When asked by business owners or senior executives how to improve their business, I usually give the same answer: adopt Deming’s Management Method, known as Total Quality Management (TQM).

TQM helps businesses evolve towards higher quality management. The effectiveness of the approach has been well proven and, though it can be a difficult management methodology to adopt, the results it delivers far outweigh the work required.

The biggest challenges when implementing TQM stem from the counter-intuitive nature of its certain elements. This makes it difficult for businesses to adjust to a Deming-like way of thinking. For example, Deming advocated the abolishment of numerical targets. When applied to a core business practice such as budgets, you would be forgiven for thinking Deming was a little crazy.

Actually, he had perfect clarity. The apparent paradox can easily be resolved by making a distinction between a budget created through an analytical process and a budget created in an arbitrary way.

Deming didn’t have a problem with computing the expected outcomes. On the contrary, he pushed for measurement and fact-based decision making wherever possible. At the same time, however, Deming spoke against made up targets and budgets.

Car manufacturing can provide a useful example to illustrate the danger of using such figures:

  • If your assembly line makes a car every 2 minutes, you can calculate that this equates to 60,000 cars a year.
  • An instruction comes from the top to increase output to 63,000 cars a year. A very reasonable year-on-year increase of just 5%. Surely, your department can manage this?
  • But how could you do it? Stop regular maintenance of the assembly line? Make the assembly line move faster? Any such decision would lead to a lower quality product and interruptions in the manufacturing process which would reduce productivity in the long run.
  • Unless you introduce another shift or build another line, you cannot boost the output without consequences.

Scenarios similar to the one outlined above occur more often than you think, also in retail. Budget increases come from the top, arbitrarily derived and driven by shareholder or senior management expectations. Deming wouldn’t tolerate this, and for good reason.

Yet retailers must have budgets. Without knowing your expected revenue, you cannot plan the expenditure needed to operate your business at the required level.  But, these budgets must conform to Deming’s guidelines; they must be computed to reflect calculated expectations rather than wishful thinking. Your budgets must dovetail with the details of your planned business operations.

For example, if you work on sales budgets for an apparel retailer, your calculations must be based on the number of options, the expected rate of sale of your options per site, the number of sites, provisions for markdowns, estimated split by size, etc.

If the math tells you that sales will increase by 9 per cent, adopt this as your budget – if you can afford the required stock purchases. But, if your computations indicate a 5 per cent fall in sales, you need to go back to the drawing board and add more options, more sites, or both. The alternative would be to accept the decline in sales.

In summary, businesses definitely need budgets, but they must be Deming-quality budgets. It always pays to remember Deming’s warning: practically any numerical target can be achieved at the expense of intangible assets of your business. Boost your prices and the revenue will jump – for a short while and then your customers will start to shop elsewhere.

Use your numbers wisely. Derive them from facts. And, don’t try to bend reality to fit made up figures; the price of doing so always ends up costing you dearly in the long run.

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Andrew Gorecki, MD of Retail Directions, has worked with the retail industry since 1985. Industry insiders appreciate his strategic advice and insights, as he lives and breathes for the industry. Andrew received a nomination for the Australian Entrepreneur of the Year Award in 2010.
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