Articles published on my business blog

Materiality – saving 0.000001%

May 1, 2012

My boss came into my office to tell me that an emergency meeting had been called to discuss a problem with the way that the computer system calculated extended prices for a product with very significant sales. I checked the program code and it appeared to be doing the arithmetic correctly, but I would have to wait until the meeting to find out the nature and extent of the problem.

When I arrived at the meeting I found that the other attendees included the national sales manager, the head of finance, the Managing Director's assistant (and heir to the MD position), a senior representative of the accounts department, the person responsible for managing physical distribution of products, and the head of IT (me). This amount of executive power cost a lot to put together even for a short time, so it was obvious that this must be a very serious problem indeed.

A major product manufactured and sold by the company was distributed in two ways – bulk sales and bags stacked on pallets. There was no problem with bulk sales or bagged sales to large customers which were all done on account, but there was a problem with cash sales of bagged product to casual buyers. The problem was that it was not always possible to reconcile the cash actually received for a sale with what the computer system later determined should have been the extended price. (This was before the days of online, immediate sales. Sales were completed and the paperwork sent in to head office for later entry into the computer.)

Pricing was always per tonne of product, and while there were 25 bags to the tonne there were 36 bags on a pallet. The sales clerks at the depots would divide the price per tonne by 25 and multiply by 36 to get the price per pallet, and sometimes they got this wrong. Specifically, they didn't do the rounding properly and this caused discrepancies of fractions of a cent when the sales were finally recorded in the computer system.

Yes, I said "fractions of a cent".

One idea came from the national sales manager who suggested that pricing per tonne should always be in multiples of 25 cents, but this was vehemently rejected because "the computer department is not going to dictate company pricing policy". Various other suggestions were made, but all were quashed by the order that I was to return to the IT department and make sure that the necessary programming changes were made to fix this enormous problem. You may remember that I had already checked and could see no error in the price calculation code.

I finally decided that I needed to know the exact extent of the problem. The company sold about $200 million worth of this product each year, and only a small proportion of this was by cash sales of bags, so I had to ask: "How much money are we talking about here?".

$20. Twenty dollars. Per year. Out of $200 million sales. I was so glad that we had devoted several hours of executive time to this.