Untangling Complexity with Lean Accounting by Eldad Coppens

Logo
 First, a note from Brian Maskell:   
 Eldad Coppens is the CFO of Qfix.  Mr. Coppens  holds an MBA from the Wharton School of the University of Pennsylvania and a BA in Economics from Princeton University. Before becoming an investor in and officer of Qfix, He was Managing Director of Credit Suisse First Boston, a leading global investment bank.
 
Dan Coppens (CEO) and Eldad Coppens (CFO) with Qfix positioning device.

Dan Coppens (CEO) and Eldad Coppens (CFO) with Qfix positioning device.”Qfix is a world leader in the design, manufacture and marketing of patient positioning and immobilization products for radiation therapy, located in Avondale, PA, just west of Philadelphia.  Our business is characterized by a high degree of vertical integration, a broad portfolio of products manufactured both by us and by others which we distribute worldwide, and a significant level of organizational complexity involving managing everything from an intensive research and development program for new products, 24/7 manufacturing facilities, a full-fledged customer service operation, a direct sales force spanning the continental U.S., and a global distribution network everywhere else.”Qfix is a world leader in the design, manufacture and marketing of patient positioning and immobilization products for radiation therapy, located in Avondale, PA, just west of Philadelphia.  Our business is characterized by a high degree of vertical integration, a broad portfolio of products manufactured both by us and by others which we distribute worldwide, and a significant level of organizational complexity involving managing everything from an intensive research and development program for new products, 24/7 manufacturing facilities, a full-fledged customer service operation, a direct sales force spanning the continental U.S., and a global distribution network everywhere else.

“Qfix is a world leader in the design, manufacture and marketing of patient positioning and immobilization products for radiation therapy, located in Avondale, PA, just west of Philadelphia.  Our business is characterized by a high degree of vertical integration, a broad portfolio of products manufactured both by us and by others which we distribute worldwide, and a significant level of organizational complexity involving managing everything from an intensive research and development program for new products, 24/7 manufacturing facilities, a full-fledged customer service operation, a direct sales force spanning the continental U.S., and a global distribution network everywhere else.

If you look at our website at www.Qfix.com, or download a catalog there, you’ll understandQFix_Products the breadth of our product offering.

Before we discovered Lean Accounting and BMA, we were already deeply engaged in implementing Lean Manufacturing and the Lean mindset in our organization.  As a manufacturer, the initial appeal was to maximize the efficiency of our production lines, and so we were already busy creating value stream maps and introducing visual management tools such as kanbans and charts for various productivity-related metrics.  In all of our reading and learning about Lean, we occasionally came across the concept that accepting the Lean framework also implies abandoning traditional financial and accounting paradigms.

We were eager to learn more.  Frankly, we had never been satisfied with the quality and utility of financial information produced by using the traditional cost and financial accounting approaches.  Trying to understand the cost of a production unit by allocating/absorbing such fixed overheads as rent, back office, utilities, etc. or even direct labor, which is also essentially a fixed cost, never seemed satisfactory either as a foundation for tracking costs or for pricing products.  And traditional financial reporting might be a guide to overall profit and loss, but was useless for answering the question we were always asking ourselves, which was “why and where do we make (or in some instances, perhaps unaware, lose) money, and how can we use that information to make good decisions and improve our results?”

Anyone who has ever taken an introductory course in Microeconomics is indoctrinated with the concept that while the average cost of a product is a function of both fixed and variable costs, rational economic decisions are made at the margin.  Profitability is maximized with increasing output as long as the marginal (variable) cost is less than the price that the marketplace will offer for a product.  So why is it that traditional cost accounting focuses so much firepower on time-consuming and misleading calculations of average costs by endlessly determining the fixed cost “content” of a unit of production and deviations from “standards” determined in circular fashion by the same methodology?  Lean Manufacturing teaches us that running an efficient process is all about smooth flow and removing bottlenecks which produce unnecessary inventory, poor resource utilization and wasted effort.  In other words, you maximize efficiency/profitability when you optimize the exploitation of your fixed costs.  This is an approach entirely consistent with sound Microeconomics, but at odds with traditional accounting.   Lean Accounting not only addresses this conceptual flaw – it also eliminates a great deal of accounting drudgery that is costly, counterproductive and anything but lean.

Having experienced the epiphany of our initial encounter with the concept of Lean Accounting, we were thrilled to be able to work with BMA, the Lean Accounting Leaders (yes, they really are), to bring its advantages to Qfix.  In 2011, we happened to be in the process of implementing a new ERP system, so we decided to take the opportunity to create an entirely new Chart of Accounts mapped tightly onto our identified value streams.

The benefits of implementing Lean Accounting in our company have already been manifold.  To list a few, we now have:

  • Financial data that provides a quantitative “x-ray” of our operations along all of its major dimensions
  • Timely reporting in a straightforward, actionable format – rather than wait to close out a month, by which point one is increasingly staring in the proverbial rear-view mirror, we receive bi-weekly reports of real-time information that highlight variations in performance and spending in a palpable manner.
  • Financials that are consistent with GAAP without the distortions of traditional GAAP accounting – in fact, one of the benefits of Lean Accounting is that it provides increased insight into both the strengths and weakness of GAAP accounting.  Lean Accounting, because of its focus on tracking the flow of resources and spending in real time, is a superior tool for monitoring cash-flow generation (though it is decidedly not cash based accounting).  Lean Accounting also clarifies inventory measurement and valuation by dispensing with the notion that fixed costs are somehow absorbed in inventory and sitting on a shelf (with the perverse distortion that profits are actually magnified in the process of inventory accumulation!).  In theory, GAAP accounting’s approach of matching revenue accruals with associated costs is designed to provide a more faithful guide to actual performance, by adjusting out timing effects related to cash inflows and outflows.  However, adjusting out flows weakens GAAP as a tool for controlling – flows!
  • Greater diffusion of financial results within the company.  Lean Accounting creates data that is useful for managing the business and therefore valuable to place in the hands of managers.

QFix ProductsWbLgWe are only beginning to reap the potential benefits of this powerful management tool.  Already, it has helped us to have a much deeper understanding of the true economic characteristics of our various value streams and resulted in better management of our working capital.  One of the major goals of Lean is to free up capacity that can be redeployed to grow the business.  Because of Lean Accounting, and through the application going forward of capacity analysis tools and box scores for decision making at the margin, we will increasingly be in a position to see how operational decisions that improve flow in the value streams impact our financial results and to maximize our returns on capital invested.”

Visit Qfix on the web at www.qfix.com.  Qfix is located at 440 Church Road, Avondale, PA 19311 USA Phone: 610-268-0585610-268-0585 Fax: 610-268-0588

This entry was posted in Endorsements from Customers, Guest Post, Lean Accounting and tagged , , , , , , , . Bookmark the permalink.

One Response to Untangling Complexity with Lean Accounting by Eldad Coppens

  1. Marc Gilson says:

    As finance manager in the industry for 24 years, I can confirm that GAAP have forced to put a part of fixed costs into the inventory valuation, triggering wrong operational decisions as increasing production without having received more orders from customers. I would advise to disconnect GAAP accounting from lean accounting. GAAP accounting comes from accountants to fulfill tax requirements. Its logic is far from the business point of view, hence the distortion between accountants and operational people!

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>