Lean Accounting Elevator Speech

Lean Accounting is intended to replace traditional accounting and measurement systems; it is not intended be an additional analysis. Lean Accounting is right for companies that are well on the path toward lean manufacturing.

Lean Accounting has six primary elements:

Performance measurements that motivate lean actions - at the cell level, the value stream level, and at the plant or corporation level.

The elimination of most accounting and control transactions through the elimination of the need for them. They (accounting transactions, shop floor control, inventory records, labor tracking, etc.) are needed in traditional companies because processes are out of control. In lean companies we can bring processes under control and eliminate the need for the cost accounting, inventory control, etc. Lean performance measurements become the primary control manager.

A valid assessment of the financial impact of lean manufacturing improvement. Many companies are looking for short-term cost cutting to come from their lean efforts. They are usually disappointed. Lean manufacturing does not cut costs; it turns waste into available capacity. The financial impact comes as you make decisions on how to use this capacity (and the cash flow from reduced inventory). These are strategic decisions. Lean Accounting uses a specific tool for understanding the impact of lean changes on the company financially.

A Successful Lean Team Steps Up with a Proven Approach

Replacement of standard costing with costing of the value stream. As a company seriously applies lean thinking they become less like a job shop and more like a process manufacturer. Value stream costing becomes more relevant and "accurate" for managing the value stream. This step (and its a big one for many companies) eliminates almost all of the wasteful transactions associated with traditional cost accounting. Plus it gives the value stream manager (and other interested parties) more valid information.

Decisions that used to involve standard costs now use value stream profitability and contribution margin. These decisions include pricing, profitability, make/buy, new product introduction, product and customer rationalization, etc. This aspect is similar to throughput accounting in that it requires an understanding of flow through the bottleneck (or constraint) operations within the value stream. We use a method called "value stream cost analysis" to understand where the costs are in the value stream and where the available capacity is.

Driving the business from customer value. This is what we are striving towards. We use QFD and target costing to drive our business from customer value and not from cost. We need a profound understanding of how we create value for the customer; we need an understanding of where our costs are in the value stream; we compare where we create value with where we expend cost; and we initiate kaizens (and the like) to bring value and cost into line. The best way to reduce cost is, of course, to increase sales.

Lean Accounting is more than a set of tools relating to measurement, capacity usage, value, and continuous improvement. Together these tools become a lean business management system that is radically different from traditional management.

Implementing Lean Accounting requires a maturity path. We always recommend a prudent approach, taking account of where the company is with lean manufacturing (and other lean programs). It is only as we bring the processes under control through lean thinking that we can - step-by-step - dismantle the wasteful, misleading, and actively harmful traditional accounting systems.

Timing is important. You need to address Lean Accounting when people recognize a problem with the old accounting.

We have presented a Lean Accounting overview to audiences with glazed eyes and tired expressions. What we presented had no relevance to them because they had not implemented enough lean manufacturing to have bumped up against the problems caused by the traditional accounting systems. Plus most of the people would have regarded lean manufacturing as a shop-floor issue and could not understand why it has anything to do with finance.