Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
JIT and Lean Enterprise Main Page |
Lean Accounting Main Page
The purpose of this paper is to examine the major considerations, actions, and potential issues related to lean management reporting in a lean enterprise.
What is Lean?
Lean involves an enterprise-wide continuous improvement initiative including changes in the company's culture, structure, processes, employee skills, and performance measurements. The main principles and practices of lean include the following:
Customer value - A focus on creating value for the customer including product and service capabilities quality, speed of delivery, and price.
Reduce waste - A relentless focus on eliminating waste from processes, e.g., eliminating excess inventory, wait time, rework, unnecessary movement, inefficient processes, and wasted talent.
Continuous improvement - Improving all processes to increase customer value.
Value stream structure - Structure the organization into value streams that include direct and support activities required to produce a product or service from customer order to delivery.
Continuous flow - Products continually move through production processes, ideally as a single unit.
Pull - Customer orders trigger production.
Respect for people - People are empowered, cross-skilled, and heavily involved in the continuous improvement of processes.
Lean Management Reporting vs. Traditional Management Reporting
Timing - Lean reporting requires timely information for rapid identification of problems and improvement initiatives. Traditional reporting is frequently produced two weeks into the following month.
Transparency - Lean reporting requires information that is easily understood by all employees. Traditional reporting includes financial information and variances that only a few accountants understand.
Structure - Lean requires reporting on a value stream basis. Traditional reporting is focused on cost centers and departments rather than value streams.
Focus - Lean reporting focuses on customer value, continuous flow, and customer pull. Traditional reporting focuses on financial measurements that motivate large batch sizes, and overproduction. Traditional measurements are based on treating inventory as an asset, and allocating overhead based on production volume.
Impact of Lean - Lean reporting accurately reflects the benefits derived from implementing lean concepts. Traditional reporting distorts the impact of lean, e.g., reducing inventory causes overhead costs to be expensed rather than added to inventory, causing a decrease in short term profitability in traditional financial reports.
Decisions related to Capacity - Lean reporting requires information to support decisions related to using idle capacity. Traditional standard costing motivates production on a push, rather than a pull basis. This works against freeing up capacity and using it in a more beneficial way.
Control - Lean reporting focuses on control at the employee level. Traditional reporting is based on budgets, variances, and top-down control with little input from employees.
Emerging Forms of Lean Management Reporting
Lean management reporting generally involves three levels:
Daily/hourly reporting of cell performance - White boards or notice boards are visible at the cell level including data on volumes, quality, speed of changeovers, and equipment effectiveness.
Value stream box scores on a weekly basis - Box scores include operating measurements (e.g., on-time delivery, first time through percentage, sales per person, average cost per unit), capacity measurements (e.g., productive, nonproductive, available), and financial performance measurements (e.g., revenue, material costs, conversion costs, and value stream profit).
Value stream income statements on a monthly basis - Income statements that show sales, cost, gross profit, value stream profit, and return on sales for each value stream. Not all costs are allocated to the value streams, e.g., corporate cost are reported separately as business sustaining or corporate resources. The emphasis on visual controls, employee empowerment, reduced inventory, and simplified financial reporting usually results in shutting down standard cost systems.
Implementing Lean Management Reporting
Successful implementation of lean management reporting requires:
Overcoming barriers to lean reporting - Barriers include accountants resistance to change, and the lack of senior management support. Educating accountants and managers on lean enterprise concepts, and the limitations and flaws of traditional accounting measurements helps overcome these barriers.
Managing and communicating with affected stakeholders - Stakeholders include senior managers, directors and shareholders, members of the corporate office, bankers, employees, and auditors. All of these stakeholders need to understand how implementing lean concepts affects inventory and short term profitability.
Timing the implementation with the rollout of lean - A value stream structure must be in place before lean accounting, costing, and management reporting can be implemented. Existing management reporting should be retained during a pilot system while everyone involved learns about lean enterprise concepts and its implications. Value streams, box scores, and value stream income statements can be developed for the pilot value streams. Then, lean training and activities can be implemented across the organization, including a value stream structure (including appropriate changes in the general ledger), box scores, and value stream income statements. After implementing cost analysis consistent with a lean enterprise, standard costing can be eliminated. Continuous improvement should be applied to lean management reporting along with everything else in the organization.
Addressing various technical concerns - For example, technical concerns include what metrics to report, how to collect the data, and the technology used to produce the lean management reports.
Developing Value Stream Income Statements
There are six major steps involved in developing value stream income statements as indicated in the illustration below.
1. Design value stream income statements - Statements will differ across industries and organizations based on the relevant cost categories for each company.
2. Link resources to value streams - Equipment, as well as direct and indirect staff are assigned to the value streams. Although the costs of support staff that work within the value streams are included, corporate costs are reported separately as indicated above. Complications include allocating "monument" costs or the cost of large items of equipment involved in multiple value streams, and in estimating the value of inventory associated with each value stream.
3. Identify data requirements - Determining the data required to produce the value stream income statements and where the data are stored, including how to allocate the monument costs, and how to estimate inventory values.
4. Develop data collection and reporting technology and processes - This includes determining how often data are collected, and how the statements will be produced and distributed. This step includes the required changes in the general ledger, e.g., developing appropriate cost codes.
5. Implement technology and processes - Implement, test, and refine the systems and processes developed in the previous step.
6. Continuously improve reports and processes - Refine the statements based on feedback from users. Turn off standard costing and budgeting processes and systems.
Conclusion
Implementing lean enterprise concepts and lean management reporting is a journey that involves educating all stakeholders on the concepts and benefits of lean, restructuring the organization into value streams, eliminating traditional management reporting, and replacing it with value stream reporting that supports a lean enterprise.
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