Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
Johnson's purpose in this paper is to revisit and extend his arguments against accounting control systems frequently made over the past several years (e.g., see Relevance Regained), and to recommend an alternative approach to business organization and management.
The main theme addressed at a variety of conferences over the last twenty years has been how American companies can become more competitive. Many approaches have been promoted such as ABC, ABM, cost management, and more recently lean accounting. The problem with most of these approaches is that they provide good answers to the wrong questions. For example, ABC provides a good answer to the question how can we more accurately cost products? But the underlying assumption in ABC and other accounting based solutions has been that accounting information is the appropriate basis for controlling costs and that more accurate product cost will lead to better financial performance. However, a much better question is how can we organize work to eliminate cost and to optimize the whole system? The answer, according to Johnson is to organize work based on the concept of a living system.
Three models are discussed to make the point.
1. Model one is an uneven, unstable batch-and-queue material flow system based on a collection of independent processes. The assumptions are that the whole is the linear sum of its parts and that accounting control is an appropriate way to manage the system. This model is characterized by a mechanical mass production system where standard cost accounting and variance analysis are used to control costs. Minimizing average unit costs in the parts is assumed to be the way to minimize the cost of the whole system. The flaw is the assumption that optimizing the parts will optimize the whole. This is the most destructive aspect of a variance control system. (See the note on Johnson & Broms for a graphic view of this type of system).
2. Model two is a self organizing group of interdependent processes associated with the Toyota production system. The system design recognizes that the whole is greater than the sum of the parts and features nonlinear relationships and continuous feedback. The key is the way the system is designed, not the mechanical concepts of financial control. In fact the accounting system does not enter the shop floor. "The plant... is like a black box that the accounting system does not enter" (p. 6). Emphasis is placed on minimizing total costs, not the average unit cost of the parts. (See the note on Johnson & Broms for a graphic view of Toyota's system).
3. The third model is the living system. The living system is the "ultimate lean" system and the model that will provide sustainability. Johnson concentrates on the first two models in this paper and discusses the living system in the 2006 March/April issue of Cost Management.
The Bumper Story
In this section Johnson provides an example (based on an article by D. S. Cochran) to show the organization and performance differences between two manufacturing plants that produce bumpers. One plant is referred to as Plant M and the other plant is referred to as Plant L.
Plant M is organized around the concepts of Model 1, or the mechanistic type of system. Plant M uses a standard cost control system to achieve low unit cost at each stage of production. An MRP system facilitates materials scheduling and flows through the plant and large inventory buffers are used to deal with the inevitable variations in capacity levels and cycle times.
Plant L is organized around the principles of Model 2, or the self organizing lean system. Plant L's operations are designed to minimize resource consumption at each step where work flows continuously at the average pace of customer demand (takt time). Each operation is performed in a standardized way and the output is delivered to the next step (internal customer) when it is needed. Problems are corrected as they occur and inventory buffers are essentially zero. The work itself is the control system, so there is no need for the external remote control prevalent in a mechanistic system. There are no accounting targets and no standard cost variance reports. Plant L is essentially a self regulating, self correcting system emphasizing the connections between people, not quantitative targets and variances.
Comparing Results for Plants M and L
Some of the performance results for the two plants appear in the table below.
|Overall Measures*||Plant L||Plant M|
|Total cost per bumper||1||>>1.00|
|* Adapted from Exhibit 6 and based on Cochran's results.|
Accounting systems, lean or otherwise, can provide financial results, but cannot explain how the results were achieved. Lean accounting, if viewed as a way to use accounting to control operations is just another form of muda or waste.
* Cochran, D. S., J. Linck and J. Won. 2001. Manufacturing system design of automotive bumper manufacturing. Journal of Manufacturing Systems. (See this article and several related articles on the Collective System Design web site).
Johnson, H. T. 1992. Relevance Regained: From Top-Down Control to Bottom-up Empowerment. The Free Press. (Summary).
Johnson, H. T. 2006. Sustainability and "Lean Operations". Cost Management (March/April): 40-45. (Summary).
Johnson, H. T. 2012. A global system growing itself to death - and what we can do about it. The Systems Thinker (May): 2-6. (Summary).
Johnson, H. T. and A. Broms. 2000. Profit Beyond Measure: Extraordinary Results through Attention to Work and People. The Free Press. (Summary).
Martin, J. R. Not dated. Lean concepts and terms. Management And Accounting Web. http://maaw.info/LeanConceptsandTermsSummary.htm
Martin, J. R. Not dated. Profit Beyond Measure graphics and notes. Management And Accounting Web. http://maaw.info/ArticleSummaries/ArtSumJohnsonBromsGraphicsNotes.htm
Martin, J. R. Not dated. What is lean accounting? Management And Accounting Web. http://maaw.info/LeanAccounting.htm