Distribution Problem: The Budget

By Ron Hawthorne

Team Leader

Budget is manufactured by a single, small factory at the Industry Company, namely the Board of Directors. There are a few basic types of Budget: Production, Research and Development, Capital Improvement, etc. Budget can be customized somewhat at various points in the distribution chain, but the basic type cannot be changed. Fabricating Budget is a complicated process with very long set-up time, hence Budget is generally manufactured in very large lots. As in most large organizations, all of the Budget for the entire year is produced in one run, called the Annual Board of Directors Meeting.

Budget is distributed through a complex system of distribution centers and warehouses generally referred to as the Management Chain. This system has many levels and can be quite tangled. A given node within the system may receive Budget from more than one upstream node. The purpose of this system is to deliver the Budget to the retail outlets, referred to as Individual Work Groups, for sale to customers known as Workstatement, or simply, Jobs. The Jobs are expected to buy the Budget with a currency known as Increased Shareholder Value, however other arrangements are often made. Some Budget is given away (no return) in hopes that it will allow for more profitable Budget sales in the future.

Customers (Jobs) are very particular about the kind of Budget that they purchase. A Job that needs Maintenance Budget, for example, cannot be given Production Budget. To ensure that the right kind and amount of Budget is available for any Job that shows up with Shareholder Value to spend, Individual Workgroups do their best to predict their customer’s Budget needs. These estimates are passed back through the Management Chain, with each link collecting the estimates from a number of outlets or lower level distribution centers. In this way, the estimated needs for the total organization are collected by the top level distribution center, known as Executive Management. It should be noted that this top level estimate rarely equals the sum of the Individual Workgroup estimates, since each distribution center adjusts the estimate based on their assessment of the Shareholder Value market. Similarly, the Budget that is delivered does not equal the total estimate.

Although Budget is only manufactured once per year, it is distributed four times per year. This quarterly Budget distribution allows for changes in the distribution of Budget to the various parts of the organization based on performance, but does not affect the total available Budget for the year. The quarterly allocation is distributed as described above, with some being stockpiled at distribution centers and some being delivered to the Individual Workgroups.

Some groups have customers (collectively referred to as Workstatement) that are relatively predictable. These groups are generally able to meet their customers needs with this quarterly distribution of Budget. For other groups, customer needs are less predictable. These groups may find themselves with too much Budget of one kind in their inventory and not enough of another. This sometimes results in lost sales, but more often results in measures being taken that are outside the planned Budget distribution process. For example, Budget can be "trans-shipped," or delivered directly from one Workgroup to another. This often benefits both Workgroups, but may disguise true Budget needs from the distribution system, thereby perpetuating the faulty distribution.

Other common measures for dealing with Budget shortage are Budget substitution, and advance sales of Budget. In the first, a Job that wants Budget of a particular type is given a different kind of Budget with a promise that the right kind of Budget will be delivered later. Although inefficient, this is a very common method for dealing with short term Budget availability problems. When a suitable short term substitute is not available, Workgroups may make advance sales of Budget. These are generally referred to as Budget overruns, and are considered very bad business.

Similarly, the retail outlets often find ways to deal with a Budget surplus. The most common method is to have a sale. A sale is a process whereby excess Budget is discounted, i.e. given to Jobs that return very little or no Shareholder Value. The Workgroup is willing to make this exchange because they feel that the Budget will be wasted otherwise, and it increases their total sales (satisfied Jobs).

All of these creative tactics used by the Individual Workgroups are taken to satisfy local measures, but hurt the global measures for the company. These actions can be avoided by more frequent distribution of Budget. If Workgroups could get Budget on a weekly, or even monthly basis rather than quarterly, then they can reduce their inventory and respond more quickly to market changes. This would all but eliminate the need for discount sales, substitutions and most overruns. (Some overruns would still occur because some Budget, e.g. New Product Development Budget, can only be produced in very large batches. More frequent distribution would provide better allocation of Budget to groups that need it, but overruns would still occur if the total available Budget was not adequate.)

To be able to make more frequent deliveries, the company would have to shorten the delivery chain (eliminate levels of Management), improve communication and give more responsibility to Individual Workgroups. The system only works if Workgroups can receive Budget very quickly once they identify a need for it. The more distribution centers that the Budget has to go through, the longer it takes. So, quick means fewer levels. Quick also means that the request for Budget by a Workgroup is immediately responded to without a lot of evaluation and second guessing. The Workgroup is given responsibility for determining what Budget is necessary. In essence, a rope is tied from the Workgroup to the top distribution center. When Budget is sold, equivalent Budget is released from the distribution center. This ensures that Budget is always available for Jobs that return Shareholder Value. (Note that this may not apply to the free Budget, such as overhead or R & D. Distribution of these Budgets may be more tightly controlled.)

Finally, in order to commit to deliver Budget based on Individual Workgroup requests, the company must have confidence that the Workgroups are getting a good price. The target price for Budget (value returned for Budget delivered) is determined globally, but the specific price is set locally, and may be defined in local currency ("parts" complete, rather than "products" complete, hours saved by the local group, etc.) Workgroups must have the ability to determine how or if the specific currency that they are getting converts to real Shareholder Value. This requires frequent, open communication throughout the company.