Changing traditional mass production thinking to lean thinking requires changing key fundamental assumptions regarding manufacturing principles. People talk about the need for culture change when they adopt lean methods because it is such a different “mental mindset” when it comes to operating the business. Lean methods require a fundamental change in thinking about “the normal way” things get done. These changes effect the way organization’s control, measure, and account in a lean environment.

The first principle of "lean thinking" (according to Jim Womack) is "Value".  Lean manufacturing focuses on increasing Value vs. traditional mass production which focuses on reducing unit cost. Those are two different perspectives on how the world works.  This does not mean cost is unimportant!  Lean manufacturers need to have a better insight to “real” cost than you obtain with standard cost methods.

Conventional accounting expects managers to use after-the-fact measurements to diagnose operating problems and to take corrective action based on them. There are two flaws in this thinking.  First, after-the-fact accounting measures are useless in a fast-moving lean production system.  Second, traditional measures of earned hours, utilization, etc. are not relevant for evaluation of individual process elements that are subject to demand and flow variations, in fact these metrics often provide misleading information that cause people to work the numbers rather than do what is right for the business.

From a management reporting and operational accounting perspective, organizations need to do four things when they start their lean manufacturing efforts:

1)      They need to determine the financial implications of lean changes. The method must be simple, use operational information as well as financial, be verifiable, and adhere to generally accepted accounting principles.

2)      Organizations need a comprehensive approach for performance measurement. Performance measurements that link the business strategy through three levels: overall value streams, cell manufacturing, and non-production processes. In traditional organizations these measures are difficult to link, and often contribute to a lack of cooperation between departments and different functional responsibility areas.

3)      Organizations need to eliminate wasteful transaction metrics. These transactions include labor tracking, inventory tracking, WIP tracking, shop floor reporting on transfers between work stations, physical inventory, and the like. These metrics exist for a purpose, "to provide financial control of the business."  And in a slow moving environment with a homogenous product line they probably worked fine. To change them puts a significant burden on manufacturing to truly bring their processes under control so that detailed transactional control is no longer necessary.

4)      Finally the organization needs to move away from allocating costs. Product or customer groupings that use over 25% of particular overhead costs should absorb that hit, but the general allocation of overheads to products, does not provide “real” information.  In fact this information is misleading, especially when these cost are used for pricing purposes.

Financial Implications of Lean Changes

One of the misleading sources of cost savings is process savings vs. business savings.  For example: if a company reduces change-over times on machine set-ups a process savings has been realized, it only becomes a real bottom line business savings though if the available time is used to create more value-added products or services.  In Goldratt's words, "Does through-put increase?"

It takes a management led cultural change to make lean methods happen.  Leadership that is committed to continual improvement in core value-adding processes using lean principals as guide, and provides support to knock down the barriers inhibiting full adoption of lean methods.

In the next issue we will expand on "lean accounting" and the idea of why allocating overhead cost is such a wasted transaction that often provides misleading information.

The Cumberland Group

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