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.
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.
Traditional Accounting is Outdated
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This traditional accounting system methodology is now outdated as we move from mass production to more individualized and custom production, to virtual production and fulfillment, and to lean manufacturing systems that are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.
Economies of Flow
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.
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.
Profit: an Accounting Number
Businesses run on cash, Not Profits! 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.