LEAN ACCOUNTING BEST PRACTICES FOR SUSTAINABLE INTEGRATIONE phần 7 docx

For most companies, a lean transformation represents an enormous change, and many companies have found or are finding the transformation difficult to achieve or sustain. Exhibit 8.2 shows the use of management tools related to lean as reported in the Management Tools and Trends surveys conducted by Bain & Company. Trends are difficult to assess from the aggregated data be- cause recent samples of companies are more worldwide compared to earlier samples when responses were more concentrated in Europe and North Amer- ica. Nonetheless, a large number of companies worldwide use tools and prac- tices associated with lean management. Mark Deluzio is a consultant with extensive experience in lean management, and he estimates that no more than 5 percent of U.S. companies truly use lean management as a comprehensive management system (in a conversation at the 2005 Lean Accounting Summit). While not all companies using tools related to lean management are really in- terested in comprehensively adopting lean, the vast gap between the isolated use of lean tools reported by Bain & Company and Mark Deluzio’s estimate of successful lean management systems suggests that a lot of companies are having difficulty implementing lean. Obstacles to Lean Accountancy 179 0% 10% 20% 30% 40% 50% 60% 70% 80% 1993199419951996199719981999 2000 2002 2004 Year Percent TQM Six Sigma BPR Cycle time reduction Mass customization EXHIBIT 8.2 Lean Management Tool Usage Rates Source: Bain & Company, Management Tools and Trends Survey. ch08_4772.qxd 2/2/07 3:42 PM Page 179 Given the magnitude of the change required, it comes as no surprise that management accountants encounter many difficulties as they attempt to sup- port lean transformations. The same cultural issues that make lean transfor- mation difficult across the organization create problems for accountants. (See Chapter 3 for a discussion of ways that executives can enable the transfor- mation of traditional cultures.) In addition, some of the same professional and educational factors that led to the decline of management accounting present further obstacles for accountants attempting a lean transformation. If these ob- stacles can be overcome, the self-reinforcing cycle can be turned in a positive direction, and management accountants can increase the likelihood the orga- nization will sustain its lean transformation. This chapter examines the obsta- cles to lean accounting, and offers suggestions for overcoming these obstacles. The evolution and adoption of the recent management accounting develop- ments are also examined for insights that may apply to developing accounting to support lean management. 8.1 UNDERSTANDING LEAN AS A MANAGEMENT SYSTEM Anyone who has ever been involved in a significant accounting system change knows that successfully implementing such a change is a challenge. A lean transformation, however, transcends the accounting system. Orry Fiume, former vice president of The Wiremold Company, maintains that a major cause of the low rate of successful lean transformations is managers’ failure to see lean as a total management system. When managers hear “Toyota Production System,” they typically believe that lean applies only to production or manufacturing. They believe that lean is an isolated set of techniques that they can pass along to their factory managers to implement with little impact on the rest of the or- ganization. Or they see lean as a tool box from which managers can pick only the tools they like best, or the tools they feel most comfortable with, or the tools they believe will be easiest to implement. Reflecting the patterns of the Bain & Company research, these managers leave the rest of the tools in the toolbox, adopt only the tools they have chosen within their existing management system, and believe they have implemented lean. Many management accountants have difficulty with lean transformations, struggling to implement piecemeal tools from a system meant to be applied as a unified whole. Unfortunately, most organizations use a piecemeal approach to enterprise change initiatives, so this common misconception about lean is 180 Lean Accounting ch08_4772.qxd 2/2/07 3:42 PM Page 180 understandable. This also makes it easy for accountants to dismiss lean as a “manufacturing thing” that really does not affect accounting. Accountants who actually understand lean as a management system recognize that they are con- fronted with a management system change that mandates an accounting system change. While the change seems more daunting for management accounting, it is also more critical because the existing accounting measurement system can be a significant barrier to change for all areas of the company struggling with the lean transformation. 