Put People on the Balance Sheet

According to a Trackback at the end of Bill Waddell’s latest inspiring post full of big ideas, there are only 27 hits on Google for the phrase Put People on the Balance Sheet. We’ll I’m adding #28. Thanks to the Flying Aqua Badger for calling this t our attention (who is the Badger and what does he want?).
What does it mean to put people on the balance sheet? The balance sheet is a financial document where you list your assets and liabilities. They must equal each other and balance out. Machines and buildings are assets. Inventory is an asset (ha!). People generally don’t show up at all, or they do as liabilities in some form.
Why should people be assets? First of all, people are idea generators. Ideas can make you money. Read Norman Bodek’s book about Quick & Easy Kaizen and you’ll be convinced. We haven’t yet built machines that can come up with ideas or solve practical day to day problem as well as people can. Probably never will. People have the ability to learn an incredible amount of things. And people’s skills and knowledge can be used to make money. If you are an employer, you should pay attention to this part. If you give people education and encouragement, they will do kaizen. People are really good at it.
No less than bestselling author of the book Good to Great, the guru Jim Collins, tells you to “get the right people on the bus” and then figure out where you’re going. In other words it’s people first, then strategy, market, product, process, etc. If you get the people part wrong, good luck with the rest of it. If it’s so important to have the right people on your team, and you’re going to spend money and time educating them in your strategies, products, and processes, then why would they be anything other than assets?
I’ll relate a real-life example from a client of what can happen if you don’t put people on the balance sheet as assets. This company’s cost of labor is less than 5% of the cost of goods sold. Materials makes up 90% and the rest is overhead. Because of this, their production processes are designed so that productivity is 20% to 30% lower than it could be if it were designed according to Lean manufacturing principles with one-piece flow, right-sized machines, quick changeover tooling, etc. But that’s just another 1% or so and this is not a big business case for changing how they look at labor. What’s more, the direct labor is mostly outsourced to temp labor companies so this company can take away or add labor on demand.
But this comes at a high total cost. Their people are not as well-trained as they could be, the manual processes are not fool-proofed or well-designed, and since they can always throw a bit of labor at sorting through bad incoming materials, they live with a high Cost of Poor Quality (which they do not measure, but is evident to the trained eye).
Their equipment is quite a bit larger than ought to be, since labor cost is not an issue and the managers and engineers are happy to let people sit in place and batch and queue all day. As a result the value added per square meter in the factory is quite low. This doesn’t matter as long as you don’t need to build more factories, and all the cost and complexity this requires. This company is in high growth mode however, and they need to break away from the “direct labor doesn’t matter” thinking before they put up too many more factories of the same type.
Manufacturing (and all work) is fundamentally built around people. A process is the junction of the 4Ms – man, material, machine and method. Materials are assets, machines are assets, methods (intellectual property) are assets, so why not man (people)?
And last but not least, it’s a good idea to put people on the balance sheet in the asset column because Toyota does it. I wouldn’t jump off a bridge if Toyota did, but I’d recommend copying just about anything else you can about Toyota’s philosophy and operating system. At Toyota it’s success through kaizen and respect for people.

3 Comments

  1. Josef Horber

    March 2, 2006 - 7:55 am

    Hello, Jon
    in my opinion, this idea makes sense. The reasons to put “people value” on the balance sheet are maybe not so evident, as let´s say putting a production machine, but it makes definitely more sense, then putting WIP inventory on the balance sheet.
    How does Toyota handle this? Which amount do they put on the balance sheet:
    -training?
    -a recurring amount, like a certain % of each year´s salary (so the value is constantly growing)?
    -a fixed amount, maybe linked to Your position / salary (which would not increase over time)?
    Would be interesting to know.
    Thanks for the post and best regards,
    Josef Horber

  2. Joe

    March 2, 2006 - 3:06 pm

    I too would like more information on Toyota’s balance sheet regarding employees as assets……..

  3. Jon Miller

    March 2, 2006 - 8:47 pm

    Josef,
    Thanks for your question.
    I don’t know the exact practice at Toyota. I believe Toyota uses the expression “put people on the balance sheet as assets” more as a description of their way of thinking and not actual accounting practice.
    We will look into this further and let you know.
    Jon