In the June 2003 installment of Lean Culture, I suggested a series of “barriers to change” in the implementation of Lean or World Class Manufacturing, with the #3 barrier being traditional accounting/metrics.
It is critically important for us to realize that accounting as a functional discipline is in most companies one of the most potent cultural forces that drive behaviors in our business. The tried and true axiom is true: “what gets measured gets done.” That’s the good news. The bad news is traditional accounting is obsolete.
This may seem shocking or even scandalous on the surface, but I would suggest you think about it. Think about the incredible amount of change we have seen in how we manufacture in the last 20 years (especially in the implementation of Lean concepts). Now think about accounting, which is still being done fundamentally the same today as it was 150 years ago.
In the space provided here we cannot examine all aspects in detail; however, I will summarize a few here and then expand on two others by way of two case studies. Some of the key aspects of traditional accounting that get in the way of implementation are:
First, these are all “rear-view mirror” in nature. Most companies don’t close their books for two, four, six or even eight weeks after a monthly cycle ends. This means the information used to guide our decision making has little bearing on what is happening today, and worse, very little guidance on what will happen in the future. While I do not advocate eliminating these, additional methods are needed to gather and report information that is current and future-based.
The issue here is the allocation of costs based on arbitrary methods – by machine hour, by person-hour, or by some complex method combining different classifications of machines, people (grades) and departments with different costs. No consideration is given to customer or value stream requirements. As a consequence, over-production is encouraged to “earn our burdens”.
The unintended consequence of these methods is that they drive us to meet pre-ordained targets without regard for what is globally competitive. We can be doing high-fives and celebrations for “hitting our numbers” while going out of business because we cannot compete cost-wise in global markets.
The unintended consequence of these cost tracking systems is the implication that if we “hit the standard”, it is time to relax. True World-Class global competitors are never “done” when they hit a target or goal because they typically use “zero-based” period-to-period measurement techniques. This means we must carefully track our current performance and tirelessly seek to improve it to a higher level day after day, week after week, month after month, and year after year.
Accounting usually has responsibility for shop floor cost data tracking. Unfortunately, most of the information collected from the shop floor on operational performance is suspect. OK, before you throw this article away in disgust, let's look at a couple of situations. Take typical labor reporting – many companies use their shop or job orders as a mechanism to track progress on jobs and require operators to clock-in and out on each process step for cost accounting purposes. Often this includes clocking in-and-out for setups and then in-and-out too for performing the operation.
I have had the privilege of working with several companies recently who use the above approaches and are aggressively implementing Lean and World Class Manufacturing. In all when we created initial Value Stream Maps to understand where to make improvements we first tried to use the data in the accounting system. In every case, we were forced to abandon using accounting system data because what is really happening on shop floor often has little resemblance to what is recorded in the system.
Typical shop-floor data collect suffers from many data accuracy problems. The first example is a printing, die cutting and packaging company and its application of operation reporting via a computerized shop-floor data collection system. For one operation we videotaped several setups, establishing a mean time for a change over at 20 minutes and a “sequence change” to reset serial numbers for a common size product at five minutes. The operators agreed with this data. One little problem was uncovered: all of the costing system accounting data suggested the average setup was taking 97 seconds.
Two principal reasons for the unhook are misunderstandings of just what “setup time” is, and skipping some of the recording steps. Why skip some of the recording steps? I can’t fault the operators at all. Due to the very short run times on a large percentage of jobs, in many situations, they were finding it took longer to clock in-and-out on a task than it takes to actually do the (value-add) work. If you are trying to get production out the door and have to do a little triage, it’s easy to justify cutting corners on the cost accounting system. The un-hook is understandable, but brings up a bigger question: is it worth tracking?
Shop floor data collection robs productivity. In our second example company, we performed a three-day Kaizen to streamline the flow of their finishing operations. The old process included four major steps: jogging, cutting, drilling, and finally, packaging. Each of these required the operators to retrieve shop paper, move material, clock in-and-out on both setup and run times, and record manually what happened as well. After implementing the cell, we suggested sacrilege: only record the first and last steps and eliminate manual recording other than material variance information. Product now moves through the system in less than one hour (instead of several days), using 60% less space and is nearly 30% more productive. Ironically, nearly ½ of the productivity gain was accomplished by simply eliminating the clocking in-and-out and material handling steps for just two of the four operations.
The best way to counteract these (and many other) systemic, organizational and culture issues is through dialog and involvement of the accounting folks in the process from the onset of your implementation. Some suggestions:
Let’s expand on that last point a bit more. If your team has studied the process and established standardized work in anything approaching cellular or flow manufacturing, then a “team based” measure may be much more appropriate than “individual based”. Properly done, the initial Kaizen will establish exactly what it will cost for labor from unit-to-unit and the standard work ensures performance at or above that level. So, other than periodic “snapshots” to verify the current state – what is the value-add in tracking individuals and individual operations? With the proper preparation, the answer will be self-evident.
To summarize I suggest the best filter is to carefully and critically keep asking the same questions of everything we do (including accounting): “is this activity truly value-add in the eyes of our customers?” If the answer is no or it is questionable, ask “how can we eliminate the need for this activity, or make it part of another value-add process?” Open and honest dialog along with a willingness to “get out of our box” can lead to some amazing change-for-the-better – and leaving behind out-dated accounting approaches.
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