From CAM-I Wiki
by Charles T. Horngren, Stanford University
Organization and management ideas and practices have advanced considerably for many years. But the art of management is in its infancy. Developing our knowledge, skills, and attitudes begins in books like this one. The foundations of general management are explored here. How? By focusing on planning and budgeting fundamentals. By building a closed loop model that provides more rigor and relevance for improving management’s knowledge of facts and relationships that should improve decision-making. In short, this book prompts readers to think more deeply about how to run organizations. Moreover, this book covers detailed implementation of the methods that it favors.
Do you think that your organization’s planning and budgeting can be improved? Budgets have their fans and their attackers. Nevertheless, everybody agrees that such planning tools are imperfect. Some researchers and managers, including the authors of this book, believe that improvements can be made. Others believe that budgets should be abandoned altogether. The accompanying ferment in the literature and at conferences underscores that we all have plenty to learn about the basics of management.
The Closed-Loop identifies the strengths and the numerous problems of budgeting and then develops a model of planning and budgeting. The Closed-Loop Model is an activity-based algorithm that achieves operational balance, then financial balance, and explicitly matches resource demand and resource capacity. The model’s approach explicitly emphasizes and links operational performance with financial results. It reviews an organization’s strategy and pinpoints the roles of demand, consumption, and capacity in operations. In doing so, the model focuses on the demands for products and services, their activity requirements, their resource requirements, their capacity requirements, and their interrelationships. The model heavily uses activity-based concepts and capacity concepts, bringing them down to the activity and resource levels. Particularly noteworthy is how the authors weave capacity analysis and measures into the Closed-Loop Model. The Closed-Loop has a common thread that has persisted in management accounting for more than a hundred years: The attempts to link causes and effects. Examples include the increasingly granulated or refined approaches toward allocations of indirect costs to products, services, and customers. For example, in manufacturing companies the procession has been from broadly averaged, plant-wide overhead rates, to departmental rates, to narrower, microscopic rates based on activities within departments, each rate tied to a different cost driver. Other examples are various versions of the balanced scorecard. All of them center on the idea of leading and lagging measures of performance.
A unifying underpinning of the Closed-Loop Model is its focus on cause-effect relationships, on identifying leading and lagging measures. That is why the operational loop and its non-financial results play the leading roles in the model. The financial loop represents the lagging measures. To predict financial results more accurately, managers must have confidence in their predictions of operational metrics. To enhance accuracy, better data must be gathered regarding the relationships of demand, consumption, and capacity. Fortunately, information technology has progressed so that details can be collected more economically than ever. Therefore, the demands for more accurate linking of causes and effects are now more easily satisfied. Systems, tools, and techniques, including the Closed-Loop Model, are economic goods, just like beer or milk. Consumers buy enough beer or milk to satisfy their perceived wants – and no more. Similarly, managers buy enough sophistication in their methods and systems – and no more. The authors of this book recognize that management decisions regarding costs and benefits will affect the feasibility of adopting the Closed-Loop Model.
The Closed-Loop is the result of thorough thinking about both concepts and practical difficulties of implementation. The model is clearly presented, including its necessary details and possible problems. This work is the product of many minds working together. It will appeal especially to readers who are not satisfied with glib coinage of new terms and vague generalizations. It provides an in-depth innovative model for improving planning, budgeting, and general management.
Charles T. Horngren Stanford University