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Traditional Accounting & Lean & World Class Manufacturing Implementation

Implementing the World Class (Lean) Enterprise – Why Traditional Accounting Approaches Get in the Way, and What to do about it

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.

Traditional accounting–a powerful influence you ignore at your peril

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 The bad news is traditional accounting is obsolete.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 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.

Where traditional accounting methods get in the way of being lean

Now let’s add to that a bit of modernization by thinking about how we are tracking information and reporting our performance with traditional IT-based accounting. First, it’s all “rear-view mirror” in nature. Most companies don’t close their books for 2, 4, 6 or even 8 weeks after a monthly cycle ends. This means the information we are getting to guide our decision-making has little bearing on what is happening today.

Secondly, most of the information collected from the shop floor on operational performance is suspect. Now, before you throw this article away in disgust, let’s look at a couple of situations. Take typical labor reporting. Many well-intentioned companies use their shop orders as a mechanism to track progress on jobs and require operators to clock in and out on each process step. Often this includes clocking in and out for setups and then in and out to perform the operation. Any material losses should be recorded, and any leftover materials returned to stock (or otherwise recorded). Tracking performance for incentive programs also presents some interesting quandaries as well.

Brief Case Studies

I have recently had the privilege of working with several companies who use the above approaches and are aggressively implementing lean and world-class manufacturing ―in all cases, when we were gathering baseline information to create initial Value Stream Maps to understand where to make improvements. We tried to use the data in the accounting system first. In every case, we were forced to abandon it because what is really happening on shop floor often has little resemblance to what is recorded in the system.

The first example is a printing, die cutting and packaging company. In printing, setup reduction is often one of the key drivers of inventory and system costs. 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. To begin measuring progress, we first assumed we could continue to collect the information as we were before. One little problem was uncovered: historical data suggested the average setup was taking 97 seconds.

Two principle reasons for the disconnect 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 record the work than to do it. If you are trying to get production out the door and have to do a little triage, it’s easy to justify.

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 packaging. Each of these required the operators to retrieve shop paper, move material, log in and out on both setup and run times and manually record 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. The 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 half 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.

In yet a third company, I observed an intense effort to measure and reward operators based on their machine efficiency–performance against the standards. The same company is asking for help to solve a number of problems; one being inventory accuracy at under 90% and excessive system scrap. It took only a few minutes to diagnose a big issue: rewarding for “getting numbers” only.

Part of the process for keeping inventory accurate is for the operators to take all leftover, unused materials, mark them and return them to the warehouse. With no incentives provided, the warehouse people have to count the materials, return them to stock and make the corresponding record transactions in the system to keep things straight. What makes you think the operators give a flip about record accuracy? How do you think the warehouse people feel about the operators earning incentive pay (several hundred dollars a month!) and then have to clean up after them? This is a good example of the axiom: “be careful what you ask for, you might get it.”

So, what’s the poor lean implementation team to do?

The best way to counteract these (and maybe 100 other accounting related) systemic organizational and cultural issues is through dialogue and involvement of the accounting folks in the process from the onset of your implementation. Some suggestions:

  • REQUIRE Accounting to be represented in your guiding coalition of stakeholders at a high enough level to be able to affect systemic changes. The guiding coalition guides and prioritizes your implementation, while identifying and driving cultural change.
  • Use Value Stream Maps to highlight waste and information shortfalls in the accounting system or the accuracy (and/or validity) of the information.
  • Provide more information to the accounting community. There are two useful books I have read recently: Throughput Accounting by Thomas Corbett and Who’s Counting by Jerrold Solomon. Though the former is based on Theory of Constraints (TOC) accounting, there are good business cases developed that challenge standard and/or activity-based accounting approaches. The latter reads much like The Goal by Eli Goldratt, but is written from a lean practitioner’s point of view on the challenges faced in accounting during the implementation of lean and world-class manufacturing.
  • If incentives are considered, it must be an “everyone” or “no-one” deal. Incentive systems should hinge company-wide on 4 to 7 key metrics, including safety, inventory, customer satisfaction, quality, and productivity. The deal is this: measures of profitability only as the basis of incentives is a sure road to disaster–especially if everyone is not sharing equitably in the success.
  • Re-vamp cost accounting to be value stream-based by building a business case to demonstrate that many conventional wisdom approaches are, in fact, wasteful to
    the extreme.

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 questionable, ask “how can we eliminate the need for this activity, or make it part of another value-add process?” Open and honest dialogue, along with a willingness to “get out of our box,” can lead to some amazing change for the better–while leaving behind outdated accounting approaches.

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