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  This traditional accounting system methodology is now outdated as we move from mass production to more individualized and custom production, to virtual production and fulfillment, and to lean manufacturing systems that are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.

Lean is defined by at least one manufacturer as a philosophical approach to business, based on “satisfying customers by making exactly what they need, with the level of quality they need, when they need it, in the amount they need, while using a minimal amount of material, equipment, space, labor, and time.”

Sounds like the way every company ought to be managed, doesn’t it? Some companies have used lean with great success, yet many companies still don’t use lean principles, aren’t aware of what lean is, and don’t want to get involved with it.

Why is that? Well, what do we know about lean?

Lean Is All About Manufacturing

True, lean is rooted in manufacturing. The best known example of lean is the Toyota Production System, or TPS. Toyota has not limited its lean system to manufacturing, either. They’ve applied it to other functions, which has largely led to its success in lean. They recognize that siloing, or segregating, business functions is a major driver of waste. Yet somehow, siloing persists in business.

Siloing breeds inefficient or no communication. Therefore, siloing is responsible for at least three types of muda (waste) — delay, duplication, and unnecessary motion. Manufacturing has to be coordinated with sales, marketing, accounting, HR, and every other functional area, and vice versa. It wouldn’t do much good to have lean operations in one area and not in the others.

By all means, start small to increase your chances of success. Once you’ve had that first success, it’s easier to farm the concept of lean out to other areas of your business.

Lean Is Hot Now, But It’ll Cool Off

Lean is not a new practice or tool.  Lean has been practiced at least since the early part of the 20th century. Frederick W. Taylor, often called the Father of Scientific Management, wrote “Principles of Scientific Management” in 1911, which became a sort of bible for manufacturers. Japanese manufacturing used, and refined, many of the principles of lean to reestablish itself after World War II.

Based on the success of lean in Japan, it took root around the world, though with limited success. Companies that didn’t have the level of success with lean that Toyota and others experienced didn’t apply its principles holistically, or felt they couldn’t wait for a long-term payoff.

Lean has proved itself around the world for decades, and interest in lean seems to be increasing. For instance, Google Trends shows interest in “lean production” spiking last quarter and a growing interest in “lean management” over the last couple of years.

The Company Will Expect Me To Do More With Less

Lean has nothing to do with increasing the pace of work. Rather, it has everything to do with increasing productivity, coordinating processes, and eliminating waste. The objective in lean is not to speed up work but to even out the flow of work — remove delays and other kinds of waste that we’ve always thought were inherent but aren’t. The company may be looking for increased productivity, but speed does not equate to productivity, or quality.

Lean Advocates Don’t Use The Same Language We Do

Lean comes down to two objectives — increase value and eliminate waste. Every tool and technique, every theory and principle boils down to value and waste. What activities — in the customer’s view — contribute value to your products? What activities, or steps in the process, add nothing of value but raise your costs? Value stream mapping, kaizen, kanban, muda, and all the other terminology isn’t nearly as strange as not improving processes.

Lean Is Time Consuming And Costly To Implement And Maintain

Any time you begin a new (to you) way of doing things, you have to expect that not everything will go according to plan from the outset. However, once you’re past the “break-in period” with lean, you begin to realize its benefits. Lean is identifying and eliminating waste — improving the flow of processes.

Lean is a philosophy that ties together ideas and practices. Lean isn’t expensive tools and equipment. Eliminating waste frees capacity. This, in turn, obviates the need for more office space, more equipment, and more facilities. When done correctly, lean saves much more over a lifetime than it costs to implement. Lean continues to pay for itself.

To summarize, lean is not…

• Just for manufacturing;
• A fad that management will easily pick up and discard;
• Going to force you to do more with less;
• Some obtuse concept practiced by wizards in pointy hats; nor is it
• Costly and time consuming.

Do you have experiences with lean that you’d like to share? Did you have any misconceptions that were erased once you started using lean?

Lean is a way of thinking about quality, your employees, and how you use your resources to deliver your product or service to your customers in the smoothest, most predictable, and easiest way.  Six Sigma, on the other hand, is a process model used to separate common cause variation from special cause variation in order to reduce such variation, which, in turn, improves your process performance.

So, which do you use? Lean? Or, Six Sigma?

When Do You Use Lean?

Lean thinking can be used to reduce obvious waste.  What waste is obvious?  There are eight common wastes that are the most obvious and, therefore, are the easiest to remove from your system.  These are the “low hanging fruit” on your quality tree. Lean can be rolled out relatively easily and implemented company-wide.

Lean is a good starting point for companies looking to build a new quality system.  Lean is fast — small projects can be completed in days, or even hours.  Most Lean projects require little investment beyond people to implement the project.  You can use your regular employees on the project, giving them a little bit of Lean training to get started.

When Do You Use Six Sigma?

Six Sigma is best for problems where the solution is not obvious.  Six Sigma is a five-step process model:

• Design,
• Measure,
• Analyze,
• Improve, and
• Control.