8.2 CULTURAL COMPATIBILITY WITH LEAN MANAGEMENT An environment where people have to think brings with it wisdom, and this wisdom brings with it kaizen [continuous improvement]. The ‘T’ [in Toyota Production System] actually stands for thinking as well as for Toyota. Teruyuki Minoura 1 Lean management derives its power by capturing the creative abilities of all people. Ideas for improving processes, products, and services come from every- one in the organization, even those outside the organization such as customers and suppliers. All participants in the value stream share in the waste elimina- tion and value creation gains for the end-use customer. People usually will not contribute their creative powers to improvement efforts unless they are asked, they believe their suggestions will be taken seriously, and they believe they will share in the benefits derived from their suggestions. A cooperative orga- nizational culture must be in place, or lean management will not work. Most companies begin their lean transformations without having a cooperative culture in place. “Business as usual” in the United States is the command-and-control culture outlined in Exhibits 8.3A and 8.3B. The command-and-control culture evolved from scientific management and the eco- nomic assumptions of self-interested individuals governed by market forces and enforced contracts. Military analogies are often used to describe management’s role in formulating and executing strategies. The relationship between man- agement and labor is presumed to be adversarial. Extrinsic rewards are required to get labor to follow management’s orders, and monitoring is needed to ensure Obstacles to Lean Accountancy 181 ch08_4772.qxd 2/2/07 3:42 PM Page 181 compliance. In contrast, the cooperative, continuous improvement culture re- quired for lean management emphasizes teamwork, creating win-win solu- tions benefiting all stakeholders. The distinction between management and labor is blurred. Everyone is working to better serve the customer and create more value to be shared by all stakeholders. 2 The cultural differences outlined in Part A of Exhibit 8.3 have enormous implications for management accountants. Managers are the owners and users of knowledge in the command-and-control environment. Workers are supposed to act, not think. Periodic reports provided to management by accountants are reports on workers to enforce compliance. Management accountants guard the information and prepare the reports used by management to enforce compli- ance and “control” the business. Everyone has to think in the lean environment. Innovation and improvement is everyone’s responsibility, and everyone needs information. Real-time, nonfinancial data are critical to respond to customer needs, and improve processes and value streams. Information is for workers, and workers usually gather and control the data they need to perform their roles in satisfying customers and improving processes. Managers are workers that coach and enable other workers. Management accountants become primarily information system consultants. The different assumptions underlying command-and-control and coopera- tive cultures encourage and enable different actions. These actions are summa- 182 Lean Accounting EXHIBIT 8.3A Cultural Comparisons: Assumptions Business as Usual— Lean—Cooperative, Command and Control Continuous Improvement • Shareholder perspective • Stakeholder perspective • Competing individuals: • Cooperating teams: Shared Market forces and contracts goals and values • Product focus • Customer focus • Products cause costs • Work causes costs • Managers are source of • Workers are source of change, workers are costs innovation and learning • Managers own information • Workers own information • Accounting reports ON • Real time operational and workers—compliance customer data FOR workers—learning • Efficient use of committed • Remove constraints, resources eliminate waste ch08_4772.qxd 2/2/07 3:42 PM Page 182 rized in Part B of Exhibit 8.3. A command-and-control culture is not likely to lead to lean behaviors. In fact, a worker or manager in a command-and-control culture is likely to perceive and use information quite differently than a man- ager or worker receiving the same information in a cooperative culture. Kaizen costing, for example, appears to be nearly identical to conventional budget- based performance evaluation when viewed from a command-and-control perspective. Aren’t the Kaizen cost targets really just budgets? Aren’t differ- ences between the targets and actual results just variances? If Kaizen targets are adjusted more frequently than traditional budget targets, isn’t that just a more onerous version of conventional budget-based performance evaluation? Is this just a Japanese term chosen for novelty or to encourage a consulting en- gagement? If more frequent budget target changes are all that there is to Kaizen costing, management accountants can ratchet down budget targets with any- one! The difference is not so much in the data as in how the data are used and in how the culture enables the data to be used. Bob Emiliani, president of the Center for Lean Business Management, main- tains that the two fundamental principles of lean are continuous improvement and respect for people. Many U.S. managers have embraced the continuous im- provement concept, but they try to foster or force continuous improvement in a command-and-control environment where respect for people is lacking. Emiliani describes this as “imitation Lean” as opposed to “real Lean.” 3 Obstacles to Lean Accountancy 183 EXHIBIT 8.3B Cultural Comparisons: Actions Business as Usual— Lean—Cooperative, Command and Control Continuous Improvement • Persuade and sell • Customer relationships • Price-driven purchasing • Supplier relationships • Manipulate output to • Produce output (on time) to control costsactual demand • Unbalance and decouple • Balance and integrate • Elimate workers, cut • Train workers in self- spending