While Watching Old Movies on a Rainy Saturday …

ExecutiveSuitewPLB…I came across something amazing.

Have you got 9 Minutes? Watch this clip from the movie “Executive Suite.”  Learn how Lean was alive and well in1954!!!

Then think about the the Lean issues it points out.

Below are some Lean points I identified. (I put the Lean principle at the start of each item.) Maybe you spotted some others? Some better ones?  Write to me, and let me know what you see.

  1. FLOW – Financial improvement only comes when operational processes are made better.
  2. VALUE STREAM – We must monitor operational changes together with the financial outcomes.
  3. PERFECTION – Lean is a long-term quest for perfection. Short-term pandering to the stockholders is focusing on value to the owners. Lean companies focus on value to the customer.
  4. CUSTOMER VALUE – Executive leaders must constantly be at the place the work of producing customer value is done (the gemba.) Production, Sales, Marketing, Product Development, Customer services, etc. If they spend their time in meetings , in distant conference rooms, they wind up knowing nothing of value about their company.
  5. PERFECTION – Poor quality leads to poor business.
  6. CUSTOMER VALUE – Target Costing. We must deeply understand what our various customers value and always strive to provide this value.
  7. PERFECTION & CONTINUOUS IMPROVEMENT – We must use consistent innovation to create products of value for our customers at prices they will pay.
  8. EMPOWERMENT -  (i.e. respect for people) is essential for a culture of lean improvement. When top-down management endorses anti-lean behavior (like low value products or short-term “make the month” decisions) your people will close down on you.

If it’s a rainy day where you are, and you have some more time for reading or to watch more video, here are a couple of extras that might interest you:

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In Defense of Accountants

the-usual-suspectsI get tired defending accountants over and over again for a crime they have not committed.

Standard costing, as we know, does not work for Lean companies.  What do we do?  We “round up the usual suspects” [i]

This often means people are all too ready to bash the accountants – because they are their people who come up with the numbers.  “Why are this month’s numbers bad” … or “Why don’t this quarter’s profits square with the budget?”  Go ask the accountants – the keepers of the standard costing numbers.

However, it isn’t only the accountants who are hanging onto standard costing.   The reasons go to the heart of how a company is traditionally managed and run.

If you agree that standard costing systems and Lean get along about as well as  a snake and a mongoose, then you have to take a hard look at why companies want to keep using them.

In this blog, I’m going to look at the primary reasons companies keep on using standard costing, even when it doesn’t work.  My list includes valuing Inventory, making business decisions,  measuring operating performance, and ERP.

Inventory Valuation

This might be the only valid reason why Accounting needs standard costing.

If you are just getting started with Lean, your company probably has high inventory levels. The easiest, simplest way to value inventory is to use standard costing.  No matter what your inventory, you have to value it for financial reporting. This basically means you have to capitalize a portion of actual manufacturing costs into inventory. A company that cannot accurately value inventory is not in compliance with GAAP and is basically in all kinds of trouble.  Accounting still has to use standard costing to value inventory in the near-term.  It’s not practical for Lean people to demand that standard costing be turned off ASAP.  This is okay for a time.

Now, listen up Lean people! Here is what needs to happen: you need to implement Flow and Pull and reduce inventories ASAP.   The faster you do this, the quicker inventory quantities are reduced and the quicker Accounting can let go of standard costing. I’ve seen too many companies going “Lean” not focus enough on Flow and Pull.

And, Accounting – you are on the hook too!  You have two responsibilities.

  1. First, do all you can to help eliminate traditional performance measures (absorption, variances, etc.) for Lean operational performance measurements ASAP. Focus on using your standard cost systems ONLY for inventory valuation.
  2. Second,  maybe you can’t dump it right away, but you can and should simplify standard costing.  Also ASAP you can implement the simplest, leanest way possible for managing inventory valuation.

-       Routings, bills of material, work centers, labor rates and overhead rates need to be simplified to do one thing – the proper valuation of inventory for financial reporting.  See my blog series about debunking standard costs for useful ways to go about this. READ HERE

-       Stop worrying about individual product costs (more on that in a bit). GAAP and its minions –  auditors – only care if the total amount of capitalized manufacturing costs is accurate. They really don’t care about individual product costs.

Company Decision Making Information

This is the second reason companies hang onto standard costing systems. Many companies use established types of financial analyses based on standard costing for managing the business. Here are some examples.

  • Business Unit Reporting – some companies create business units by product-type or customer-type and these business units are given responsibility for profits of the business unit. Therefore, business unit income statements are required. Most of the time the business units don’t align with the natural value streams, which leads to a complex cost allocation system using standard costs.
  • Sales/Marketing Reporting – many companies to this day still allow their sales and marketing people to manage their business based on standard margins. Also many companies still use product cost to set prices!!!!  In both cases, maintaining a standard costing system makes it easy to get this information
  • Product Design and Product Engineering – the people responsible for the design of products often want to know the cost of the product. And they want the information readily available & dynamic.
  • Senior Management and Cost Savings – many senior management teams seem to be obsessed with reducing costs. They want to see margins improve and/or product costs to go down. Senior managers usually like high-level summary financial information. The standard margin analysis is such a tool
  • Purchasing/Supply Chain – reducing material cost is a typical goal. The easiest way to show this is with a favorable purchase price variance report.

I’m sure you can think of you own examples.