The DMAIC model is how scientists solve problems.  They collect data, apply statistical analysis, and isolate the problem.  Then, they analyze the data until they find correlations, test possible solutions, and solve the problem.

Some Six Sigma projects can take as few as three months, while others require 12 months or more to complete.  Six Sigma requires technical experts (“black belts“) trained in the tools, statistics, and solving problems.  Six Sigma works best on isolated problems and can take years to implement company-wide.

Lean can be used at any point in time but is, perhaps, best used to implement a quality culture of continuous improvement.  Lean is a great starting point for building a quality system, since it’s easy to get started, projects are quick, and results can be obtained fast.

Six Sigma is better after a quality program is under way and employees have become accustomed to improvement.  Six Sigma is better at large-scale, expensive problems that you can collect a lot of data around.  Six Sigma is a mature quality approach that requires discipline, trained individuals, and big problems.

My suggestion is to start with Lean and build an improvement culture.  Then, after years of Lean training, implementing lean projects, and resolving the more obvious wastes in your organization, you’ll be ready for a more mature program like Six Sigma.  Some have now started to call this “Lean and Six Sigma”.

So, it needn’t be a case of “either…or”. Instead, it may be a case of the whole being greater than the sum of the parts. Lean and Six Sigma, apart from one another, are very good quality improvement tools. Together, Lean and Six Sigma are great! (Sort of a yin-and-yang, I suppose.)

Try “Lean and Six Sigma”. Let us know how well it works for you.

Why should you implement a lean kanban system?  How can you beat a simplified production system that costs less, satisfies customers more, and takes the headaches out of management?  A kanban is system of signals used in lean to balance the flow of work, materials, and people to get a job done.  Kanbans are used within agile software development, manufacturing, service deployment, construction, and just about anywhere people are implementing lean systems.

Let’s look at the top ten reasons for implementing a lean kanban system.

1. Visualizes your work

A lean kanban translates your production planning into visual kanban boards, kanban cards, or electronic e-kanban signals. A value stream map is used to understand your kanban needs.  Workers can all see what the current production plan is easily and quickly by reading the visual kanbans.

2. Reduces your Work In Progress (WIP)

A Kanban is built by balancing your individual work cells to the pull of customer demand using kanban signals.  Lean balanced flow reduces WIP created by batch sizes that are larger than customer orders.

3. Moves your work along Steadily

A balanced flow is achieved by understanding the takt time or rhythm of customer demand and then adjusting individual work cell batch sizes to achieve the steady balanced product flow.  Your workers jobs are now even, steady, set to a comfortable frequency that satisfies customers and management.

4. Improves your work flow

A steady balanced lean product flow is a great lean process improvement over traditional chaotic systems made of large batch sizes.  The whole system operates together as a team reducing employee stress levels and adding a calm to the organization.

5. Releases your work on demand

New orders trigger the system to produce the next batch.  A balanced system only produces enough products to fulfill customer demand and hence only releases orders on demand.

6. Simplifies your production planning

Your production planning is reduced to adjusting the kanban size as market conditions change.  A steady balanced manufacturing flow sets the order turnaround time eliminating expedited orders and special rush jobs that are the bane of traditional production planning.  In effect, all orders are expedited when you balance the flow to customer demand.

7. Eases your purchase planning

Purchasing becomes balanced with production kanbans and can be simplified even more using e-kanbans that automatically send purchase orders direct to suppliers.

8. Increases your customer satisfaction

The real goal of a kanban is to understand what all customers demand and then focus your production on that customer demand.  When your customers get what they want, when they want it, they become very satisfied customers.  That is the value of a lean competitive advantage.

9. Eliminates your employee confusion

Simplified production planning, simplified purchase planning, and simplified work cells all lead to a simplified system.  Employees can see the simplification and easily understand the flow.  Confusion is virtually eliminated.

10. Minimizes your overproduction risks

Inventory can become obsolete quickly in today’s fast changing marketplace.  A lean kanban will reduce your exposure to excessive older inventory by focusing your production on customer demand instead of production planning.  If you only make what you need then there is little obsolete inventory risk.

Top Ten Reasons for Using a Lean Kanban

1. Visualizes your work
2. Reduces your Work In Progress (WIP)
3. Moves your work along Steadily
4. Releases your work on demand
5. Improves your work flow
6. Simplifies your production planning
7. Eases your purchase planning
8. Increases your customer satisfaction
9. Eliminates your employee confusion
10. Minimizes your overproduction risks

The Lean Network is an Australian not-for-profit organization run by lean practitioners, for lean practitioners with the explicit purpose of disseminating the lean body of knowledge known as LEAN THINKING. Members voluntarily share information about their lean implementation experiences in a spirit of cooperation and willingness to help each other.

The Lean Network meets on a monthly basis for lean Site Visits or lean Knowledge Sharing Meetings.  Lean events occur on the Third Tuesday of each month alternating between a SITE VISIT or a MEETING at the Dept of State and Regional Development in Parramatta, NSW, Australia.

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.