"Think simple as my old master used to say - meaning reduce the whole of its parts into the simplest terms, getting back to first principles." - Frank Lloyd Wright
Just about a year ago to the day I extolled the virtues of In-N-Out Burger, and their success founded in simplicity and focus. Seems appropriate to re-enforce the point by extolling the same virtues - and same level of success - at Southwest Airlines.
A great article appeared in Slate the other day describing Southwest's keys to 39 successive years of profitability. "How does Southwest do it? In part, by keeping operations simple. Simpler operations mean fewer things that can go awry and botch up the whole process."
It takes a particularly smart accountant - and a rare one - to realize (1) the truth in VP of Ground Ops Chris Wahlenmaier's statements: “When you charge people to check bags they try to carry more on, sometimes more than can fit in the overhead bins. That results in more bags being checked at the gate, right before departure. And that wastes time.”; and (2) "... we only make money off our planes when they’re in the air."
One kind of airplane - most certainly sub-optimizes the unit cost of lots of individual flights - but it is more than offset by the benefits of standardization. "We only need to train our mechanics on one type of airplane. We only need extra parts inventory for that one type of airplane. If we have to swap a plane out at the last minute for maintenance, the fleet is totally interchangeable—all our on-board crews and ground crews are already familiar with it. And there are no challenges in how and where we can park our planes on the ground, since they’re all the same shape and size," says Wahlenmaier.
That sort of holistic thinking - holistic accounting - is what really sets Southwest apart and drives their success. It is really very, very lean thinking. Wahlenmaier says they only make money when the planes are flying. True enough, but more important they are only creating value for customers when the planes are flying. Southwest's industry leading turnaround time translates into industry leading value adding ratios. All of that standardization is akin to SMED. Their set-up times - the time it takes to change over from one flight - one set of passengers, one set of luggage and often one crew - to another is industry leading.
It is ironic that, on the same day the Slate article was written United announced another increase in baggage fees. I'll bet the accountants at United who figured that one out didn't take into account the cost of delay and complexity.
Airlines live and die - mostly die - with their equivalent of standard costing. They calculate cost per passenger, profit per passenger, profit per flight, and live mired in that detail. All of those figures depend on an assumption of accuracy of a lot of allocated overhead costs, and cause the companies to lose sight of those same overheads which really drive success a lot more than the direct costs. They cannot see, manage or optimize the whole as a result.
The same thing is true at In-N-Out Burger. While the other fast food guys stare at margins for individual menu items - depending also on allocated overheads In-N-Out recognizes the huge driver complexity has on total cost, ability to control quality, and ultimately, on customer satisfaction.
While United, McDonalds et al think they make money per passenger, more and more they foul things up, incur huge costs and drive customers to the likes of Southwest and In-N-Out Burger where customers get what they want, fast and consitently.
It takes a wise accountant to pay scant attention to unit costs and their silly allocations and convoluted assumptions and see the whole. Ford said, "Profit is the inevitable conclusion of work well done." Work is better done when people can do the work through simple, consistent processes, and the accountants who can figure that out are precious.
Original: http://idatix.com/manufacturing-leadership/the-value-of-smarter-accountants/