Unleash the Power of Lean Accounting

Abstract

EXECUTIVE SUMMARY * Lean accounting concepts are designed to better reflect the financial performance of a company that has implemented manufacturing processes. These may include organizing costs by value stream, changing inventory valuation techniques, and modifying financial reports to include nonfinancial information. * Value stream management (VSM) is a different way of measuring and evaluating a company's results and involves changes to decision-making processes. For Wallow, VSM re suited in better communication, reduced inventory and improved decision making. * Steps to implementation at Watlow Electric Manufacturing Co. included identifying the company's main value streams; mapping out key metrics to monitor achievement; organizing into three or four value streams per site; changing chart-of-accounts structure to a few value stream groupings rather than by traditional departments; zeroing out labor and overhead rates from the system and stopping collection of these data; and splitting out material costs from other COS conversion costs and using a memo line in internal financial statements to increase visibility of inventory purchases. * Early challenges included anxiety among many employees and some product managers. It only took a few weekly reviews for the employee team members to take ownership of their assigned metrics. Product managers received decision-making templates and training that pricing should be market-based rather than cost-plus-based. * Watlow now plans to pursue the transaction simplification and elimination aspects of accounting. The company will simplify shop floor transactional processes, incorporate more visually managed processes, and implement better pull-based material flows. ********** [ILLUSTRATION OMITTED] Many companies have pursued manufacturing in recent years as a key strategy for profit growth. However, most companies have kept in place traditional measurement and management tools, preventing them from fully realizing the broad benefits of lean. The finance team at Watlow Electric Manufacturing Co. discovered how to unleash the full power of through the implementation of a nontraditional approach to measuring and managing the company, called accounting. Lean accounting concepts are designed to better reflect the financial performance of a company that has implemented manufacturing processes. These may include methods such as organizing costs by value stream, changing inventory valuation techniques, and modifying financial reports to include nonfinancial information. Lean manufacturing encompasses a variety of concepts and tools, all aimed at simplification of a business to the essential elements, with an eye to meeting the requirements of the customer in a more effective, and therefore profitable, manner. Lean accounting follows the same mantra as manufacturing: Identify value in the eyes of the customer; organize in value streams; apply flow and pull; empower employees; and continually pursue perfection. Like many companies, Watlow began pursuing as a growth strategy for our business a few years ago, using many tools to improve operations. As a participant in many kaizen events (focused incremental process improvement projects), the management team knew progress was being made in many areas, yet found it difficult to quantify the improvement using traditional measurements. In fact, some of the financial measures seemed to contradict some of the improvements that had been made, making the team question whether the payoff for the time invested in applying practices and tools was worthwhile. We had heard the term lean accounting, thinking that it was simply applying the same toolset (pull, flow, etc.) to streamline the financial transactional flows of a business. Our CFO, Steve Desloge, discovered an excellent book, Practical Lean Accounting, by Brian Maskell and Bruce Baggaley, and provided copies to all of the site controllers to read. …

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