management • Build for scale and size • Build for flexibility • Local optimization • System-wide improvement • Bureaucratic control • Empowered local action procedures ch08_4772.qxd 2/2/07 3:42 PM Page 183 In sum, a cultural change and a management system change are necessary for a successful lean transformation, and a successful lean accounting trans- formation requires an accounting system change on top of that. Exhibit 8.4 de- picts the lean transformation environment. The model in Exhibit 8.1 has been expanded to include structure and culture dimensions. A structure dimension is added as well as the culture dimension because most lean transformations include structural changes that unstack the pyramid organizational structure typical of most command-and-control company cultures. Lean principles enable the reorganization of company structure around value streams because the value stream clarifies the contingent relationship between strategy, struc- ture, culture, actions, and measures for all employees. Each of the five dimen- sions influences all the others. Assume a strategy change is the impetus behind the desire for a lean trans- formation. For people in a company with a strong cooperative culture already in place, the strategic demands and cultural influences will directly (and indi- rectly through their effect on actions) support the transformation to lean management and lean accounting. Since most companies attempting lean trans- formations do not have cooperative cultures in place, these companies have to 184 Lean Accounting (Management Accounting) Strategy MeasuresStructure ActionsCulture EXHIBIT 8.4 Accounting, Culture, and the Lean Transformation ch08_4772.qxd 2/2/07 3:42 PM Page 184 make a cultural transformation at the same time they are making the lean trans- formation. Everything hangs in the balance. The culture can help build mo- mentum for positive change, or a failed cultural transformation can generate push-back, impede necessary actions and accounting (measurement) changes, and support reversion to a strategy more compatible with a command and con- trol culture. Lean transformation champions want management accountants to be change agents, helping to build and reinforce the cooperative culture nec- essary for lean to thrive. The change to a cooperative culture can be subverted, dooming the lean transformation to failure if the accounting system continues to support a command-and-control culture. 8.3 OBSTACLES TO ACCOUNTANTS CHANGING TO LEAN ACCOUNTING A cause-and-effect diagram (also known as a fishbone or Ishikawa diagram) for the failure to implement lean accounting is presented in Exhibit 8.5. Causes are organized in the four classic categories, Man, Machine, Materials, and Methods, and the two most commonly added categories, Measurement and En- vironment. Detail of the Man category is presented in Exhibit 8.6. (a) Machine, Materials, and Methods Many firms have invested in enterprise resource planning (ERP) systems to expand their data-gathering analysis and reporting capabilities and efficiency. Other firms have less-integrated systems with more or less stand-alone ac- counting information systems (AISs) and production support systems. Because the vast majority of firms follow traditional management practices, the devel- opers of the ERP, AIS, and production support systems have designed their systems for a traditional management environment. Managers engaged in a lean transformation find to their dismay that their systems, representing a substantial investment in software and training, are not well suited to lean management. Because lean accounting emphasizes simplicity, most of the changes re- quired involve turning off features of the existing systems rather than an extensive investment in new features and systems. For example, the manufac- turing resource planning (MRP) system may be unplugged for production scheduling, but still used for generating bills of materials and for rough capacity Obstacles to Lean Accountancy 185 ch08_4772.qxd 2/2/07 3:42 PM Page 185 planning. Labor reporting is greatly simplified, and variance reporting may be eliminated. The machine (systems incompatibility) obstacle is more a reluc- tance, given the sunk costs, to limit the use of the existing system than it is a requirement of massive investment in new systems. Lean management relies primarily on operational measures rather than financial measures for operational control and to support continuous im- provement. Because of the financial measurement orientation of traditional ac- counting systems, some operational measures desired for lean accounting may not currently be collected. In other cases, the data are collected by the production system, but they are not currently made available when and where needed. (This is part of the systems problem discussed above). Converting to lean accounting often requires accountants or more likely, other workers to manually collect operational data or to program systems to collect additional operational data. In most cases, the additional work required is more than off- set by the elimination of other unnecessary work, such as detailed labor track- ing and inventory tracking. 