The price of managerial neglect

April 07, 2006

BUFFALO, N.Y. -- What does it cost a company when a manager neglects to improve a supply-chain or other manufacturing process over a three-year period? According to conventional management wisdom, such sins of omission are commonplace but difficult, if not impossible, to quantify in dollars and cents. Until now.

A new method for putting a price tag on the cost of "managerial neglect" has been developed by two industrial engineers in the University at Buffalo School of Engineering Applied Sciences. The method, and how it would be applied to a two-stage supply chain, is described in the current issue of "The Engineering Economist."

"Our method can be used for any process that has variability, like a multi-stage supply chain, manufacturing process or a quality-improvement project," explains Alfred Guiffrida, Ph.D., UB adjunct instructor of industrial and systems engineering, who developed the method with Rakesh Nagi, Ph.D., UB professor of industrial and systems engineering.

"Management theory says to improve a process you have to first improve its variability. Well, we've developed a way to put a price tag on the expected costs of failing to improve variability, for failing to improve a process," Guiffrida says.

Adds Nagi, "In this context, managerial neglect is something that a manager should be doing, but is not doing, and it's costing the company something. It's seldom that managerial neglect is quantified in financial terms."

The method, which the UB engineers say can be used with an Excel spreadsheet, finds the net present value of improvements that could be done over a period of time, but are not done. The method factors in the learning rate of a process, which is the rate by which a process would improve naturally, without intervention, through repetition.

The cost of managerial neglect is found by calculating the difference between learning-rate returns and the cost of not making improvements over time. In the example of a hypothetical two-stage supply chain (from manufacturer to customer) the UB engineers showed that managerial neglect over a three-year period would double costs incurred from untimely delivery of goods, inventory holding, production stoppage or other inefficiency.

"In other words, if a manager does intervene to improve the supply chain the company over three years would save 50 percent in costs incurred by inefficiencies in the supply chain," Nagi says.

Their managerial-neglect model could be used by managers to make the case for capital expenditures needed to improve a company's processes, Guiffrida and Nagi say.

"Our model is easily applicable to the real world," Guiffrida says. "Managers could use it to get the attention of upper management, to show them in quantifiable terms the costs you incur unnecessarily for failing to make improvements."

Adds Nagi, "Companies should be willing to invest the expected cost of managerial neglect because they are going to incur the cost through poor performance of the process, anyway. This will help middle managers justify investments needed for improvement."
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The University at Buffalo is a premier research-intensive public university, the largest and most comprehensive campus in the State University of New York.

University at Buffalo

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