Ten Years or Sixteen Years – and Still a Growing Strong

I recently cleared out the basement and found my company archives. Among the bills, receipts, and memos I found a old mindmap. It is, as far as I know, the first theoretical work on Lean Accounting and it’s dated 1998.

This has really stood the test of time. Bruce Baggaley did most of the thinking work on our development of the principles of lean accounting, and of course we got a huge amount of generous help from people in lean companies who were living it.

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I’m in Savannah, GA today for the 10th Anniversary of the Lean Accounting Summit conference. There’s a lot of special speakers and extra activities, but I am thinking about years gone by. When we first started to work on Lean Accounting in 1998 almost no one knew it was needed. Bruce and I tapped the knowledge and patience of generous experts and mentors, and created a lean accounting approach that made sense to us. Then we began to write, speak, and communicate Lean Accounting.

We worked with a few small and zealous lean companies and then got a call from Parker Hannifin. We worked for several years under the sage eye of Fred Garbinski, Parker’s lean accounting leader, and invested time in many Parker locations world-wide. At the very first Lean Accounting conference in Dearborn, MI we met up with Steve Desloge and his financial team from Watlow Manufacturing. They quickly embraced Lean Accounting throughout the company.

By this time the momentum had started and many companies kindly invited us to help them with these issues. Big companies like Boeing, small but dynamic companies like Buck Knives, and many many others of all shapes, types, sizes, and nationalities. We also got to know some of the pioneers who had made lean accounting a reality in their companies years before; people like Jean Cunningham, Orry Fiume, and Jerry Solomon.

And now, 16 years later and 10 annual trips to Orlando or Vegas, the momentum continues to gather and grow. Not a week goes by than I hear from one company or more that are using or starting Lean Accounting, and many have learned from seminars, webinars, books, and blogs and made their own paths of change.

I am of course frustrated. I want to see the power and simplicity of Lean Accounting flooding across all companies, all industries, and all countries. We still have a very long way to go, but the journey so far has been an exciting blessing.

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Lean CFO in Europe

I am  inviting you to join me for a new series of workshops that I will be leading this fall in Europe.

In partnership with three affiliates of the Lean Enterprise Institute (lean.org) I’ll be presenting two days, focused on:

“The Lean CFO – Lean Finance and Accounting For Sustainable Profitability”

As a CFO, your role is to chart the financial success of your company. When Lean manufacturing becomes your company’s strategy, it’s crucial that you measure how you are doing based on how Lean works. A Lean company cannot account, control and measure using the old methods. Whether your company adopts Lean as “THE” business strategy, or whether “going lean” is just a part of your strategy – how you measure and present the financial benefits of Lean will make all the difference.

As the Lean CFO, you need to understand the economics of Lean so that you can align your financial strategy with how Lean makes money for the company. You will be the one to lead the effort making the changes to financial, measurements and reporting systems so you can truly assess how your company’s Lean business strategy is working.
These seminars will teach you how to change the financial and operational measurement system so that measures drive Lean behaviors. You will also learn how to apply Lean practices within the accounting department to improve productivity, flow, quality and delivery.
October 29 and 30, at Lean Management Institute – Zeist, (NL) For information visit: http://www.leaninstituut.nl/ Phone: 085 8769346 Email: info@leaninstuut.nl Download an English Language brochure, Click Here.

November 3 and 4 at the Elite World Hotel (Taksim) Istanbul (Turkey) For more information contact Buket KANBER / buketk@lean.org.tr / +90 533 468 31 85 Download a brochure, Click Here.
November 10 – 11 at the headquarters of MARELLI MOTORI S.p.A. – Arzignano (VI) (Italy) For complete details and to register, Click Here.

Read my bio: Click Here Sign up soon; I hope to see you there.

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Oxymorons: More Food for Thought

Continuing my new blog series about some of the oxymorons imbedded in the “traditional” manufacturing world …

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Just to remind you: an oxymoron is a figure of speech that combines contradictory terms.  We hear these all the time in common speech, things like “exact estimate” or “deafening silence” or “definite maybe.”

Today’s example:  Labor Efficiency

Here is one definition of Labor Efficiency from the internet:

 Labor efficiency is a measure of how efficiently a given workforce accomplishes a task, when compared to the standard in that industry or setting. There are several different ways to measure labor efficiency, depending on the type of products and services being produced, and the end goal. Companies periodically assess efficiency along with other characteristics to identify weak points in the labor force and determine where they have room for improvement, with the goal of improving the overall quality of goods and services while keeping costs down.

One typical way to look at Labor Efficiency is to compare the time actually required to produce a given product or service with a “standard” or “usual” time required. If the workforce is producing products and services faster than the usual rate, it is operating with high efficiency. The thinking is that production time, and costs, are both being reduced. So far so good.

The definition of the standard time is usually subject to an interpretive definition. Who defines the standard time and exactly what is included in the standard work time? Here are a few examples:

  • Is set up (or change over) time included in the standard time?
  • Is the time producing scrap included in standard time if the yield rate is known?

Time studies are usually done to define the standard time, but as the above examples show, the definition of “work time” can be different.

When calculating Labor Efficiency, it’s typical to include what Lean people would consider waste (change overs, scrap) in the definition of work time because if change overs are “good” or scrap is less, then the Labor Efficiency variance will be positive.

But there are 2 things that are inefficient about using Labor Efficiency as a performance measure.

First, it takes a long time to get the information and it’s usually difficult to ascertain exactly why the variance was positive or negative. Labor Efficiency is usually reported monthly or possibly weekly at some aggregate level (department or whole plant). This level of reporting makes it very almost impossible to understand what really happened.

 

Second is the myth that Labor Efficiency somehow is an indicator of costs increasing or decreasing. If a manufacturing department has 5 people in it, and today they work one shift and are 50 % efficient and tomorrow work one shift and are 50% inefficient, the salaries paid each day are the same.

Lean companies want something entirely different from their people. I heard Jeff Liker speak a few months ago and he summarized it quite well. He put it this way: a lean company considers its people an appreciating asset and wants its people at all levels to do the following:

  • Understand the needs of the customer
  • Think
  • Solve problems
  • Make improvements

This means people need the right performance measures to identify and solve problems. It’s not helpful for a Lean company to look back and know that last month Operations created an unfavorable Labor Efficiency variance. The Lean company wants to know the exact reasons why there were problems with change over, scrap, rework and downtime.

Finding problems creates opportunity. Daily and weekly lean measures of quality, flow, delivery, lead time and productivity will focus a workforce on understanding the needs of the customer, because any problem in any of these areas prevents them from meeting customer needs. And the frequency and timeliness of reporting make it easier to identify the root causes of problems, which makes it simpler to solve problems.

So here’s the oxymoron:  you become “efficient” by eliminating Labor Efficiency as a performance measure and implementing Lean Performance Measures.

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