there with wishes and goals. You need to give people a strategy to get there. You need to guide them. You have to show them the goal is attainable, and here’s how they can attain it. Unless you run into a situation that defies mathematics, like the fuel-injection pump problem. Then you’re going for a miracle. And sometimes people can produce miracles, but it helps if they’re well educated. I don’t think the people in the pump room could have pulled it off if they hadn’t already been trained on standards.

So that’s basically what we did. We found out who was the best, we set a ten-hour standard, and we went after it. We couldn’t make it, so we settled on twelve hours, and later knocked it down to eleven hours. We paid about $6.50 an hour, plus the bonus. Our salespeople say our prices are among the best in the industry. And we have all the business we can handle.

KEY POINT: Numbers are not a substitute for leadership. What’s important is how you use them.

Never get so far into the numbers that you leave out the human factor. Use the numbers as a tool to get people to contribute more, not less. If we use them to create an environment in which people don’t contribute, or can’t contribute, that’s worse than not using them at all.

Tip #5: Tell the Stories Behind the Numbers

Once you’ve developed some standards, what do you do with them? How do you use them? More important, how do you get other people to use them? How do you demystify the numbers? How do you turn them into tools that people can use – that they wantto use – to contribute more? In short, how do you educate people around the standards?

I have always found that the most effective way to do that is by telling stories. With standards, we can use the numbers to tell stories about what has been happening in the company and what we can do to change. WE can bring problems out into the open where they can be addressed – where they haveto be addressed. Once people understand a standard, they expect us to do something when we aren’t meeting it. They know that if we don’t, we won’t make money or we may run out of cash, which would be a story in its own right.

It’s a way of animating the numbers, bringing them to life. When you use the numbers to tell stories, you can educate people without threatening or intimidating them. You can show where the numbers came from and what they mean. You can illustrate in a way people understand that they do make a difference, they do control their own destinies. It’s their game.

Tip #6: Look for the Profit in Problems

Whenever you turn a loser into a winner, you get a double bang for your buck. Say you have a problem that’s costing you $500,000 a year and you figure out a solution that winds up earning you $500,000. You don’t have a $500,000 winner. You have a $1 million winner. When you can stop the bleeding and turn it into healing, you’re twice as well off as before.

The financial system sho­sws you where you can make more money just by telling you where you’re losing it.

The Seventh Higher Law Is: When You Raise the Bottom, the Top Rises

You really want people to solve their own problems. If the problem gets bad enough, you can always go in and tell people what to do. But all you’ll get is the routine. You won’t get any creativity. So you hope to don’t have to get to that point. It’s much better to have an environment­ in which people can come up with solutions themselves. Standards are tools for finding solutions.

Benchmarks Can Turn an Operation Around 

What turned people on was the challenge, the fun of the game, the fun of winning. Humor and laughter go a heck of a lot further than yelling and screaming and throwing tantrums. But you can’t set up a game like that if you don’t have standards.

KEY POINT: If you can’t get people beyond the day-to-day issues, if you can appeal to something they really want to do, they’ll blow by every obstacle. 

BEWARE ANY NUMBER THAT LOOKS TO GOOD TO BE TRUE – IT PROBABLY IS

Moral: Don’t accept any number until you understand where it came from and you know it’s real.

KEY POINT: Businesses always have problems. Numbers tell you where the problems are and how worried you should be.