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Management Is Prediction --Dickeson

March 2002
Managing means predicting. When we say, "Until you measure you can't control," we're really saying, "If we don't record the past we can't predict what's going to happen."

If we haven't kept track of what we've spent for wages, salaries and social benefits in the past, we can't project those expenses for the future. If we haven't accounted for production time, we can't predict delivery dates. The better we predict, the better we can manage.

From ancient times we've sought to predict what will happen. We've consulted an Oracle at Delphi, read Nostradamus, looked at the stars, listened to politicians, weather forecasters and stock brokers, and watched our computer screens. Still, the ups and downs in our past experience seem to defeat us.

We haven't yet learned to cope satisfactorily with variance, have we? If a company announces that profits will be off a dime a share, their traded stock prices take a dive. We're disappointed despite knowing that such variations will happen. Past experience just isn't linear. It bobs and weaves. Economists can't predict the nation's surplus or deficit for the next fiscal year, yet we argue about tax policy based on a 10-year forecast! Silly.

Shall we throw in the towel? Concede that we can't reliably predict and, therefore, we can't manage? No. We must adjust to the realities of variance as best we're able. We live with only short-term weather forecasts. Five-year business plans are tales told by Sheherazade.

We're well aware that a financial plan for a year is shaky. So, instead of a year, how about quarterly planning? Or perhaps weekly planning? The shorter the time interval ahead, the more clearly we can foretell.

Reducing our predictions from 12 to three months would increase reliability of our forecasts and make us better managers. Better still, why not report by rolling 13-week quarters? Add the latest week and delete the oldest week every week. See results of the prior week at the start of the week following.

Remember Last Week

If we know what happened last week, in the context of the last 13 weeks, we've got a much better shot at figuring what's ahead for the upcoming week, haven't we? Why shouldn't we utilize this capability of our computers to make more reliable decisions and be better managers? On a week-by-week basis? Let's just do it!

Recognize that we're not proposing to supplant general ledger financial statements that announce a "profit opinion" for the past month or quarter. We're simply asking for timely, credible, understandable managerial accounting—current accounting—numbers close to cash flow. If we knew the earnings or losses of last week, could we improve our outlook of the week ahead? Yes, we could. We'd still be short of perfect, but we'd improve.

Here's what I believe top management needs to know at 9 a.m. every Monday for the preceding week on a rolling 13-week basis. Why for the immediately preceding 13 weeks? That's one-fourth of a 52-week year. It's current and provides needed context for converting weekly information into knowledge.

a) Sales invoiced

b) Materials consumed

c) Contribution

d) Summary of period expenses paid

e) Earnings before depreciation and amortization

f) Summary of cash collections

g) Week ending cash position

h) Inventory summary

i) Days materials on hand (turnover)

j) Accounts receivable summary

k) Days sales on hand (turnover)

That's a spreadsheet with 11 columns and 13 data rows, plus some totals, weekly averages and a 52-week projection. Is it possible to have this weekly? Of course it is. And can we have simple graphs that picture the ups, downs and trends of the numbers?

If our system can't do this, we'll chuck it and get one that can. We're talking survival stuff here. Would this current information improve our predictions and make us better managers? What do you think?

Make Your Lists

That's a need-to-have information support list for top management. Now make similar lists of "need-to-knows" for each level of management accountability. Predictions are being made at all levels of management. Knowledge isn't restricted to top managers

Moving on from "need-to-have" reports, let's provide "drill-down" capability for the items. Put your cursor on a number and click to expose details. Increase knowledge depth to improve forecasts. Next, provide "moving range" charts for data points of the "need-to-have" information. With those XmR charts we know not only the average weekly experience of the past, but also the "range" of variations that can occur in our predictions. This builds decision courage and confidence. We must acknowledge, not contest, the limits of our projections.

Lay Down the Law

We know that routine variation is a law of economic life. Ninety-nine percent of the ups and downs are "chance" variations. Unless we substantially change the process there's a very high probability that deflections will be no greater than X and no worse than Y. Our predictive reliability is somewhere between X and Y. That's the best we can do. Look at the past and accept its variances as the measure of what's "normal."

Other industries are doing this in order to constantly improve quality and management by prediction. The fad of the moment is "Six Sigma" variation. Jack Welch, past CEO, decreed that General Electric would strive for this. But in printing we're still mired in the past, diddling with job costs based on the Farmer's Almanac. "What's a Sigma, Mr. Welch?" we ask. All we want is to be able to say, within limits, what we can expect a few days at a time...like the television weatherman on the local news.

If we feel lucky and want to bet that we can "squeeze a job in," and still deliver all the jobs on time, that's our prerogative as risk managers. But if we're smart managers we'd better know the risks of chance variation, hadn't we? We're not going to satisfy customers for the long pull unless we make dependable predictions of delivery time.

Or, you may get lucky and collect a big receivable sooner than "average." But then again, you may not. Want to bet the payroll on it? Are you a banker or a gambler? Your choice. How much confidence do you have in your guess...uh, I mean, prediction? Yes, managing is predicting, isn't it?

—Roger V. Dickeson

About the Author

Roger Dickeson is a printing productivity consultant based in Tucson, AZ. He can be reached by e-mail at roger@prem-associates.com, by fax at (520) 903-2295, or on the Web at http://www.prem-associates.com.
 

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