by BILL WADDELL
Last week I wrote that ABC is not Lean Accounting, and quite a bit of commentary and controversy resulted. I am still working on addressing some of the requests for more specific information on the specifics of Lean Accounting, Activity Based Costing, Time-Driven ABC and Throughput Accounting; as well as the comparisons and contrasts between them. The challenge is to accomplish that task in a blog. To do it justice would take a rather lengthy book.
In the interim, however, I would like to address what I see as the biggest issue the various folks who commented and sent emails challenging Lean Accounting wrestle with – that of context. To paraphrase some of those concerns, people challenged how Lean Accounting supports setting prices, planning for the future, capital expense analysis and make-buy decision making. The short answer is that it doesn't. At least it doesn't if you put Lean Accounting in place without changing the rest of the management infrastructure at the same time.
The evolution of lean from a factory floor issue to an all-encompassing enterprise wide way of doing business has been slow and sometimes painful. It was almost 20 years from the first realization of the Toyota Production System to the point we are now – where most American factories are doing something with lean on the factory floor – where they have accepted the ideas that pull is better than push, setup times can and must come down, quality can be excellent, and flow is very, very important.
As that painful transition took place, it became increasingly apparent that there was a huge disconnect between best practices on the factory floor and accounting logic. To be sure, the gap has been known for quite a while. My friend Tom Johnson wrote Relevance Lostwith Robert Kaplan way back in 1991. The CAM-I project that led to ABC pre-dated that, and Cost Management For Today's Advanced Manufacturing is still one of the best books I have found to describe the issues. The original edition of The Goal even predated CAM-I. Each of those efforts advanced the thinking and the body of knowledge. Each of them raised the awareness within the manufacturing community of the existence of a serious problem with how we account for manufacturing, and raised the level of awareness. However, even the most ardent proponents of ABC and Throughput Accounting would have to admit that there has been precious little traction for those approaches after 20 years of work.
Lean Accounting is a misnomer. I have urged Jim Huntzinger, the driving force behind the Lean Accounting Summit, to call the annual gathering the Lean Management Summit instead. Lean Accounting is the product of people like Brian Maskell and Bruce Baggaley, Jean Cunningham and Orry Fiume, Jerry Solomon and Mark DeLuzio, Jim Huntzinger and others acknowledging that none of those approaches went far enough. More important, that the right accounting numbers would only be of value of they were used in a different manner. They built on all of that thinking, took much of it several steps further, and recognized that Lean Accounting has profound implications on the entire organization.
If you were to attend the Lean Accounting Summit, you would hear people talking about a lot of things other than debits and credits, and assets and liabilities. Most of it, in fact, has little pure accounting content. instead you would hear folks discussing how best to structure value streams, how to price products strategically, rather than as a function of the cost of the product, strategic planning and hoshin kanri, and the most effective design of performance metrics – many of them non-financial. Within the context of these and other profound changes in how businesses are managed, Lean Accounting makes perfect sense and provides a powerful tool to management. Standing alone, Lean Accounting does not fit.
So I will do the best I can with your Lean Accounting questions over the nexy week or two, but keep in mind that it will be apples to oaranges. ABC and Throughput Accounting relate to accounting (with a small 'a'). Small 'a' accounting is a subset of Lean Accounting, and it is really a comprehensively different way of running your business.