Off In Their Own World

by BILL WADDELL

There is no big surprise that a couple of academics would write an article in 2010 reporting that extensive research had led them to the conclusion that the automotive companies built excessive inventories in order to achieve short term profits - and that doing so created long term problems for the companies.  Of course they were pointing out the very same things lean folks had been taking issue with for decades.  They researched and published as original thinking the essence of the problem lean accounting had been addressing since the first Lean Accounting Summit in 2005.

We have been hooting about this in Evolving Excellence on a regular basis.  As far back as 2006 we have written things like "Full absorption and the Matching Principle undermine manufacturing excellence," and, " we call inventory an asset and institutionalize full overhead absorption that enables us to be more profitable by overproducing and moving indirect expense to the balance sheet."  This issue was the central theme of Rebirth of American Industry written back in 2005.  This is not any great mystery - I mean, if a guy who stumbled through the University of Cincinnati on the 'a C gets a degree' philosophy can figure it out how hard can it be?

The academics have determined that, "Excess production coupled with absorption costing allows the spreading of these fixed costs over a larger number of units and confers short-term performance benefits. Third, firms in this industry, especially the “Big Three” U.S. automakers, have a short-term-oriented incentive structure that focuses on improving short-term financial costs and margins."

No, the fact that the academic world is hopelessly out of touch with the real world is nothing new and hardly worth noting.  It is what came next, after "Drivers and Consequences of Short Term Production Decisions: Evidence From the Auto Industry" was published in Contemporary Accounting Research in the Fall of 2010 that is remarkable.

"Alexander Bruggen, Ranjani Krishman, Karen Sedatole and Scott Jackson received the AAA's Greatest Potential Impact on Management Accounting Practices Award for 2012.

The award, sponsored by the AICPA [American Institute of CPS's], the Chartered Institute of Management Accountants and the Society of Management Accountants of Canada, recognizes academic papers that are considered to be most likely to have a significant impact on management accounting practice.  It was created in 2009 to help support the next generation of management accounting researchers and underscore the importance of research to practice and the profession."

That's right - a virtual who's who of the management accounting profession thought this was groundbreaking new stuff.  This is like the scientists and engineers at NASA giving an award to a couple of professors for proving that the earth revolves around the sun.

But it gets worse.  My good friend Jean Cunningham- the Guruess of Lean Accounting - included an article from CFO Magazine in her latest newsletter.  The CFO's were so impressed with the news that the wheel had been reinvented they gave it two pages. 

"It's no secret that in the years leading up to the Great Recession, the Big Three automakers were producing vehicles in excess of market demand, leading to large inventories on dealers lots across the country. Now, some researchers say they know why the automakers acted as they did, and they are warning other manufacturers to avoid the same temptation.  By coupling excess production with absorption costing, managers at GM, Ford, and Chrysler were able to boost profits and meet short-term incentives, according to professors at Michigan State University and Maastricht University in the Netherlands."

This really demonstrates just how dysfunctional the accounting profession is, and just how destructive they are to the companies they are supposed to serve.  Don't get me wrong - there are thousands of great accounting people embracing lean principles and working hard to figure out how to contribute more.  But there are hundreds of thousands who are steeped in the insular, negative culture that is the hallmark of accounting.  Rather than act as part of a team trying to accomplish great things, controllers and CFO's focus on catching people spending too much, making mistakes or stealing from the company.  They treat their peers in other functions not as partners with a common goal, but as incompetent, uncaring or dishonest enemies of the company.  

A 'Not Invented Here' culture pervades the accounting profession because the only opinions they respect are those from other accountants.  It's not that most of them disagree with lean and lean accounting - it is that most of them haven't invested even the least bit of time trying to learn anything about it.  If they did not arise from the accounting profession, ideas, principles and strategies are of absolutely no concern to them. The company's problems are not their problems. 

Too often accountants believe their sole job is to do math by arcane rules - not to be involved in any way, shape or form in leading - and certainly not to accept any responsibility for the success or failure of the company.  Their only role in outcomes is to figure out who to blame.  And that is what leads them to look so foolish by seeing as brilliant that which has been a matter of common sense to everyone else in the organization for decades.

Original: http://idatix.com/manufacturing-leadership/off-in-their-own-world/

Comments

[Rick Bohan]

You're too hard on the academics. Yeah, they're "proving" what we already knew but how's that a bad thing? We view the roles of scientists and academics as always discovering new stuff but just as important is verifying some of the old stuff.

I run into the same attitude with my clients...we gather hard data that verifies a root cause and somebody will invariably say, "I coulda told you that."

Additional data is never a bad thing.

[Karen Sedatole, PhD]

You're missing the point. The point of the study was to show that current practice is NOT in line with the "things lean folks had been taking issue with for decades" and the academics have been teaching to undergraduate and graduate students for just as long. Citations in the article make it clear that what is being documented is departures from best practices.

More importantly, the study examines why many practitioners ignore best practices by delving into the incentive structures that led to those dysfunctional decisions. The study also empirically documents the previously undocumented consequences on brand image of those decisions.

As a practitioner at the forefront of your field, you should be celebrating this type of academic research. This is one example of research that is in touch with the "real world" as opposed to being off in its own world. Indeed the reason this project came about is that managers in the strategy group of one of the Big 3 automakers approached us asking us to help his team provide evidence of what they suspected to be true. My experience is that practitioners often have good intuition, but as I'm sure Mr. Bohan knows, it takes skill, resources, and time to verify what many hold to be self-evident truths.

This article was nominated for the award you mentioned by a Duke University academic who uses it in his MBA classes. This is how we create change. One student at a time.

Have you read the full article? Often, much gets lost in the translation to a popular press sound bite. I'd be happy to send it to you if you'd like.

[Karen Sedatole, PhD]

Two additional comments - (a) Scott Jackson is not a co-author on this paper and (b) My co-author is Ranjani "Krishnan" not Ranjani "Krishman".