Deming on invisible costs and other figures

Running a company on visible figures alone

We have written in Freedom, Inc. on the invisible costs of traditional companies and illustrated it through the costs of the workplace stress. Of course, there are others and the early exponent of those was Deming. Here is a quote from his 1982 book Out of Crisis.

One cannot be successful on visible figures alone. Now of course, visible figures are important. There is payroll to meet, vendors to pay, taxes to pay; amortization, pension funds, and contingency funds to meet. But he that would run his company on visible figures alone will in time have neither company nor figures. Actually, the most important figures that one needs for management are unknown or unknowable, but successful management must nevertheless take account of them. Examples:

  • The multiplying effect on sales that comes from a happy customer, and the opposite effect from an unhappy customer. The happy customer that comes back for more is worth 10 prospects. He comes without advertising or persuasion, and he may even bring in a friend. It pays to keep the customers satisfied: if a car owner like his car, he’s apt to buy four more cars of the same make over the following twelve years… The customer is also likely to spread the good news to eight other people. But woe to the car company that delivers a shoddy product. An angry car buyer will tell his troubles to an average of sixteen people…
  • Visible figures showed that the credit department of a company had succeeded in retaining mostly only customers that pay promptly. The credit department had performed well on me job allotted to them. They deserve a good rating. Figures not so visible, it came to light, showed that the credit department had driven to the competition some of their best customers. Top management looked too late at the total cost.

As the outlook for a company grows bleaker and bleaker, management falls heavier and heavier on the comptroller for management by figures. In the absence of knowledge about the problems of production, the comptroller can only watch the bottom line, squeeze down on costs of materials purchased, including the costs of tools. Machinery, maintenance, supplies. Neglect of the more important invisible figures unknown and unknowable, on the total costs of these moves, causes further shrinkage of profit from whatever business remains.

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One thought on “Deming on invisible costs and other figures”

  1. Thanks, teeth whitening, for your feedback.
    Would be interesting to hear why don’t you agree with Deming here.

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