John McClenahen, who retired from IndustryWeek in 2006, remains a keen observer of the global manufacturing environment.

The Myth of Profit or Loss

April 29, 2013
  Such mutually-exclusive terms—profit or loss, and asset or liability—do not even begin to accurately describe the spectrum of elements that are manufacturing today, asserts John S. McClenahen, former IndustryWeek editor.

We all do it. We characterize some person as good or bad. Or some action as right or wrong. We speak of guilt or innocence. We are prone to demand “just a simple yes or no.”

In U.S. manufacturing, such “either/or” thinking, aided and abetted by generally accepted accounting principles, encourages managers to categorize virtually everything as an asset or a liability and focuses their attention on the bottom line of profit or loss.

Yet false-choice thinking and false-choice principles do not reflect the reality of manufacturing—in a production plant or across a company. Rather, manufacturing today is, well, more like the spectrum of American politics. Manufacturing embraces not only the functional equivalents of Republicans and Democrats, but also of Independents, Tea Partyers, Libertarians, Conservatives, Liberals, and Greens—to name a few. Manufacturing, like American politics, is a dynamic mix.

Think about investment in R&D. An asset? Or a liability? In reality, research and development touches almost everything manufacturers do—from making goods to providing services to designing effective supply chains to determining customer satisfaction. Best managed manufacturers and manufacturing facilities invest in products, processes, and people. They seek out and adapt promising research. They develop better processes. They implement best practices. They encourage continuous personal improvement through classroom and on-the-job training, including the cross-training of production people. They empower workers with responsibility for scheduling production, making safety and compliance decisions, and sharing in quality assurance. They accept short-term costs for the probability of long-term gains. They accept short-term losses for the promise of longer-term profit.

What’s more, manufacturing’s best-managed companies also recognize that all their activities exist in a dynamic economic and political environment, and that executives, managers, and other employees will sometimes have to react to developments not of their own making, events they did not anticipate, or decisions with which they do not necessarily agree.

Simplistic and misleading labeling has done a dramatic disservice to understanding the complex realities—and contradictions—of American politics. Think “Red” or “Blue.” Similarly, such mutually-exclusive terms—profit or loss, and asset or liability—do not even begin to accurately describe the spectrum of elements that are manufacturing today.

To be sure, some managers at some of the manufacturing plants judged to be North America’s best by IW during the past five years zero in on profit as the number one indicator of performance—of their facility’s success or failure. Significantly, however, many other managers at many other plants embrace multiples of indicators ranging from cash flow and customer experience to value and yield as top measures of performance. Profit (or loss) is only one of as many as 77 mutually inclusive measures.

This is another of a series of occasional essays by John S. McClenahen, who retired from IndustryWeek in 2006 and remains an interested observer of global manufacturing.

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