186 Lean Accounting Failure to implement lean accounting Traditional management training Don’t understand lean management Traditional management training Full costing Financial accounting training Full costing Financial accounting training Cultural Organizational Resource commitments Educational Professional Personal Believe lean is manufacturing only Functional silos Functional silos Traditional culture Existing measures don’t support lean Perceived lack of lean measures Financial accounting training MEASUREMENT MACHINE MATERIALS METHODS GAAP, tax requirements GAAP, tax requirements Lack of resources for lean account training/development Lack of management support for lean accounting ENVIRONMENTAL (Organizational and Cultural) MAN (See Exhibit 8.6) Required non-financial data not collected ERP systems support traditional management AIS geared to financial and tax reporting EXHIBIT 8.5 Cause and Effect: Obstacles to Implementing Lean Accounting ch08_4772.qxd 2/2/07 3:42 PM Page 186 For years, accountants have taken financial data gathered in systems de- signed to support financial and tax reporting and have used that data to gen- erate management accounting reports. Generally accepted accounting principles (GAAP) for financial reporting and income tax rules require that full-absorption costing be used to value inventory and cost of goods sold. Full-absorption costing measures reward overproduction and penalize just-in-time produc- tion, as discussed in Chapter 2. The problem is especially acute during the crit- ical early stages of a lean transformation. Of course, managerial reporting is not bound by financial and tax reporting rules. It is a relatively simple matter to adjust from an inventory value supporting lean (valuing inventory at direct material cost, or maintaining inventory at the value of standard work in process plus a standard buffer of raw materials and finished goods) to an inventory value satisfying GAAP. For example, the appropriate amount of conversion cost can be added to inventory valued at direct material cost with a single ad- justing entry because only the total value of inventory needs to be adjusted to full-absorption cost. Obstacles to Lean Accountancy 187 Cultural Organizational Resource commitments Educational Professional Personal Codependency with traditional management Codependency with traditional management Traditional management training Traditional management training Traditional management training Traditional management training Traditional management training Traditional management training Traditional management training Not an accounting system Financial accounting training Financial accounting training Financial accounting training Financial accounting training Financial accounting training Financial accounting training Financial accounting tr aining Financial accounting training Functional silos Lack of lean management training Lack of lean management training Lack of lean management training Lack of lean management training Lack of trust in lean management Not invented here Prefer traditional culture Believe traditional mgmt is superior Traditional mgmt training Financial accounting training Bias against change Bias against change Bias for complexity Not an accounting system Financial accounting training Functional silos Functional silos Lack of lean acccounting training Financial accounting training Perceived conflicts with GAAP Professional orientation Fear Losing Prestige Fear of Job Loss Fear of Personal Failure Employee Causes for Failure to Implement Lean Accounting Fear of Company (Lean) Failure Unwilling or Afraid of Change Lack of resources for lean accounting training/development EXHIBIT 8.6 Cause-and-Effect Detail: The Man Category ch08_4772.qxd 2/2/07 3:42 PM Page 187 Implementing lean accounting usually requires changes to machines (sys- tems), materials (data), and accounting methods. Like any changes, these changes require an initial investment in effort, equipment, and training. How- ever, the investments required are relatively small. Were they the only obstacles to implementing lean accounting, machine, materials, and methods obstacles would be easily overcome. (b) Measurement If traditional accounting measures supported lean management, there would be no need for an accounting system change. Accounting would not be viewed as an obstacle to lean management, and the discussion of lean accounting would be limited to the elimination of waste from accounting processes. Faced with the reality that traditional measures do not support lean management, the ob- vious follow-up question is, “What measures do support lean management?” Many accountants are at a loss to provide the answer to that question, but their lack of awareness does not mean the answer is not available. The measurement problem is not a lack of suitable measures but a lack of awareness of those measures. This lack of awareness can be overcome through education in lean management and lean accounting—education that, unfortunately, is missing in the traditional financial accounting–oriented education and training in the accounting profession. (c) Environment (Organizational and Cultural) Cultural change is difficult for everyone regardless of discipline or functional area. For accountants, however, cultural change may be particularly difficult. Despite the widespread dissatisfaction with traditional accounting and claims of lack of relevance, traditional accounting reports (based on internally gen- erated financial measures of cost and revenue) continue to be the dominant form of information for management control and decision making in command-and- control cultures. H. Thomas Johnson refers to this as “remote control manage- ment.” Top managers allocate corporate resources to divisions based on reported financial results, similar to the way mutual fund managers allocate invested cash to different corporate stocks. If division managers cannot manage opera- tions to yield the desired reported earnings, they manage earnings. 