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  This traditional accounting system methodology is now outdated as we move from mass production to more individualized and custom production, to virtual production and fulfillment, and to lean manufacturing systems that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

Part two continues the Lean Manufacturing discussion with Quarterman Lee, General Alexander Haig and Dan Miklovic.

A discussion of Lean Manufacturing and its origins broadcast by many PBS stations and syndicated on cable. This Lean Manufacturing segment of “World Business Review” provides a concise summary of Lean and may be useful for those who are new to Lean or who want to introduce the concepts to others.

Thanks to recent reports across all media (ex., “Toyota’s Slow Awakening to a Deadly Problem“, 1 Feb 2010), we’re beginning to see the enormous scope of the acceleration error that has prompted the recall of millions of Toyota vehicles.

Toyota, a company long considered a paragon of lean manufacturing virtue (hence, its assuming the mantle of “World’s Largest Car Maker” from GM), appears to have a serious defect in many of its highest-selling products. “Unintended acceleration” has resulted in hundreds of accidents (reported so far) and the loss of untold lives. In the last two weeks, Toyota shut down the production lines of some of its most popular vehicles to address the situation.

Could it be, as some have suggested, that Toyota has been “hoist with (its) own petard”? Or, to put it another way, was Toyota done in by the very system designed to make it efficient and prosperous?

Just today (1 Feb 2010), Toyota “officially” announced it had found a way to correct the problem (one that goes beyond replacing or doctoring floor mats), but many people aren’t satisfied the manufacturing giant has found the real solution. And even if it has, it will be a long, long time before Toyota recovers from the damage it has done to its reputation.

Questions abound, including “Why didn’t Toyota conduct a thorough investigation when it first learned of the problem (back in 2007?)”, “Why did the company stay with the ‘floor mat’ explanation for so long?”, and “Why didn’t safety bodies (like the NHTSA) do more when they realized there was a problem?”

Toyota’s TPS system appears to be in need of a corrective action — the question is, “Where?” Is the problem in manufacturing only? Customer service? Marketing? Design & development? Outsourcing? Or, did Toyota get too big for its own good?

Toyota’s not the only organization incriminated in this scenario. The National Highway Traffic Safety Administration doesn’t come out of this situation unbloodied and unbowed. There are allegations that it could have and should have done more to keep the defect, whatever its root cause, from getting out of control.

In a half-hearted defense of NHTSA, they appear to have been ahead of many of their counterparts around the globe. Recalls in Europe and elsewhere followed the recalls in the US. Furthermore, every government body is hurting. There isn’t anything they don’t need — the authority to inspect and recall, or enforce laws; more people; more training; and a degree of autonomy, so they’re not called on the carpet (truly, no pun intended) for doing their job.

No amount of corrective action, though, can begin to make up for the people who’ve already lost their lives. (Interesting how in a situation like this, we tend to say, “Lives were lost needlessly“, when the opposite is true. Too many times, lives have to be lost — often in numbers — before action is taken.)

Lessons we might take from this at this “early” stage? One: corporate management is increasingly susceptible to hubris as a company grows.   Maybe Toyota was afflicted with the same disease financial services caught — we haven’t seen a problem in so long, they must all be licked. Not that corporate “attitude” is the root cause of Toyota’s problem, or even a proximate cause, but the “floor mat” story should have given us all pause to reflect.

Two: nothing can completely take the place of testing and inspection. We have safety standards, regulations, etc., in place in the aerospace and food businesses. For better or worse, more is on the way. Why not make the automotive world jump similar hurdles (i.e., make safety mandatory)?

Three: the best designed, most rigorous systems eventually come apart when they’re not paid attention. CAPAs, like anything else in your Quality Management System, have to be applied continually in order for your company and your system to improve. Toyota has said it in so many ways: “Satisfactory” isn’t.

So, what happened? Your ideas?

(P.S. – Not like Toyota needed more bad news, but now they have a braking problem on the newest Prius. What do you think of that?)

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

Forecasting is the art of guessing.  Could there be more science to it?  To make it a science we need data and data is one thing Google has is a lot of  – search data to be precise.  If only we could use the search data to find patterns… wait, Google has released such a product.  Google Trends and Google Insights for Search provide a real time report on query volume or the history of a search term.

Type in keywords and you will find the search behavior over time.  I looked at two popular terms we have been blogging about.   Lean Manufacturing, which fell about 50% over four years, compared to social media, which climbed 400% over 2.5 years.

What does this tell us about those search terms?

Lean Manufacturing has dropped in popularity while social media has climbed (in fact its popularity has doubled in the last six months).  In the Google paper, they explain how this could be used for understating economic activity.  Understanding that more people are searching for “social media” may provide some insight into future purchase behavior of, let’s say, social media sites, blogs, or networking, which are the three fastest rising searches related to social media.

Summarized in a paper called Predicting the Present with Google Trends, Google goes on to explain how this could be used to understand economic time series for the sale of cars, homes, or travel.  It may be too early to tell, but the correlations are pretty close to make some interesting predictions.  Give it a try and see if you can improve your forecasts using Google search behavior.