Posted by: Wayne A. Marhelski | November 12, 2009

Embrace the Enemy?

accounting
In all too many instances, there are complaints that accounting departments are a barrier to the Lean transformation. There is even a movement from some proclaiming that traditional accounting methods are too contrary to appreciate the benefits of lean and a newer approach referred to as “Lean Accounting” is the answer. This belief comes from proponents claiming that Lean Accounting better aligns accounting methods with the reality on the shop floor and the results that Lean can produce. The reality though is that there is a larger hurdle to jump in trying to convince accountants that traditional methods aren’t applicable and that a new method needs to be used.

A very large challenge in adopting the Lean Accounting approach is in overcoming the inertia present within the accounting profession. The education system still concentrates on traditional accounting principles and techniques. Another challenge is that CPA’s (Certified Public Accountants), at least in the United States, are required to follow GAAP (Generally Accepted Accounting Principles) so their hands are largely tied. This is further reinforced when one considers that independent auditing firms also conform to GAAP and expect to see reports and statements to which they are accustomed.

So What’s a Lean Leader to Do?

The first and most important element is to sit down with the controller, CFO or other financial person in the organization and understand the priorities for the company. Is the company focusing on growth, by growing sales volume or the ‘top line’ by capturing market share? Or is the goal to improve the cash flow, or how much  and when, money flows into and out of the company. The question isn’t whether or not Lean can affect these particular areas, because it can and is a proven approach when applied correctly. The challenge is how to take the accounting world’s language of direct versus indirect labor, variable versus fixed costs and many other unique terms, and wrapping them around the language commonly used by Lean champions: Kanban, takt, cellular manufacturing, TPM (Total Productive Maintenance), SMED (Single-Minute Exchange of Die), etc.

“But I’m not an accountant or a CPA, so how am I supposed to convince these people that Lean is the right approach?” Having a conversation with the financial group is mandatory, no question about it. So, being able to speak some of the native tongue, in this case the language of accounting, will go a long way to understanding exactly what they are saying. Check out a local college or university and see if they offer a course, “Finance for the Non-Financial Person”. I’ll be highly surprised if they don’t.

Second, you need to align the Lean approach to the needs of the company, think Hoshin Kanri (Policy Deployment). Once the direction is understood, it then becomes possible to build a roadmap identifying the results necessary to benefit the company and help achieve the desired outcome. In fact, I suggest you have as many conversations as possible, until at the very least you’ve worn them down enough to give this whole ‘Lean thing’ a shot.

As you make improvements, it will help to know how they may impact the finances of the company in order to report them in terms that top management will embrace. Commonly used terms by those involved in creating change, such as cycle time or takt, mean little to those who are more focused on language such as gross margin or SG&A (Selling, General and Administrative Expenses). What it means is that your success is highly dependent on getting the key decision makers on board, and keeping them there. Reporting an increase in Sales per Employee is much more meaningful to this crowd than simply claiming a 10% productivity improvement. It’s the terms used that can make all the difference.

Since cash is the lifeblood of a business, and the accountants are the ones who manage the cash, they can make a Lean leader’s life easier or harder based on how well the objectives are aligned. As the saying goes, “Keep your friends close, and your enemies closer.”

Submitted by:
Wayne Marhelski
VP Global Gas Sourcing
Sensus
wayne.marhelski@sensus.com


Responses

  1. Wayne:
    Contrary to the popular myth, I have not found accountants reluctant to change their accounting systems providing you approach the people in the ways you suggest. You must “speak their language” and take account of their concerns.

    Controllers and CFO’s are – quite rightly – very concerned that changes will not impact their GAAP reporting and inventory valuation. When they learn that Lean Accounting methods are 100% GAAP compliant, that there are 7 fully auditable methods of valuing inventory, and that auditors of every size and stripe have found Lean Accounting methods to be acceptable; then they are happy to move ahead and address the problems Lean Accounting is designed to solve. In fact, of then the accounting people are fully aware of the shortcomings of their methods, but prior to Lean Accounting, they did not have other methods to chose.

    Brian Maskell

  2. I haven’t found an accountant yet that isn’t interested in helping to find ways to improve the bottom line. If the purpose of Lean is to eliminate waste, somehow the prospect of improving profitability is inevitable. If the opportunities are real, the numbers will show the results.

    I agree that a good lean practitioner should become familiar with accounting terminology. If the goal is to improve the bottom line, it is imperative to understand where the “cash” is going.

    The reason why many lean initiatives and improvement efforts fail is that accounting hasn’t been involved up front. The key is to understand that something actually has to change in order for the bottom line to change! Reducing cycle times and improving quality is great but how is it measured? To be more specific, how is it measured in financial terms? Headcount, Material Savings, Increased Sales, Reduced Overhead?

    Bridging the language gap between operations and finance has been a struggle for many companies. The numbers always tell the story – no matter how well you spin it. I agree that getting to know your accountant is one of the best moves you can make, not just for today, but any day.


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