Sometimes things go as planned, and sometimes they don't. In this lesson, you'll learn about management by exception, including how it works and its advantages and disadvantages. You'll also have an opportunity to take a short quiz.
Management by Exception Defined
Management by exception is a management system where business results are compared against the results that were either budgeted or planned. Unlike other types of management systems, management by exception means that management intervenes in daily operations only if there is a deviation, or variance, between the actual results and the planned results.
Minor deviations may be brought to the attention of low-level supervisors, while huge deviations may be shot straight up to the top levels of management. This, theoretically, allows managers to focus on the most pressing and important issues and problems. For example, if productivity goals are being met, managers are busy dealing with other problems rather than walking around the production floor monitoring activity.
One of the most important tools used in management by exception is variance analysis. Variance analysis is a process that is used to determine the variance, or difference, between the actual results and the planned for results and the cause of the difference. In other words, it's the technique used to determine whether there is a problem needing management's attention when managing by exception.
Let's look at a quick example of management by exception and the use of variance analysis. Edward is an accountant who is responsible for tracking the production costs for his company's production division, which produces toys. Edward's company has launched a new toy line. The cost per unit of production was budgeted during the beginning of the project.
In reviewing the monthly invoices and receipts, Edward has determined that the production division is 10% over budget on the new toy. Company procedure only gives him authority to address overages of 5%, so he must bring this issue to his manager, Marty.
Marty has the authority to investigate and address variances of up to 10%. He investigates and determines that about a third of the variance was due to an unexpected increase in the price of one of the commodities used in production. The other two-thirds of the variance were related to price increases from some suppliers that are out of line with market prices. Edward's manager meets with the company's purchasing agent to discuss alternative vendors to correct the variance.
Managing by exception has some distinct advantages. Let's look at some.
- Management is able to focus on pressing problems rather than micromanaging the day-to-day operations.
- Problems are triaged at the appropriate level based upon the degree of variance, permitting a more efficient use of time for management at all levels of the management hierarchy.
- Employees are left to handle day-to-day operations free from micromanagement, which can provide job satisfaction.
Managing by exception is not without disadvantages.
- It assumes that only management can effectively deal with variances even though non-management employees may be capable and more suited to do so because they are on the ground.
- If management only intervenes when there is a bad variance, it can be very demoralizing to employees. It's important that management intervene when positive variances, such as higher than expected sales revenue, occur through recognition of the achievement and other types of positive reinforcement to motivate employees.
- Management may become isolated from day-to-day operations, and employees may feel isolated from management due to low interaction.
Let's review what we've learned. Management by exception is a system of management where managers only intervene if actual results vary from expected results. Variance analysis is a tool used in management by exception to determine differences in expected and actual results. Management by exception presents both advantages and disadvantages.
Advantages include letting management focus on the bigger issues and problems and letting employees deal with the day-to-day operations. Disadvantages include the assumption that employees can't effectively address variances. The management system also may isolate employees from management and management from daily operations. Additionally, if the focus is only on mistakes, it can lead to low employee morale.
After this lesson, you should be able to:
- Describe management by exception and variance analysis
- Explain the advantages and disadvantages of management by exception