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17/03/2017 09:17:34 AM

What is Lean and Why Should CFOs and Accountants Care?

The implementation of Lean can require substantial changes in management accounting and reporting and significant changes to the role of management accountants. For non Lean organisations, knowledge of Lean may enable CFOs to advocate for the potential benefits of implementation and/or to learn from the less complex management reporting performed in Lean organisations.

1. What is Lean?

Lean is a continuous improvement system that developed out of the Toyota Production System.  Through the implementation of Lean organisations have managed to virtually eliminate customer delivery lead times, double productivity, reduce space requirements by half and inventory by up to 80%; all with minimal investment in new equipment. Originating in manufacturing, the Lean approach is now increasingly being used in service industries such as government, health care and financial services.   While Lean has continuous improvement tools, such as 5S (order, cleanliness and visibility in work spaces), the 5 whys (root cause analysis) and value stream mapping, it is much more than these tools. Lean is an enterprise wide management philosophy involving changes in management systems, culture, organisational structures, processes, performance measures, employee skills and rewards.
 
Lean focuses on providing customer value to meet customer expectations on product/ service attributes, quality and timely delivery.   A core principle of Lean is continuous improvement focusing on enhancing processes, eliminating waste and reducing inventory levels.   A production system of flow is developed with one-piece flow the ideal and batch sizes minimized.  Production is pulled through the system from customer demand rather than being produced to inventory for later sale.   
 
Under Lean the organization is restructured from the traditional functional structure to value streams (all of the resources required to produce a family of products from order to delivery and including support staff, such as management accountants) and production organized into cells.  This structure enables a greater focus on customer value and reduces the silos and conflicting performance measures of traditional organisations. Respect of employees is a key plank of Lean with employees empowered to improve processes and solve problems.  
 
2. So Why Should CFOs and Accountants Care About Lean?
 
Lean has significant implications for CFOs and accountants in organisations already on or commencing the Lean journey but also for those in non Lean organisations.
 
- For CFOs and accountants in Lean organisations:
 
a. Management reporting needs change in Lean organisations. Restructuring from functional organisational structures to value stream structures and flaws in traditional management accounting in supporting Lean typically result in substantial changes to management accounting and reporting processes.  As control moves from hierarchical management control to the workers and the focus on continuous improvement increases, information that is timely, relevant to the work performed and understandable by non-accountants is required.  Management information needs to address organizational objectives such as customer value, quality, continuous improvement and elimination of waste, reduction of inventories, increasing available capacity and support decisions on the utilization of freed up capacity. Traditional management accounting and reporting does not meet these needs producing performance information weeks after events happen and in a form that is not understood by most workers. Aspects of standard costing systems and budgeting work against the principles of Lean by motivating managers to produce large batches and produce above current customer demand.
 
b. The drive for continuous improvement, efficiency and elimination of waste is applied to all processes including accounting processes.   While Lean provides tools to improve accounting processes, the real impact comes from the philosophy and drive to reduce waste putting the microscope on complex and time intensive accounting processes such as the annual budget cycle and intensive data collection for costing systems.
 
c. The role of management accountants changes substantially. With the restructuring to value streams, management accountants are moved out into the value streams. The elimination of much of the mechanical activity associated with traditional budgeting, costing and management reporting frees management accountants to get involved in Lean continuous improvement activities and the analysis of opportunities to utilise operational capacity freed up through Lean implementation. In Lean enterprises management accountants can move from being "bean counters" beyond the aspirational role of "business partners" to true members of the operations team who deliver customer value. This change in role, while exciting, will be a challenge for many management accountants.
 
- For CFOs and accountants in non-lean organisations:
 
a. Understanding Lean enables commercial minded CFOs to consider and, where relevant, advocate the implementation of Lean. Benefits achieved through implementing Lean are impressive across an expanding number of industries. As more companies implement Lean they will encourage their suppliers to take the Lean journey in order to improve delivery times and pricing.
 
b. Lean organisations that have successfully implemented Lean accounting provide examples on the implementation of streamlined accounting processes. While issues of traditional management accounting and reporting are magnified in Lean enterprises they also affect non Lean organisations. Moving away from detailed annual budgeting has been advocated by the Beyond Budgeting movement, whilst problems with traditional management reporting and costing have received much attention and Balanced Scorecards have become popular [iii]. The implementation of new approaches are often resisted by executives and finance professionals due to the way things have always been done and inertia. Successful Lean enterprises can show how things can be done differently. Not all Lean accounting is relevant for non Lean companies (for example value stream reporting) and even in Lean organisations changes involve a journey which involves executives experience with the inadequacies of legacy methods and becoming comfortable with alternative controls introduced.