What does this have to do with personal finance? Keep reading; we will address this question.
Telecommunications was the dot.com of the early 1900’s. This industry however was quickly monopolized by the American Telephone & Telegraph. AT&T’s manufacturing arm Western Electric was responsible for making many of the phone systems components from the old dial telephones many of us grew up with to the switches and amplifiers that enabled the system to function.
Even with a monopoly, basic phone service for many years remained very inexpensive at about $10 per month included the lease of telephones. Only telephones that were made by Western Electric were allowed to be used on the network. Since the phones were actually owed by Western Electric it was an expensive burden upon them whenever there was a failure. As s result Western Electric was tenacious about improving quality to reduce the costs of maintenance.
In 1918 a young man by the name of Dr,. Walter A. Shewhart was hired by Western Electric to help improve quality. In 1924 with a single piece of paper Dr. Shewhart forever changed industries approach to quality control.
Where is the personal finance? It’s coming, it’s coming.
In essence the statistician presented the theory that in any system there will inevitably be some natural variations, called chance-cause. No matter how exacting our specifications we cannot escape some level of deviation.
Within any system there is also a likelihood of unnatural variation, called special-cause. These differences are caused by some new variable that is unexpectedly introduced into a system.
By measuring a system over a period of time to establish a baseline a person can learn what may be expected as chance-cause variation. In doing so, even with the discrepancies you can be assured that any additional effort to improve quality is likely wasted effort.
However, having this picture of expected variation also allows you to capture the special-cause variation; those differences that should not occur. When identified the observer is provided the unique opportunity to trace the source of the error and correct it.
Dr. Shewhart further summarized his approach to continuous quality control as PDCA (Plan-Do-Study-Act)
Plan – Establish a goal of a project to improve quality. Define the steps and processes necessary to achieve the desired objectives. Furthermore, it is advised that each of the goals associated with your Plan be S.M.A.R.T. goals
Do – Implement the process established. You are encouraged to begin on a small scale if possible to prove your theory first.
Check – Validate the results received are meeting your Planned expectations.
Act – Analyze any differences. Determine what variation is a result of Chance-Cause and accept them as unavoidable for the time being. Identify any Special-Cause variation and establish an PDCA plan to address and eliminate these discrepancies.
Personal finance? Yes, how about now. Thousands of companies are using it and even school systems use PDCA to improve their processes.
You have to begin by setting goals and establish a Plan; be it savings, investing or debt reduction, only once you have established some S.M.A.R.T. goals can you begin.
Implementation will depend on your goals, but the steps must be clearly defined. Are you taking the snowball approach towards debt reduction? If so,you should know what bills get paid, when and in what amounts. If you are trying to save you should know how much and what expenses are being controlled to achieve your goal.
Checking your progress is about holding yourself accountable; establishing metrics, charts, spreadsheets and graphs to track your progress against yoru S.M.A.R.T. goals.
What are the results of your efforts? Here is where you Act. You may not always achieve your expected results and that is OK as long as you remain committed and adjust your plan and implementation process accordingly. In effect this means beginning the process anew. If however you achieve the desired results, following the PDCA methodology you would also begin again; this time refining your approach for additional improvements or a greater goal than previously set.