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Over the last three decades, lean principles have driven massive productivity improvements in manufacturing operations around the world. Manufacturers of all sizes are more efficient, better managed and more profitable because of lean - yet this improvement has plateaued at many companies. What's holding up the progress of lean?
While many factors can stall a lean effort - ranging from a myopic focus on "tools" (e.g., 5S, quick changeovers, etc.) to the removal or retirement of a lean champion - at many firms the culprit is more specific: outdated accounting systems.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 lean either slow or evaporate. These executives are reengineering accounting on two levels - both how accounting is done (process) as well as what accounting measures and reports (outcomes). They are not advocating the wholesale elimination of traditional accounting practices; instead, they see the potential for accounting 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 redefined according 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 rules expressed 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 Accepted Accounting 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 both production 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 other business functions and departments.
Financial accounting can work against lean in three major ways:
- By focusing on internal definitions of value rather than customer definitions of value: When setting profit goals that determine market price and resource allocation, product inputs are measured as fixed and variable costs instead of expenses necessary to create value. Lean thinking says that pricing should be based on what the customer is willing to pay and what the market is willing to bear - the true measure of the value that manufacturers add to raw materials. No customer is concerned about itemized internal costs at the level of detail that a traditional financial accounting system requires.
- By requiring time-consuming activities that add no value: Lean accounting practitioners sometimes distinguish between accounting for lean - meaning lean-style management accounting as discussed in the above chart - and lean accounting - meaning the elimination of waste in accounting processes. (Interestingly enough, the former tends to produce the latter.) Once companies begin to focus their accounting efforts on adding true value, they often realize that many of their previous accounting efforts are no longer necessary. Companies that practice management accounting - even in limited ways - typically report reductions in paperwork, recordkeeping and tasks. And, like lean on the factory floor, the goal of bringing lean to accounting practices is not to eliminate accountants; it is to free up financial managers to provide true value in the form of analysis, insight and performance-improvement coaching.
- By advocating principles diametrically opposed to lean: Financial accounting places value on inventory by considering it an asset and by "hiding" the cost of excess finished goods by calculating margin on goods sold, not goods produced. This thwarts the waste-elimination principles of lean, which stress reduction in total inventory (almost always a favorable outcome).
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