What Must Be In Place For Us To Begin the Implementation of Lean Accounting?
A few weeks ago we received a call from a professional at a multi-billion dollar, multi-plant manufacturing firm. This person stated that, while he had read one of the books on Lean Accounting, he was having difficulty implementing this in his business. Then he went on to say that, by the way, "I must have this Lean Accounting implemented by this Friday, or I will be fired from my job!"
After a two-day conversation / assessment with this gentleman, we concluded that this company had not even begun a serious Lean implementation, so why did they desire to implement Lean Accounting? After much thought, the entire conversation with this professional person became the catalyst for this month's Lean Beans' newsletter: "What DO I have to have in place in my business in order to start the implementation of Lean Accounting?"
First and foremost, you must be engaged in Lean to start Lean Accounting!
Lean Accounting is a management accounting system to complement Lean Change Management, and both are a "philosophy" of doing business. Lean Accounting is not a software program (such as ABC Cost) nor is it a CD-rom which one "plugs and plays." Lean Accounting is a direct, contribution-style management accounting system which we create in order to assist Operations in assessing and quantifying its Lean Change Management initiatives. It is an actual vs target cost system which encourages the correct behavior in all of our associates in the business. Standard Cost and Absorption Cost systems are volume-based, while Lean is not. If we continue to use a volume-based cost system in Lean, we will see many unfavorable variances and a lot of red ink on our company Income Statement. It is not until we have only about two weeks of product in our Inventory that we will see no difference between Absorption Costing and a Variable Cost system. In the meantime, we need something other than Standard Absorption costing to manage our Lean business.
Technical or Cultural Aspects of Lean: Which comes first?
The aspects of Lean (and Lean Accounting) are easy to grasp and easy to understand: focus on the customer, a product family structured organization, standardized work, flow, pull, and continuous improvement. Yet Lean (and Lean Accounting) is difficult to execute. Reading about this in books is not sufficient for implementation. Lean requires a specific management system (a culture) to sustain it, and that management system includes Lean Accounting. Because Lean is a system, it does not matter where we start, but we do know that the physical "technical" changes must precede the "cultural" management system changes. As we begin Lean, every technical change requires a cultural change, and the support of a new management practice. So this is not a question of "which comes first – the chicken or the egg?" The technical change comes first, then the management change, e.g., Lean Accounting. We cannot implement Lean Accounting until we have first begun to implement the principles of Lean.
The first two Principles of Lean need to be in place.
So, what DO we need to have in place to begin the implementation of Lean Accounting? Obviously, the first thing that must be in place is a Lean initiative itself! Then let's look at the 5 principles of Lean to start:
- Create Value for the customer.
- Map the Value streams.
- Create flow.
- Pull from the customer.
- Repeat, repeat, and Perfect.
In order to successfully implement Lean Accounting, one needs to have the first two principles of Lean in place. That is to say, we need to have created Value for the customer, and to have mapped the Value streams. So what do we mean when we say "create Value" for the customer?
How do I create "Value?"
I want you to think of a time when you purchased some product from a large department store or discount house. Let's say you purchased a vacuum cleaner. It came in a large box and, when you got the box home and dispersed all of the many parts from the box, you found that there was one bolt missing which did not allow you to assemble and use this new vacuum. You search through the papers which came with the product, and you call an 800 number for assistance. When someone answers that 800 support line, you state your problem. The person on the other end of the phone replies, "I am sorry, but you have called the wrong department. Let me transfer your call." And so you then repeat your problem to the second support person, who also responds, "I am sorry, but you have called the wrong department. Let me transfer your call."
Do you get the picture? This business is organized in "departments" or what we in Lean call "functional silos." But the customer does not care about your departments or your Org Chart. To better create "Value" for the customer, the business should be organized in what we call "Product Families" – groups of products which run through the same processes or operations, or involve a similar group of customers. If your business is still organized in "Departments", you are not ready for Lean Accounting as we are going to develop a Lean P&L, not for the entire business, but for each Product Family and/or each Value Stream within each Product Family. Remember! Lean Accounting has as its main purpose the ability to give accurate and timely information, both financial and non-financial, in "checkbook style" line items, to OPS folks on a day-by-day basis or hour-by-hour basis (not once a month) such that they can immediately act upon and improve this P&L.
Mapping the Value Stream
So why, you may ask, would I need to have Principle 2 of Lean --mapping the Value stream-- in place before I begin Lean Accounting? The key word here is "non-financial." We are going to need a lot of non-financial data and non-financial metrics to assist in the implementation of Lean and Lean Accounting. These are data which are not found in our G/L. Where will we get most of this data? We will find what we need in the Value Stream Map (VSM) and the new Lean metrics. This VSM is the "vision" for each Product Family, and it contains data such as cycle time, takt time, number of pieces of inventory and WIP, uptime, changeover time, and flow of product. This VSM, along with the Lean P&L and new Lean metrics, will allow us to financially validate our Lean Change Management improvement projects.
