Spending last week at the Lean Accounting Summit probably made me a bit over-sensitive to the subject, but coming across a story about the Department of Justice spending 16 bucks apiece for muffins and a dollar an ounce for coffee got me thinking about this whole value adding – non value adding thing. I thought I would offer up a pretty simple way to quickly change the nature of the financial discussions within an organization.
Step one is to have the management team sit down with the chart of expense accounts and argue about which of them add value in the eyes of the customers, and which don't.
This is quite often a contentious exercise, as people resist the notion that their work – often their whole department – does not add value. The acid test is whether customers will pay more for the product if you perform the task in question better, or do more of it.
Non-value adding work can be dumped into one of three categories: pure waste (stuff like defects, material handling and bureaucratic nonsense), regulatory waste (the cost of complying with OSHA, EPA, EEOC, ISO paperwork and the like) and management controlled waste (lean training and lean consultants, staff salaries, computers, office furniture, etc…). The management controlled waste is the sort of thing customers won't pay for directly, but you do because management thinks it will be more than offset by reductions in other waste, or will enhance the value adding efforts by more than it costs.
Step two is to change the format of the P&L statement. No need for anyone to get traumatized over this. The P&L can be generated in both the old and new formats – it's not an either/or situation.
Instead of this:
Same numbers – just looking at them different. In the first one – the traditional P&L - when management doesn't like the profit number, they look to material and labor costs as the opportunities to improve.
In the second version, it is hard to ignore the $530K – 21% 0f the money – spent on things customers will not pay you for.
No big change in accounting, not asking management or anyone else to change anything or make any commitments – just looking at the numbers from a different angle – and it never fails to change the discussion. For too many managers who don't spend enough time at the gemba and are unable to see waste in reality, putting the waste on a piece of paper with a $ in front of it makes it very easy to see. You will be surprised at how quickly terms like 'value adding' and 'non-value adding' become part of the company language, and at how quickly management becomes focused on eliminating waste.
… and it works for manufacturers, healthcare organizations, retailers …. even government agencies like the Department of Justice.