Lean implementations sometimes get a bad reputation.  Some people think of lean in terms of layoffs, or too much of a focus on the lean tools and not enough on the people side of lean, or perhaps it is just a bad lean implementation.  So what is going wrong with your lean implementation?  Maybe you forgot lean accounting.

So Who Needs Lean Accounting?

You do if you think lean is about cutting costs.  That’s because…

“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).”
Brian Maskell, President BMA Inc.

Brian Maskell is an accountant who has written a lot about lean accounting.  The main problem with accounting today is that it was developed to address the mass production costing systems of a century ago.  This traditional accounting system methodology is now outdated as we move from mass production to more individualized and custom production, to virtual production and fulfillment, and to lean manufacturing systems that are designed around manufacturing flow and not around manufacturing scale.

Lean is all about economies of flow, not about antiquated mass production concepts like economies of scale.  Our manufacturing base is evolving.  Old line mass production techniques are moving to China, where long lead times from large-batch production runs are aligned with the long transportation times of sea-based shipping.

In order to compete today, one must evolve into higher throughput manufacturing, greater customization, and increased focus on the customers who prefer to have products when they need them and in the quantity they demand today, not months’ worth of stock sitting idle on the factory floor.

In lean accounting, inventory is considered waste, not an asset.  Labor is a fixed cost, not variable.  In accounting terms, your standard costing methods that treat labor and overhead as depreciable costs are damaging to the real understanding of how manufacturers make money.

Do You Use Metrics that Encourage Wasteful Actions?

Metrics like efficiency of labor, machine utilization, purchase price variance, or overhead absorption variance cause actions like building inventory, running large batches, maximizing earned hours, or purchasing large economic order quantities (EOQ) of raw materials.  Lean is not about reducing costs to increase profits.

Profits are an accounting number — businesses run on cash.  Employees and suppliers don’t get paid in profits, they get paid in cash.  Lean produces cash and increased capacity, that once sold, can be turned into profits.

Without an understanding and implementation of lean accounting methods, your lean implementation is destined to fail.  Lean accounting will help you to understand how your direct costing models are out-of-date, how to see and measure the financial impact of your lean improvement projects, and how to translate the increased capacity brought on by lean implementations into cash.

You can’t really implement lean thinking in any organization without lean accounting.

Much has been made about the lean benefits of “5S” — Sort, Shine, Set in place, Standardize, and Sustain — over the years it has been a part of the quality lexicon.  Very little is said about the drawbacks of implementing a 5S system.  5S is an exceptional lean system, in theory.  Where it often falls short is in the execution.  Now, I’m not saying that for every benefit of 5S, there’s a drawback.  As designed, it’s all good.  But like they say, “There are at least two sides to every story.”

The benefits of implementing a lean 5S system are huge.  They include:

• The employer’s concern for cleanliness and worker safety contributing, sometimes significantly, to morale…people take greater pride in their company when the company takes pride in its plant, offices, & people;
• The efficiencies gained by freeing up space, improving layout, and optimizing work flow are enormous;
• The potential for increases in productivity when things are laid out so as to maximize efficiency and turnaround time;
• Less time and motion are wasted when workstation layout is optimized, even in an office setting; and
• A well-run 5S system can encourage employees to think about, and look for, other incremental improvements, or kaizens (“baby steps”, Dr. Leo Marvin* called them) as they go about their daily business.

Read about the Toyota Production System (TPS) if you haven’t already.  There’s much to learn about the benefits of 5S in the TPS story.

The shortcomings of 5S are not in the system itself, but in how 5S is applied.  Most companies that don’t get 5S fall short on the most crucial element of all — sustaining.  To them, 5S isn’t a system — it’s an event.

What they don’t understand is that 5S isn’t a one-time-does-it cure, like a pill or injection for a serious physical ailment.  5S is a system, a cycle.  It’s a habit the workforce gets into, like exercising three or more times a week to decrease the likelihood of a “serious physical ailment”.  The company that doesn’t get much out of 5S probably isn’t incorporating the 5S philosophy in its daily routine.  Perhaps they don’t understand lean thinking.

Clearing everything off of everyone’s desk once a year is not 5S.  Having a place for everything and everything (back) in its place, every day — that’s 5S!

5S is sometimes applied rigorously — to the letter — by overzealous, micromanaging types.  They mistake discipline for tyranny.  Taken to extremes, 5S stifles individuality and creativity, lowering morale and productivity.  (Believe it or not, people aren’t inspired when they’re told, “It has to be this way…or else!”)

Some managers don’t quite get the “standardize” part of 5S, either.  Standardizing is about processes and procedures, not people.  When you say every workstation has to have a uniform appearance, that doesn’t mean you have to rob individual work areas of personality.  Limiting workers to “one or two personal effects, not to exceed a certain size or character”, has nothing whatsoever to do with 5S.

Granted, a small number of coworkers go overboard, with their Beanie Babies and their Star Wars posters, ad nauseam.  But, if my boss said, “Get rid of the hockey puck paperweight…oh, and no baseball calendar”, I’d be much harder to get along with than I already am.  (Ask my coworkers.)

In the effort to optimize work flow, maximize efficiency, and gain productivity, sometimes we forget to “build” breaks into the day.  We can’t possibly keep working at a steady pace throughout the workday, even though our machines and our computers can.  Actually, machines and computers need maintenance and down time almost as much as we do.  People cannot “multitask”, either. (Trying to multitask leads to irritability, sleeplessness, and a greater risk of illness, contributes to short attention span, etc. — as “Yogi” Berra said, “You can look it up!”)

The moral of the story is, “Understand and follow the spirit of the law, not the letter of the law.”  Use 5S as it’s designed and you’ll have increased success and a satisfied workforce.

* “What About Bob?” (1991)

When is a good time to implement lean?  If times are bad and you’re in a recession you need to get lean now in order to handle the increased work resulting from internal layoffs.   But Lean as a strategy also means being more efficient when times are good in order to increase your competitive advantage.  When can you stop becoming lean?

Lean helps an organization release unnecessary capacity, we call this waste.  Just like a diet program is designed to reduce fat from your body.  Fat is just extra calories or stored energy your body is not using.  This is also wasted energy.  In business this wasted energy has many forms: inventory, rework, defects, inspection, overproduction, unnecessary motion, delays, overprocessing, and unnecessary transportation.  Lean thinking is like a diet program designed to eliminate this waste.

In bad times you may be forced to do less and as a result you can use lean to adjust to the recession.  But it’s the good times that are more likely to cause your business to gain weight.  When times are good it is just too easy to add people, begin unnecessary work, build inventory, and absorb unnecessary transportation.  It is exactly the good times that implementing lean production methods is needed even more.

So in bad times you need to implement lean to survive the recession, in good times you need a lean competitive advantage.  When can you stop becoming lean?  I believe your business can always use lean.  Just like a diet program requires you to change your eating habits, forever, you can never stop being lean either.