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Lean Accounting Attributes

LEAN ACCOUNTING ATTRIBUTES

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You Want It In A Nutshell? Here’s the Lean Accounting Nut.

unnamedCompanies that are seriously pursuing the lean journey soon find their accounting, control, and measurement systems need to change to support the new strategy. The principles and methods of lean thinking and practice are quite different from traditional business and require different measurements.

The changes are driven by both positive and negative needs. The positives include accounting, control, and measurement processes that support the new lean strategy. The negatives are to eliminate the harmful impact of traditional accounting and measurements.

unnamed-1There is a third change driver that is relating to waste. While traditional companies often build increasingly complex accounting systems, lean companies recognize that accounting and measurement systems need to be stripped down to the minimum amount of work.

Why are traditional accounting & measurement systems harmful to lean?Traditional accounting and measurement methods are NOT wrong and bad. But they were designed to support mass production. Lean manufacturing is in many ways the OPPOSITE of mass production.

Traditional measurements like labor efficiency, purchase price variance, machine utilization, and others drive mass production thinking. They lead to large batches, long lead times, high inventory, shortages, expediting, and crisis management.

Benefits of Lean Accounting

These are not bad measurements, but they are designed to support mass production and motivate mass production thinking and actions. This is the opposite of what a lean company is trying to achieve. If we are working towards lean change and improvement, these accounting and operational measurements will push back and stymie our efforts.

A very potent anti-lean measurement is the overhead absorption variance. This also leads to manufacturing large amounts of products even when the customers have no demand for them. A recent academic study showed that the 2008 bankruptcies of General Motors and Chrysler Corporation were impacted badly by overhead absorption thinking. The car plants continued to manufacture “economic” order quantities, spending huge amounts of money, and making thousands of cars that nobody wanted to buy – until the companies ran out of cash.

In a job-shop style production these measurements and accounting are particularly harmful. The use of standard costs and margins leads to poor decisions. Decisions related to pricing, sourcing, make-buy, capital purchase, improvement projects, new products, etc. need to be made for the value stream as a whole. Decisions made related to the individual product or sales order will always be poor decisions.

A lean organization -particularly a low volume and high variety – must eliminate these accounting and measurement systems and replace them with Lean Accounting methods that support and prosper lean thinking and practices.

So What are the Positives?

Lean Accounting has been designed to support lean manufacturing (and lean sales, lean product development, lead engineering, lean healthcare, etc.). In order to do this we need to develop accounting, control, and measurement processes that reflect lean thinking and motivate lean methods and action throughout the entire organization.

1.     We focus our financial and operational reporting around the whole value stream rather than individual cells, work center, processes, or departments.We are not so much interested in the efficiency of individual departments or processes, but we are very interested in the productivity of value stream as a whole. The effectiveness and profitability of the entire system.

A value stream is all the things we do to create value for the customers. The starting point of all lean thinking is understanding how we create value for our customers. And this value is created within the company’s value streams. The value streams start from sales and go all the way through to purchasing, production, shipping, and cash collection.

I was working last month with an aerospace component company in the UK where we have helped them develop a value stream organization. Even though they are in the pilot stages and have only create 2 value streams so far, their team-members are wildly enthusiastic about the new arrangement. The Operations Director told me that he has been inundated by people in the company wanting to be included in a value stream.

2.      Once an approach to value streams has been set up, then the financial and operational reporting is at the value stream level.

Traditional accounting is eliminated in favor of a simple, direct weekly income statement (or P&L’s). Instead of the complicated financial reports used by traditional companies, we create “plain English” income statements that everyone in the company can readily understand and use.

IncomeStatement

If you have timely and understandable financial information, then the value stream leaders and team members are able to make much better decisions, leading to growth, productivity, and profits.

Similarly with the operational measurements. The “vital few” measurements are produced weekly and visually displayed on the Value Stream Performance Board. These simple, timely measurements enable the team to drive continuous improvement every week based on real information everybody owns.

This operational and financial information is also used to work out the true financial benefit coming from lean improvement. The Value Stream Accounting shows you the real, bottom line savings and profitability of your lean improvement efforts.

3.      The value stream team members have a clear focus on the value created for the customers.

When we are organized in value streams then all the team members have line-of-sight to the customers, When we know what the customers’ truly value and we know (and have full control over) the processes that create this value – then we can work step-by-step to increase the value while at the same time reducing the costs. If you increase the value to the customers then you can increase prices, and/or gain unheard-of market share growth, and customer loyalty.

4.      Decision-Making and the Box Score

Lean Accounting uses a “box score” which is a single page report showing the three aspects of a value stream that determine the operational and financial results. These are the operational performance measurements, the capacity usage, and a summary of the income statement.

Box Score Decision Example #1-1

The Box Score is widely used in Lean Accounting. It is used for reporting the performance of the value streams. The information on the Box Score is available in other places in the system, but it is summarized onto the one-page Box Score. The Box Score is used for calculating the operational and financial benefits of the value stream’s lean improvements. These are calculated prior to the improvements, during the improvement work, and then monitored after the improvement to ensure the benefits are sustained.

The Box Score is also the primary decision-making method for lean companies. All routine decisions are no longer made using product cost information.  When decisions are made the information is entered into the box score so as to understand the true impact of the decision (or various options being addressed) on the value stream as a whole. The box score will show how the decision impacts the operational measures, the use of people’s capacity, and the value stream profitability. The box score financial numbers are real. They show how much money will go into the bank as a result of the decisions being made.

Using the Box Score for decision-making leads to better decisions and better profits. The Box Score also allows decisions to be made at lower levels in the organization because the information is simple and readily understood by everybody. Lower level decisions lead to better decisions because they are made by the people who have the most knowledge of the issue. This also frees up the time of senior people so they can have more time for strategic activities. The Box Score is real win-win for everyone.

5.      Lean Accounting is a lot less work.

In Lean Accounting we have primary reporting at the value stream level. We do not need the thousands or millions of transactions required to maintain the departmental reporting, the labor tracking, the other so-called control systems traditional companies anguish over.

There is a maturity path to making these changes. As your company becomes proficient with lean thinking, your processes will become under control. Much of this control comes from pragmatic, visual tracking by the people in the processes. As your company makes more progress with lean, you will get to the point where the secondary, transactional control systems (ERP/MRP) are increasingly unnecessary and can be gradually phased down. Do not think that I am speaking against these ERP systems. They are valuable tools for any lean company. But they are largely wasteful and we need to eliminate waste from the systems as well as the physical process.

We have a good number of customers that have a two-transaction factory. They use a transaction to receive materials, and a transaction to ship the product. They have largely eliminated accounts payable and no longer track inventory. Not every company can achieve this; but this is the gold standard of transaction simplification.

Conclusion
As you begin to make progress with lean manufacturing, lean product design, lean sales, lean engineering, and lean administration; it soon becomes clear that the traditional accounting, control, measurements, and decision-making systems are no longer appropriate. In fact they are in many ways anti-lean. The purpose of Lean Accounting is to provide the vital operational and financial information in a way that motivates lean transformation and improvement – and is itself a low waste and lean process.

Maximize Your Lean Financial Benefits .

Lean Accounting Training Videos. One is about implementation and 5 take you through the key aspects of Lean Accounting

 

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