You may have noticed that the pace of my writing slowed over the last few weeks as the demand for my one day assessments took me to North Carolina, Tennessee, Ohio and Michigan, giving me a chance to get a pretty good look at 11 different manufacturers across a good range of industries. The experience convinced me that companies pursuing lean can be divided into two distinct categories – those that have embraced Lean Accounting, and those that haven't. The lean accounting companies are in the big leagues – they are making improvements at a much greater rate and they have a keener grasp of where their improvement efforts will bear the most fruit. Those that aren't are doing a lot of lean things, but bringing far less to the bottom line, and making fewer improvements in ares critical to achieving their strategic objectives.
The reason for the divide between the high achievers and the rest of the pack is pretty simple. If your company is using a standard cost system, you don't really know what your costs are. You're using bad data based on flawed assumptions and illogical ideas of allocations, as well as assumptions about fixed and variability that make little or no sense. When you are trying to reduce your costs – but your cost data is as bad as that – your improvements are pretty much a crap shoot. It is a stroke of luck when you actually do something to make a meaningful improvement to an significant cost area. For the most part, your improvement efforts are fighting against the cost system. On the other hand, if you are driven by lean accounting principles you are using "real numbers", as my friend Jean Cunningham puts it, so you don't suffer through all of the muck previously described.
Lean accounting is driven by a couple of key principles, but perhaps the most important in the current economy is that the 'real numbers' are based on cash. Traditional accounting – GAAP accounting – has things so screwed up that profits and money almost cease to have any relation to each other. Lean companies view cash flow and profitability as just about one and the same. That is why the traditional companies are way up a creek without a paddle and are laying off in droves in the current tight credit economy, while lean companies are relatively unfazed. Taiichi Ohno summed up the Toyota Production System rather succinctly when he said, "All we are doing is looking at the time line, from the moment the customer gives us an order to the point when we collect the cash. And we are reducing the time line by reducing the non-value adding wastes" Do that and you will have a lot of money in the bank. Chase after some convoluted concept of theoretical book profits based on matching principles and fully absorbed overhead inventory valuations and you will find yourself standing hat in hand in some bankers office begging for help, or hiring lawyers to file your bankruptcy petition.
Every member of your management team has to read Practical Lean Accounting – no ifs, ands or buts if you are going to get lean. It really is the most important lean book you will ever read. Then your CEO and your CFO have to get to Orlando for the Lean Accounting Summit. It's the difference between playing in the lean major leagues or fooling around in the minors. And for many companies, it is apt to mean the difference between being in business a year or two from now … or not.
Tim McMahon says
Standard cost accounting can cause you to make poor decisions. We have a factory that grades several products based on testing. Now the manufacuturing process of all these products is the same. The last step is where the final determination is made. Yet some believe that the premium product actually costs them more to make than the low grade. When in actuality the average grade is closer to the true cost. Is this the accounting trick based on market price and margin that focuses us to make the premium grade cost more. But the product goes through all the same steps as the low grade. Making improvement decisions with this mentality will likely be wrong.
Adam Zak says
Bill, kudos, because this is right on target.
Trained as a CPA, and having actually practiced in this profession for a number of years, I can speak first-hand about how important Lean Accounting is to the success of a Lean Transformation.
GAAP accounting is quite simply mis-information when it comes to understanding what’s really happening in the Gemba. I speak at least a few times a month with CEOs who are dealing with bad numbers, numbers which do not reflect true progress being made on Lean initiatvies within their operations.
So, when some of these CEOs subsequently withdraw their support for Lean because “Lean isn’t working,” why should we be surprised? They’re stopping the patient’s treatment because the patient doesn’t appear to be recovering. Hey, let’s take another look at that thermometer and blood pressure guage, and maybe avoid a tragic outcome.
Adam Zak, http://Twitter.com/LeanThinker
Andy Wagner says
My biggest continuous frustration with traditional accounting is the mismatch between input cost and output cost.
We’re measured monthly based on our output cost, but given our high takt times and batch and queue processes, the actions we take to change or improve what we do on the input side of the equation don’t show up in output.
I’m yet to give my plant manager a forecast that even remotely resembles what finance tells us that we’re doing.
It’s like driving down the highway backwards, looking in the rear view mirror.
هplz help me ,i want to investigate the influance of lean accounting system on the balance scorecard in my master.my nams – dalia,
If the measurement system’s broken, you can’t track your improvement activities.
Brian Maskell has some great examples on his site of traditional vs lean accounting. I’d love to see more examples with real numbers.