Join Jim Stice for an in-depth discussion in this video Hong Kong and the typhoon border shutdown, part of Accounting Foundations: Budgeting.
- An important function of budgeting is identifying potential bottlenecks in advance so that you can take steps to keep your process running smoothly. - I agree. Let me tell you a story of how costly production bottlenecks can be. A story that takes us to the mysterious East. - Ooh, the mysterious East. Are we talking about Virginia? Delaware? Not New Jersey. - No, no, no, I'm talking about the Far East. Let's go to Hong Kong. - Excellent. You know, I've spent a couple of days in Hong Kong. I've never seen a nighttime skyline quite like what I saw in Hong Kong.
- Yeah, well this story is not about Hong Kong's nighttime skyline. A friend of mine lived in Hong Kong and was a manufacturing representative for a U.S. company. - Why did a U.S. company need a manufacturing representative in Hong Kong? - This U.S. company purchased components from suppliers in Southeast China. So my friend went across the border several times a week to talk with the suppliers, check on quality control, and so forth. - How were these components shipped from Southeast China to the United States? - Well, they were transported by truck across the border to Hong Kong, and then loaded as air cargo to the United States.
These were electronic components, so they didn't weigh very much. - Aah, any trouble transporting goods across the border between China and Hong Kong? - Typically, no. Except in this particular case. It was late summer, typhoon season in the Pacific, and a three-day typhoon ripped through Hong Kong. Because of the heavy winds and rain, the customs border crossing between China and Hong Kong was closed for those three days. - Wow, that must have been a mess. - It was. Truck shipments were backed up, and even after the typhoon had passed on, it was clear that it was gonna take many days to work through the customs backlog at the border.
- Okay, but I don't see how this is a story about production bottlenecks. - Well in the middle of this, my friend got a call from his company in the United States. "Where are those electronic components?" they said. Well, my friend explained about the backup at the border. He said it would take a few days to sort everything out. All the components were available and safe. It would just take a little time to get them to the United States. - Well, that sounds reasonable. - It does, except for the fact that apparently the U.S. manufacturer was close to running out of electronic components at its final assembly facility in the United States.
Without a new shipment from China, that entire U.S. assembly facility is gonna have to be shut down. - It sounds to me like someone in the U.S. hadn't created a plan for shipment delays. They should have had some backup inventory in order to keep production going. - Yeah, they should have, but they didn't. So they told my friend to get those components into Hong Kong and to personally accompany the components on a flight to the United States the next day. - Wow, that's some time pressure. So how did he get all the components across the border through all that backlog? - Well, that's another story, but they made it to the Hong Kong airport the next afternoon where he checked in with two first-class tickets.
One for him and one for the box full of electronic components. - Two tickets in first-class? Pretty expensive. - I would say so. That is the cost of poor production planning.
This course covers purchase budgets, production budgets, hiring budgets, overhead budgets, and cash budgets. Professors Jim and Kay Stice help you weigh the impact of strict versus more moderate budgeting on employee morale, and show how budgets pay off in the future, when you can use them to evaluate your business performance.
- Understanding the budgeting process
- Involving other people
- Creating a manufacturing budget
- Budgeting for merchandising and service firms
- Budgeting cash flow
- Using a flexible budget