In the course of working with many finance people in many companies, I think most finance people recognize the weaknesses of standard costing systems. They believe their internal customers want this information so Accounting has to maintain the systems that produce this information. The types of analyses I’ve listed above are usually deeply embedded within the company.

A Lean company has to change its internal customer requirements in order to begin eliminating standard costing. It has to put effective Lean controls and tools in place, then make sure they are used for all operations, evaluations, and decision processes. It’s up to the company’s leadership to initiate the change.

Measuring Operating Performance

There are still many companies out there that use overhead absorption and production variances to measure operating performance. The only way to produce this information is to maintain standards: routings, bills of materials, run rates, labor rates, overhead rates and cost allocations. Most of the work setting standards is the responsibility of Accounting (i.e., “the usual suspects.”) because comparing standard to actual is the job of cost accounting. Lean companies, on the other hand, need to develop effective Lean Methods for evaluating performance.  At BMA we have published numerous blogs about  why and how performance measurements have to change.  READ HERE

ERP Systems

ERP systems make gathering and reporting detailed product costing and production reporting an easier task.  Of course, when the company information requirements and decision-making methods are based on standard costing, ERP can get the job done.

Most ERP systems can be configured in great detail to collect and summarize this information for the business. There are many companies out there purchasing new ERP systems to improve inventory management and valuation.

Don’t get me wrong; ERP systems serve an important purpose in companies. But the minute any company thinks that an ERP system is going to help it improve product cost accuracy the company is headed down the wrong path. You don’t want the tail wagging the dog. Just because it’s easy, doesn’t make it right!  (Note: I devote an entire chapter in my new book The Lean CFO, to taming the ERP beast.)

Wrap Up

Accountants know they need standard costing for inventory valuation, if inventory levels are high. Most accountants would love to simplify or eliminate standard costing. But they have no control over inventory levels. So if there is a desire to eliminate standard costing, first eliminate the inventory.

Accounting has many internal customers. If their information needs are based on standard costing data, it’s up to the company’s management to change the information requirements away from standard costing. Accountants can’t make unilateral changes.

So my message is this: before simply putting blame on accountants for all the problems standard costing creates, do some root cause analysis in your company to determine exactly where and why standard costing is used.

You will probably find many root causes. Then, get to work on eliminating them.  ASAP.


[i] This phrase comes from the 1942 film “Casablanca.”  It refers to a situation in which people place blame on a handy scapegoat rather than on the actual perpetrators of the “crime” or “problem” in question.

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It Irks Me

Most of the time I am very upbeat and optimistic about the progress of Lean in US and European companies. I see passionate leaders and down-to-earth, hardworking people making improvement every day. But there is something that irks me and it’s been irking me for a while. It’s about performance measurements and it’s about waste.

Most companies we work with have performance measurements in their plants and offices. In fact we show them how to set up strategic measurements, value stream measurements, cell measurements, and measurements for support processes. We show them how to link all these together.

Then we show people how to use their measurements to track value stream performance and drive Lean improvement. They do all the right things. They put their visual boards in place. They set up structured meetings with agendas each day at the cells and each week across the whole value stream. I am always pleased with what I see, because I know that a company doing this can stay focused on the business strategy while using simple measurements to drive a powerhouse of improvement.

Now .. here’s the “irks” part.

It is not uncommon when I come back a few weeks later, that all I see happening are short term tactical activities. We know the purpose of Lean performance measurements goes beyond the short term.   Lean performance measurements are aimed at controlling the process and improving the process itself.

Four levels of Knowledge no backSo, why is what I often see so irksome?

Simple:  I know there are four levels of true knowledge. These are data, information, knowledge, and wisdom. If a company focuses only on data and information and does not reach constantly for knowledge and wisdom, then everything they do will be for the short term. They miss the point and miss out on the opportunities Lean lays before them.

Here’s a table that illustrates what I mean

It Irks Me

In my experience, many companies stop at information and spend their time discussing today’s little catastrophes and crises. They can not seem to move beyond the short term.

Lean organizations and Lean people are never content to fiddle with the short term. They are passionately bent on daily improvements that step-by-step create breakthrough and game-changing excellence. Having awesome looking boards or meticulously accurate measurements without the “wisdom” misses the point!

The purpose of gathering performance measurements for value streams is to drive value stream improvement. All measurement review meetings must result in continuous improvements.  A one-off fix of a current problem is NOT continuous improvement because it may well happen again. We have to SOLVE the problem at its root so that it never happens again.

SO WHAT SHOULD WE DO?

A good way to overcome short-term thinking  is to have your stand-up meeting once a week around the performance measurements board and have a very strict agenda that requires more than solving immediate issues. For example, the agenda will allow 20% of the time on what has happened this week, and 80% of the time spent on progressing your Lean continuous improvement. The team would review of current CI events,  review the small just-do-it improvements, and discuss what else needs to be improved this week.

These activities are a part of the famous PLAN-DO-CHECK-ACT problem solving cycle. (Here’s a short video on PDCA applied to value stream measurement. )     If we don’t push through to genuine problem solving every time we use our measurements, then we are missing out on the whole purpose for creating the measurements in the first place. In other words, if we only look at data and information and do not drive on to knowledge and wisdom, we are short-changing ourselves and the other people in the company. And……. did I mention this really irks me?

And another thing that irks me is why do they leave the tails on shrimp? You have to pull ‘em  off and your fingers get all gloppy and nasty …

This is Brian Maskell, signing off from Legal Seafood restaurant at Logan Airport.

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