4 Many earn- ings management practices, such as producing unneeded inventory, channel stuffing, and deferring maintenance or research-and-development efforts are 188 Lean Accounting ch08_4772.qxd 2/2/07 3:42 PM Page 188 [...]... the processes and information needs, and so they can experience firsthand the power of lean management (b) Sparking a Lean Transformation from Accounting What about companies not currently undergoing a lean transformation? Can accounting drive a lean transformation? Accounting need not trail in the lean transformation, but it would be very difficult to lead a lean transformation from accounting without... already using the BSC prior ch08_ 477 2.qxd 2/2/ 07 3:42 PM Page 201 Obstacles to Lean Accountancy 201 to embarking on a lean transformation should find the BSC a useful tool for promoting lean (d) Lessons for the Development of Lean Accounting ABCM, GPK/RCA, and BSC have all emerged from management accounting practice Academics identified common principles and themes in the practices of innovative companies,... especially Chapter 4, pp 57 72 3 Bob Emiliani, with David Stec, Lawrence Grasso, and Jim Stodder, Better Thinking, Better Results: Using the Power of Lean as a Total Business Solution (Kens- ch08_ 477 2.qxd 2/2/ 07 3:42 PM Page 2 07 Obstacles to Lean Accountancy 4 5 6 7 8 9 10 11 12 13 14 15 16 2 07 ington, Conn.: Center for Lean Business Management, LLC, 2003), Chapter 8, pp 240–2 67 See Note 2, pp 16–53 H... (CMA) as more appropriate for careers in industry The financial reporting emphasis obstacle would be reduced if the CMA becomes the preferred certification for ch08_ 477 2.qxd 192 2/2/ 07 3:42 PM Page 192 Lean Accounting careers in industry Making an understanding of lean management and lean accounting essential to achieving the CMA could be a major step toward easing the lean accounting transition in... lean accounting transformation Specific actions to be taken will depend on the current state of the lean transformation in the organization As the cause-and-effect diagrams illustrate (Exhibits 8.5 and 8.6), many of the obstacles to lean accounting are at least in part caused by a lack of understanding of lean management To support a lean accounting transformation, accountants must understand the lean. .. industry if companies attempting a lean transformation knew that CMAs were familiar with lean management and lean accounting Thus, a reinforcing cycle could be created with lean accounting enhancing the value of the CMA certificate and the CMA certificate promoting the understanding of lean accounting The economics of the textbook market is also an obstacle to innovation in accounting education In a conversation,... transformation from accounting without strong support from top management and support in production Still, accounting can plant the seeds for a lean transformation by gathering and reporting on operational metrics that support lean management For ch08_ 477 2.qxd 206 2/2/ 07 3:42 PM Page 206 Lean Accounting example, a report showing favorable efficiency variances could be supplemented with data showing... mean that ABCM in a lean environment becomes a technique applied on a limited basis In sum, ABCM has limited value-adding applications in a lean environment, but developing a com- ch08_ 477 2.qxd 2/2/ 07 3:42 PM Page 1 97 Obstacles to Lean Accountancy 1 97 prehensive ABCM system with cost pools for all (or even many) activities would be wasteful at a lean company (b) Resource Consumption Accounting (RCA) According... and a cultural change while making the accounting system change The principal barrier to lean accounting is the cultural change, not the accounting system change 8.5 OVERCOMING THE OBSTACLES The resistance to lean accounting has little to do with the accounting and a lot to do with resistance to lean management and a cooperative, continuous improvement culture Lean accounting techniques are now fairly... exposure to lean management concepts in their training, and many companies try to implement some lean tools or concepts in production to keep up with (or gain an edge on) competitors Often, ch08_ 477 2.qxd 204 2/2/ 07 3:42 PM Page 204 Lean Accounting lean is mistakenly seen as a set of tools for production efficiency rather than as a management system requiring a cultural change The chances for a successful . consumption accounting. The history of adoption of these management accounting changes may provide lessons for overcoming the obstacles to lean accounting. 194 Lean Accounting ch08_ 477 2.qxd 2/2/ 07 3:42. necessary for a successful lean transformation, and a successful lean accounting trans- formation requires an accounting system change on top of that. Exhibit 8.4 de- picts the lean transformation. transformation to lean management and lean accounting. Since most companies attempting lean trans- formations do not have cooperative cultures in place, these companies have to 184 Lean Accounting (Management Accounting) Strategy MeasuresStructure ActionsCulture EXHIBIT