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days of anything that smacks of creative accounting, theres a quiet revolution unfolding among lean manufacturers. The idea creeping into the heads of a few radical thinkers is that the financial numbers reported should actually reflect the underlying reality of the business. Armed with more relevant information, business unit managers could then make better decisions when it came to product pricing, make-versusbuy questions, and product and customer rationalization. Falling under the general heading of lean accounting, the approach does not require any new math or tricky algorithms. But it does demand a fundamental change in perspective. Wayne Thompson, global finance manager for value stream analysis at Southco, a Concordville, Pa., company that makes latches, fasteners and hinges, offers an example of this approach to decision making. A unit of his company had an opportunity to bid on a component with a market price of $3.75. The standard accounting showed it would cost $4.61 for the unit to make and sell the product. We took a look at it and recognized that from a traditional cost accounting standpoint, this would be a loser, says Thompson. When in fact, if you go through lean processes and
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born of frustration. Many manufacturers that have used the techniques championed by Toyota to reduce set-up times and convert from batch production methods to workcells and one-piece flow, dont immediately realize the results on the bottom line. In fact, during the transition, which can stretch over a number of years, net earnings take a hit as obsolete inventory is
quent lower sales volumes. This reduced overhead absorption, which increased the overhead and led to an increase in prices that reduced sales even further. Hastening this death spiral, rather than source products from this plant, which had plenty of available capacity, other business units within the division purchased parts from outside suppliers because of non-competitive transfer prices based upon standard cost plus 15%. If the products had been priced to accurately reflect the incremental cost of production, the internal customers would have paid less in-house than they did outside. Eventually, company executives chose to shut down the under-utilized plant. At heart, the lean accounting approach takes a simpler look at what goes on between the inputs and outputs of a production process, tracking costs in less-minute detail, expensing material as soon as its pulled into production, and eliminating work orders, the tracking of transactions and the reporting of variances altogether. Many manufacturing plants today rely on such activities to monitor product costs and track the value of inventory. But, lean-accounting advocates say that such procedures are inherently wasteful. Before a manufacturer can drop such activities, however, the production operation has to be far enough into lean manufacturing to be organized by value streams, a customer-centric structure that pulls together all of the fulfillment functions from order receipt to delivery. Under a lean accounting system each value stream has its own, slightly modified, profit-and-loss statement. Traditional financial statements are still needed to satisfy audi-
Everything Is A Process
extends the push to eliminate waste within companies that have embraced lean manufacturing. Just as there can be excessive transactions on the plant floor, there are unnecessary transactions, reports and sign-offs within accounting processes. In fact, as part of the transformation to a lean enterprise, the same techniques need to be applied to administrative functions to free people to work on process-improvement activities, proponents argue. This may begin with cutting the number of vendors and identifying key suppliers that can reliably deliver material and components under blanket purchase orders, thereby decreasing the overall volume of transactions. The application of lean tools to administrative functions mirrors the transition on the plant floor where batch-processing methods are replaced by multi-functional workcells that speed the flow of paper and information and reduce the amount of queue time between value-adding activities.
ken down into recognizable categories. If the company is trying to rein in procurement costs, for example, the impact of such efforts would be readily apparent on the P&L.
ddrickhamer@industryweek.com
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