Let's Summarize in a Diagram
So, to summarize thus far, we will need the first two principles of Lean in place – creating Value, i.e. our Product Families, and creating the current state VSM – before we can begin Lean Accounting. But what else will we need to have in place? Third, we will need to assign ALL people to a Product Family or Value Stream. In Lean we strive to have all costs direct costs, thus no allocations. OPS personnel cannot act upon costs when they are "allocated" to them. We want to restructure our business organization in the manner depicted in the following diagram:
You may want to keep a small R&D group outside of the Product Families. You may also have a small group of kaizen facilitators outside of the Product Families. Then, too, your CEO, CFO, and a small core financial group (strictly for external reporting) may sit outside of your families, along with the folks whose job it is to pick and assemble parts for shipping. Hopefully, sales people are assigned to a family, as well as all other functional people – accountants, buyers, engineers, quality, HR, and all direct and indirect OPS people. Only then do we have 90% to 95% of all costs DIRECT costs. You may choose to reorganize by actually "moving furniture," or choose a matrix structure.
A fourth requirement for Lean Accounting is to have as few "monuments" as possible. One of the biggest monuments in business today is what we call "shared services." These shared services, in a traditional business, would be "allocated" into product lines. We want no part of cost allocations in Lean Accounting. Thus, if you have any shared service groups and you do not want to disband these groups, they will join the few persons mentioned above who sit outside of the product families. And we will not allocate their costs into the product families.
A fifth requirement we need in place to begin Lean Accounting is a methodology or a tracking system for out-of-control items such as scrap, rework, and any other important measures which are not contained in the P&L. These items may be on the VSM, or we may need a separate tracking system for some of these important measures.
A final requirement for Lean Accounting would be low Inventory (turns of >20x.) However, this is not absolutely necessary. While our Inventory Turns are low, we can adjust the Lean P&L by adding two line items: one for the increase / decrease in the material content of Inventory, and another line for the increase / decrease in the labor & overhead content of Inventory, until we reach Inventory Turns of 20x or more.
Can we implement Lean Accounting by Friday?
The answer to this question is "no." The implementation of Lean Accounting cannot be forced on people any more than Lean can be forced on people. Auditors do not understand Lean Accounting, bankers do not understand it, usually IT managers do not understand it, and neither do Marketing people as they tend to undermine Lean and Lean Accounting in any organization. So, if we do not "parallel" our accounting systems for awhile, our auditors and bankers and others will see this new Lean Accounting system as a "loss of control." Eventually, though, in a Lean initiative, we gradually shift away from "command and control," and an accounting system that does not "fit" Lean. But, again, we emphasize that we start with Lean, and only then do we add the management systems (such as Lean Accounting) that will support and sustain Lean.
Can we implement Lean Accounting for the entire Enterprise?
The answer to this question is "yes," but first we will introduce the implementation in just ONE product family or value stream. If we regard Lean Accounting as a matter of just adopting a new cost system to replace the old Standard Absorption cost system, we will fail. Give ALL people – OPS, auditors, bankers, marketers, execs, and board members – an opportunity to ask questions and challenge the new Lean cost management system in ONE product family. Then we allow the members of this product family to train the next product family. Let Lean Accounting keep you in front of change by providing readiness, gradually, for ALL of the above mentioned functional folks. And we provide readiness through "learning-by-doing," not by reading books and not by reacting to edicts such as "be done by Friday."
Developing Lean Accounting, after implementing some of the technical changes of Lean, will dramatically sustain your Lean initiative – but only if executed in Product Family Teams with continuous "learning," and not just with the execution of random "drive-by kaizens" and individual "hammers looking for nails." The continuous learning (not just continuous improvement) needs to be organized, and implemented one product family at a time. There must also be total communication on Lean Accounting to all remaining "functional bureaucrats" until our efforts have included every product family and every value stream.
In conclusion…
A Lean culture, or Lean management system, grows out of a Lean practice of making "processes" habitual. The focus here should be on "behavior." Lean Accounting can help with changing behavior! I would like to quote Dr. Monica W. Tracey, Assistant Professor in HR Development at Oakland University in Rochester, Michigan, who said,
"Lean is a long-term evolutionary and inclusive environment. Leadership (for Lean) differs from crisis-based, charge-the-hill leadership."
The same can be said for Lean Accounting. We cannot implement this management system outside of Lean, nor force it on people, nor can we complete it by this Friday! Most important of all, then, for the successful implementation of Lean Accounting, is to be actively engaged in a Lean initiative, and have the first two principles of Lean in place: creating Value with Product Families, and mapping the Vision for each Product Family. Only then does implementing Lean Accounting make sense for our business.
Please do call (860-280-6509) or email (sue.sondergelt@leanbeans.net) today for assistance in implementing Lean Accounting in your Lean organization. Should you not have your product families in place at the present time, we can help you with this!
|
