Accounting for Lean Success: Overcoming the Barrier of Traditional Accounting in Lean Environments

Accounting for Lean Success
Overcoming the barrier of traditional accounting in lean environments
By John R. Brandt and Mike FricholAccounting for Lean Success
Executive Summary
Over the last three decades, lean principles have driven massive productivity improvements inmanufacturing operations around the world. Manufacturers of all sizes are more efficient, better managedand more profitable because of lean - yet this improvement has plateaued at many companies. What'sholding up the progress of lean?
While many factors can stall a lean effort - ranging from a myopic focus on "tools" (e.g., 5S, quickchangeovers, etc.) to the removal or retirement of a lean champion - at many firms the culprit is morespecific: outdated accounting systems. Rooted in practices designed for the batch-and-queue environments of yesteryear, traditional accounting is often out of sync with modern lean models. Early on, lean worked in spite of this because companies focused on waste reduction on the plant floor, and most of the return on investment was earned in operations. But as lean evolves and spreads beyond the plant floor, its conflict with traditional accounting is escalating - and becoming more dangerous to the financial health of manufacturers.
Savvy manufacturing leaders realize that they must solve this dilemma or else watch their gains from leaneither slow or evaporate. These executives are reengineering accounting on two levels - both howaccounting is done (process) as well as what accounting measures and reports (outcomes). They are notadvocating the wholesale elimination of traditional accounting practices; instead, they see the potential foraccounting to play a larger role in lean by providing analysis, insight and direction that will support lean gains across all functions. These lean leaders want to reduce the "law enforcement" aspect of accounting and increase its "coaching" aspect. Accountability will not go away, but will increasingly be redefinedaccording to customer value - i.e., what the customer wants and is willing to pay for.
Leaders in lean accounting face significant hurdles in the form of traditional accounting metrics and rulesexpressed in a language that few outside the financial culture can understand. These executives must build new systems while still fulfilling accountability and regulatory needs such as GAAP (Generally AcceptedAccounting Principles). Nonetheless, successful new models are starting to emerge - demonstrating the value of this new method of financial measurement.
Supporting Lean with Management Accounting
Manufacturers discovered lean during a time of unprecedented technological expansion in bothproduction equipment and process tools. This pairing produced huge gains in productivity in operations;today, leading manufacturers are hoping to build on these improvements by expanding lean to otherbusiness functions and departments.
1 ŠTHE MPI GROUP, INC. Accounting for Lean Success
This expansion of lean is sometimes in conflict with traditional financial measurements and accountingpractices. Why? Because while the "control" aspect of accounting remains essential for transparency,regulatory reporting and accountability to shareholders and others, there are drastic differences betweenfinancial accounting, which currently drives internal and external decision-making, and managementaccounting, which should drive internal decision-making and planning:
Financial Accounting vs. Management AccountingBoth are needed, but each serves a different purpose
Financial accounting Management accounting
Recording and examining past activities Focuses on future decisions and activitiesAccuracy and categorization of data Relevance and extrapolation of informationStatutory reporting (historical, normalized reports) Actual business performance (now, future improvement)Budget and expense tracking Management reporting and analysis
Follows GAAP and other regulatory rules Uses lean, throughput, other management accountingprinciples
Financial accounting can work against lean in three major ways:
. By focusing on internal definitions of value rather than customer definitions of value: Whensetting profit goals that determine market price and resource allocation, product inputs are measured asfixed and variable costs instead of expenses necessary to create value. Lean thinking says that pricingshould be based... [download for more]