Core Operations Management: Money

Comment: This is the fourth in a series of posts on operation management. The series focuses on the ends of project management taking an operational view of environmental conditions into account and focuses on sustainability through adaptability. We are currently looking the basics; methods, materials and machiney, manpower, and money. This post centers on money. This topic always amazes me, how much tension and consternation arise from this topic.

Operations Management Basics

Business operations come down to manpower, methods, materials/machinery, and money also known as the 4M's. In modern capital economies, the traditional capitalistic business model exchanges work in return for its monetary value. Work may be characterized as service labor or as the productive effort that went into a finished good. All work results in a monetary valuation or price. Wrapped up in the valuation or price are the cost to add value (the cost-of-work or the cost-to-manufacture), risk, overhead, and the markup associated with the demand. The fundamental formula that applies is:

Profit = Revenue - Costs

Efforts are underway to change the accounting process to an consistent international standard that accounts for social and corporate governance concerns while attempting to change the fundamental capitalistic ideology. The fundamental formula still remains the driving force regardless of the socio-political rhetoric around this topic.

Money

Operations management is focused principally on efficient and effective work and its associated cost. Hence, money becomes a concern and focus. However, money is a singularity point and polarizing factor. Dollarizing everything is not always the best measure as there are efficiencies and effectiveness that are more difficult to capture in terms of money. Ratios tend to be a little stronger measure but perforrmance indexing is a better approach.

Performance indexing removes all dimensionality and relates options to one another or to a baseline standard. Typically, the baseline standard is the status quo but can also be a ideal condition or standard the organization aspires towards.

In the Figure 1 example, there is a need to live somewhere and work somewhere else. You find work but need to optimize the use of your limited capital and time resources in a down economy. You have two options; move closer to work or remain in place. Rent is lower where you currently live but the drive consumes a lot of time and money. Equal living conditions are closer to work but the costs add up. You need to realistically vet which option is the best use of your resources; time and money in this case.

Figure 1: Option Matrix

In this scenario, the performance index (CP) and the cost per month totals are very different. Moving closer is the stronger performing option when comparing all factors non-dimensionally but the costs are lower to remain in place given option characteristics. When time is taken into account, the determining factor in the example, the cost or money focus can be misleading when relational performance is considered. While the options involve money in the decision making, money is not the single decisive factor in this case. Efficient use of time is important despite being monetized as 120 hours annually spent sitting in traffic in order to save $600.00 a year? That 120 hours cost $4800.00 annually and would be compared to other uses to determine its best use. Some Financial accounting methods may take into account the cost of sitting in traffic. However, the non-dimensionalized option matrix got to it faster without the extra math. The sooner a reasonable decision can be made the higher tempo the operations become.

On a side note, there are a variety of tools such as this non-dimensionality method, operational risk management methods, Just-in-Time, and other operational tempo methods which may be known today as agile methods that aide in rapid decision making.

Other Than Money

Cash representing the associated values always has the most flexibility. Nonetheless, despite money being a singularity and a polarizing factor, value can be gained not only through the money but also knowledge, time, and through barter of things. Knowledge, also known as intellectual capital, can create circumstances of value that are often intangible. Time can be applied in various ways to create value. Interest is the most common. In some cases, bartering is better than exchanging cash. Bartering is common in circumstances where a monetary transaction may be more expensive, complex, or impossible than simply providing a thing in its place. International economies often operate on bartered values. For example, the United States overproduces corn. The Government buys the corn from farmers at prices that support the farmers efforts rather than allowing the corn prices to drop because of the excess supply. The corn is then provided to another nation to feed their population as payment of debts and/or to adjust trade deficits. Industry may conduct business in a similar manner. Especially, where money is not effective because there is no complex economy that could utilize the money as the case in some areas of Africa and Asia where providing housing, food, and other essentials is valued over cash payments.

Another other than money method is the use of collateral. In projects, it is not uncommon to use letters of credit as collateral. This approach is not a loan but instead a form of insurance that collateralizes future ability to pay. Other forms of collateral include but not limited to equity, assets, and accounts receivables. 

In Closing

Money is a driving factor and a singularity point in operations. Sometimes to the extreme. Some accountants may see the business operation wholly in terms of monetary value. So much so that they may develop pro-forma financial statements and think its a matter of adapting the business to the pro-forma statements. For example, they may cite a "Product A" on the income statement with all it's desire financial performance. In this kind of thinking, it is a matter of product development and marketing's job to find a product or service that meets the desired performance. Then its operations purpose to fine tune it and meet the expectations. More realistically, accounting may provide a financial resource forecast which places limits on the product or market development. Leaders and managers then juggle the operations to work within the means available and may utilize other than money apporachs. This often results in work around solutions in which the same results or outcomes are sought by varying and finding alternatives paths to the same end.

The primal equation of profit equal to revenue less cost remains the driving factor. Operations managers, as well as project managers, have a variety of options available to them when juggling funding issues. These options range in style and type from low cost sources of capital to work around solutions. When considering options characteristic performance may show a stronger option quicker than dollarizing options. Knowledge, time, barter, and collateral are alternatives means to cash at hand. However, cash or cash-in-hand is considered to be the most flexible and most desireable.

This concludes the operations management basics. The next several sessions will focus on some interesting topics and move into discissions on sustainability and adaptability.