Lean accounting: Have you made the change?
Lean manufacturing has had a great deal of press coverage over the last several years and many companies are attempting to embrace at least a portion of the lean philosophy.
However, traditional
management accounting fails to assess and measure lean critical success factors
and, oftentimes, provides conflicting information regarding the results of lean
initiatives. It’s critical to the success of lean efforts that the accounting
measures are accurately reporting the results of the lean decision making.
What is lean?
Lean is not just another
improvement program but a fundamental change in philosophy of how a company
operates the business. It focuses on removing any activities that do not add
value to the product from the customer’s perspective. Lean focuses on flow
manufacturing and removing waste, which is anything not necessary to produce a
good or service. A typical measure is touch time – the amount of time the
product is actually being touched by the worker. The goal is to progress toward
making processes flow and add value instead of the traditional batch and queue
method characterized by many manufacturers with
roots in the mass production system.
Benefits of lean include
reduced inventories and shorter lead times plus improved quality, less damage
and obsolescence, and increased flexibility due to process simplification.
Lean thinking changes an
organization by transforming top-down, project-driven project improvement into
a culture of empowered teams focusing on continuous process improvement and
creating value for the customer. A team-based organization requires a different
type of accounting system than a traditional organization.
Traditional accounting
Traditional accounting systems
often use full overhead absorption and were designed to support management
principles like mass production, top-down command and control, department
optimization and budgeting. As a result, what becomes important throughout the
organization is full utilization of all resources, average part cost and
overhead absorption. If your organization subscribes to a “tell me how you measure me and I will tell you how I will act” mentality, managers’ behavior
will focus on maximizing these measures.
Some plants primarily focus
primarily on keeping all equipment running, all employees “productively” making
product and minimizing setups. This keeps labor efficiency high and product
cost low (in a full absorption environment), which is how plant managers are
measured. It also leads to large batches and high inventories. There is no
consideration to whether these activities add value or if the product might go
into inventory and remain in the warehouse for long periods of time.
Lean accounting
Lean accounting assumes
profit is from maximizing flow on actual demand (pull signals) from customers;
waste is any resource that impedes flow, control is achieved through attention
to flow and waste and excess capacity provides flexibility. An early step in
lean is to create a value stream map to identify all the specific actions to
bring a specific product through the three critical tasks:
1) Problem solving – concept, design and launch
2) Information management – order taking, scheduling and
delivery
3) Physical transformation – moving from raw material to
finished item
The team then prepares a
cost analysis for calculating the cost of the value stream, which replaces the
standard costing system. With this transition, value stream profitability and
contribution margin become the basis for business decisions.
On a continuing basis,
eliminating barriers to flow, minimizing the value stream costs, continuous
improvement through work teams and eliminating inventory and overproduction
become the goals of management. Instead of focusing on individual jobs,
departments and efficiency and utilization, the flow of the value stream becomes paramount. Many wasteful transactions that
were important in the traditional accounting environment can be eliminated. As
non-value added steps are eliminated, the streamlined processes result in
additional available capacity. The financial impact comes as you make decisions
on how to use this capacity (and cash flow from reduced inventory).
Moving to lean accounting is
a radical change from traditional accounting. It might be viewed as a shop
floor issue that has nothing to do with accounting. The readiness of the
organization to move to lean accounting should be carefully assessed. A very
structured, step-by-step approach is required to successfully implement this
significant change.
For lean to be a successful
journey, the accounting measurements used must also change. If this doesn’t
happen, the benefits of lean will not be measured or reported. Traditional
accounting measures may indicate lean has actually increased costs and the
chance successfully moving to a lean culture greatly diminish. Everyone in the
organization (including accounting) must understand the lean philosophy and buy
into the new measurements that report progress of lean efforts. This will
eliminate conflicts and provide better decision-making throughout the
company.
Dale Billet is a director
with RSM McGladrey. For more information, contact him at dale.billet@rsmi.com.
