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By the Numbers

March 13, 1988

Brian Forst attempts to defend the financial executives who manage "by the numbers" from what he sees as unjust criticism, but his arguments epitomize the reasons for their censure (Feb. 14, Viewpoints, "Critics Should Stop Bashing the Bean Counters"). Forst maintains that short-term management thinking is a result not of managing by the numbers but of failing to do so.

Forst also suggests that short-term decision makers have forgotten the first commandment of financial management: "One should choose among investment alternatives by comparing profit streams . . . that approximate the firm's cost of capital."

Unfortunately, the process that Forst defends relies on flawed assumptions and inaccurate data. One of the great flaws in managing by the numbers is the exclusion from the decision-making process of difficult to quantify, but critical, competitive factors such as quality, image, service and customer satisfaction. Instead of estimating these factors, they are excluded from the investment analysis. As a result, quality improvement investments are discouraged and a message is sent to the whole company that these factors are inconsequential.

The other great flaw in managing by the numbers is the reliance on grossly inaccurate cost data. American business continues to operate using cost systems that have not changed significantly since the railroads developed them over 100 years ago. Poor cost systems cause companies to unwittingly sell some products at a loss, buy parts they should make, and discontinue profitable lines and facilities. So before the financial guys begin telling the manufacturing people which investments they should or should not make, they should replace their obsolete cost systems.

The financial people need to get out of their offices and down to the factory or salesroom floor to listen to what the real competitive problems are.


Los Angeles

The writer is a manufacturing management consultant.

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