Airport Security ? ?

Are our airports safe?

Go to the Minneapolis airport and have lunch at Chile's. You'll get a good, old-fashioned metal knife and fork . . .

Sat in the Las Vegas airport and a member of a flight crew went through a "secured" door, setting off the alarm. Five minutes later, a couple of ground crew personnel came to check it out . . . not security personnel . . . not the police . . . Five minutes is a very long time to hide yourself on the tarmac of a large airport.

Hmmmm.

- Dr. M

The Housing Market - Light at the End of the Tunnel?

Reports are coming in that the housing market is still south-bound . . . falling prices and increasing inventories.

The good news is that the rate of the bad news (i.e., first derivative for you calculus fans) is slowing. That is, the inventory of existing homes for sale is still increasing, but at slower rate.

The overlap between business and government is to balance new home starts (i.e., building permits) with the inventory of existing homes in order to help manage the supply and protect investments.

- Dr. M

The Auditing Profession

An article in CFO.com (The Power of Four) warns of the dangers inferred by the fact that there are only four large audit firms in the world.

Their suggestion is to require that auditors have "term limits". That is, companies would be required to switch auditors every x-years. The authors recommend seven. This idea is at least twenty-five years old . . . as it was floating around when I was employed by one of "The Big Eight"

Trivia question . . . name "The Big Eight".

The problem isn't that the auditors are too cozy with big clients. The problem is that most well-concealed fraud will rarely be detected until some stuff hits the fan; i.e., industry downturn.

Attempting to solve the problem of corporate fraud by focusing on the auditors will always be a solution that is a day late and millions of dollars short. Sarbannes-Oxley won't fix anything either. Consider the words of Alexis De Tocqueville:

"The best laws cannot make a constitution work in spite of morals"

- Dr. M

Ford to Cut 14,000 Jobs

That's the news from the Wall Street Journal today.

It was forty years ago that Detroit first got wind of a rising competitor. It was forty years ago that Detroit chose to ignore the warning.

W. Edwards Deming used to say, "Thrive on bad news." That is, when you get bad news, like a competitor making a technological break-through or a sales slump, don't punish the messenger or the message. This is your chance to re-think what you're doing and how you're doing it. It could be your one chance to make corrections so that you can survive.

Thrive on bad news.

- Dr. M

How Much Does It Cost?

I've received a number of requests for assistance with product costing model (e.g., Activity Based Costing) lately.

My Dad (in commercial lending) told me to be wary of the FISH method, usually used by companies in trouble . . . First In, Still Here. True story . . . he had one client - a charcoal manufacturer . . . they had a warehouse fire . . . charcoal didn't light. True story.

Anyway, more people than I would have predicted aren't familiar with the throughput model of costing.

Everyone knows that for GAAP purposes, the cost of manufactured inventory is equal to material, plus labor, plus overhead. (But remember, GAAP isn't written to help managers run businesses.) Most folks are familiar with the accounting game that allows you to lower your cost per unit by making more finished goods inventory, called "full" (or fool) costing.

The throughput method says that you can only inventory material and you treat all conversion costs (labor and overhead) as expenses in the period incurred. Thus, with throughput, you make money by efficiently manufacturing and selling stuff. You cannot manipulate the cost per unit by making more vs. less.

I had one manufacturing client (make-to-order) who had about 150 days of finished goods inventory on the shelf because they would make more in order to lower the set-up cost per unit.

Homework: Read "The Goal" by Eli Goldratt

- Dr. M

The Business of Professional Football

Fortunately, the financial success of the Green Bay Packers has only limited dependence on their success on the field . . . and I'm not just referring to the fact that Lambeau is sold out until my great-great-great grandchildren are dead.

Most of the big revenue in pro football (e.g., TV revenues and a lot of product endorsement revenue) are split equally amongst the teams.

Obviously, the big expense is player salaries. However, you almost need a PhD in some very high level math to map a player's salary and signing bonuses and incentive bonuses to the salary cap rules.

Interestingly enough, teams that make the playoffs and win the Super Bowl are only marginally (financially) better off. The players make more money, but the TV revenues are shared . . . and the teams playing have the extra costs of transportation, etc.

Still, it's a better financial plan than most other pro sports.

- Dr. M

The Housing Market

With housing prices slowing (Housing Values Slow Suddenly), we have another reminder that interest-only mortgage deals are a bad idea.

With interest-only mortgage deals, the homeowner, pays nothing on the principle (hence the name). These options are sold with the marketing pitch of "Lowering Your Monthly Payment" (which is true) and "Saving you money" (which isn't really true).

With interest-only mortgage deals, the only equity you build in your home is through appreciation. Hence, when there is no appreciation . . . there is no equity.

For those of us who have a hard time finding a good investment, you can have a guaranteed return on investment of 6.5% (approximate interest rate on mortgages these days) if you make a payment on your principle.

- Dr. M