Real Numbers

by Orest J Fiume

  The underlying concept of lean is to remove waste in all forms and become a time-based competitor. Three of the underlying tenets of eliminating waste are:

  Pull Scheduling: Make what the customer is buying right now instead of building to a long-range forecast.

  Takt time: The rate at which the product must be built to satisfy the customer. Change your processes so that they run only at the rate at which output is required.

  Flow production: Physically arrange your processes to eliminate processing things —products or transactions —in batches. Eliminate as much movement and waiting between operations as possible.

  These tenets apply to all of a business’ processes, including product design, manufacturing processes or administrative support processes.

  There are more advantages than simple cost-savings to becoming a lean company. There are many examples of where people will pay premium price for on-time delivery of a product or service. For example, anyone can mail a letter with the U.S. Postal Service for $0.37 and feel confident that it will be delivered in two or three days with a high degree of consistency. Yet, a little company called FedEx has built a $20 billion business on the promise of delivering letters and packages the following day. People gladly pay $15 rather than $0.37 in order to gain a 24-48 hour improvement in delivery time.

  FedEx could not have become the company it is without focusing closely on its process, removing waste and concentrating on that which adds value. No matter what the industry is, providing timely service that adds value to the customer is what yields results.

  The Wiremold Company and Lantech are manufacturers in two very different industries. Wiremold produces wire management systems and power and data protection products. It has facilities in six countries, from the U.S. to Europe and the Far East. Lantech makes packaging machinery such as stretch wrapping machines and palletizers and has operations in both the U.S. and Europe. Although we make different products and serve different markets, we have much in common.

  We have adopted lean as a business strategy. We recognize that by being a time-based company, reducing the amount of time it takes to do every operation, we can increase the value we deliver to our customers and have a competitive advantage.

  We know that lean is not a program-of-the-month. It is an operating philosophy. Programs have an end; lean does not.

  We consistently use kaizen as the methodology for implementing improvement. Kaizen employs small action-oriented, cross-functional teams working within relatively tight time limits —usually between two and five days —to implement targeted improvements.

  We understand that lean is not just a manufacturing discipline. It is an operating philosophy that affects the entire organization. Both companies view our enterprises holistically, with every business policy and practice from sales to accounting supporting the lean philosophy. If policies or practices do not support lean, they are changed.

  Over the years, both authors have had the opportunity to work with companies that are attempting to emulate our success. It has been informative to see the patterns that emerge. Most often, we see manufacturing companies being led to lean philosophies by an operations manager. Often, these managers are so intent on the excitement of transformation; they neglect their support operations, which is a bit like starting on a train trip without checking to see that all the cars are latched together. In every company that begins a lean journey without addressing its support systems, accounting becomes a barrier to transformation.

  One of the nation’s premiere window makers, Pella Corporation only realized in retrospect the truth of this need to latch together all support systems. Pella was first introduced to lean when three executives —representing operations, engineering and finance —attended a TBM workshop. When Mel Haught, Gene De Boef and Herb Lienenbrugger returned to Pella, they donned jeans and flannel shirts and went out to the factory floor to begin the company’s lean revolution together.

  “Thinking back, it was critical that the three elements were all represented at the December workshop: manufacturing, finance and engineering. I think if any one of us had come back by ourselves, we would have had a much more difficult time convincing everyone to get involved,” said Mel Haught, former president and COO, now Pella’s CEO.

  Now 10 years into their lean journey, Pella’s lead time has dropped by as much as 65 percent while sales have more than doubled. Profits are up six times; delivery performance is best in class. Finance has been a full partner throughout the transformation.

  Current accounting systems were mostly developed in the early 1900s to support manufacturing products in batches. These same systems now send wrong —and sometimes disastrous — signals in a lean environment. Fortunately for Lantech and Wiremold, both companies are led by CEOs who not only allowed, but encouraged new exploration into restructuring accounting to properly report the improvements being made. We wanted to match the company-wide efforts at waste elimination. Thus, through trial and error, our idea of Lean Management Accounting evolved.

  In this book you will find a few clear, repeated themes that, at this point, you may not agree with, but which we have found to be absolutely true:

  The CFO has the capacity to significantly add value to a company’s efforts to develop and implement strategies to become world class. Accountants can and must transform themselves from focusing on transaction processing —or bean counting —to becoming valued business partners who contribute meaningful information for decision-making purposes.

  Financial statements, one of the major products of the accounting process, must be presented in a manner that can be read and easily understood by non-accountants. The mystique surrounding traditional financial statements can be finally excised with Plain English Management Financial Statements (Chapter 6).

  Accountants must change focus from Cost Accounting to Cost Management. We must abandon our obsession with developing a unit cost for each of our products, and lose the associated horrors created by standard cost accounting and its related concepts of absorption and variance analysis. Unit costs are truly only an estimate, given the number of subjective allocations that go into the sum, and often lead to poor decisions. Understanding costs at a higher level and providing tools to manage them better should be our real goal.

  Mind what you measure. To paraphrase an old saying, you are what you measure. All companies attempt to establish metrics to determine if they are achieving their goals. Unfortunately, many of these measures are too complex for the average worker to be actionable, and some create dysfunctional behavior.

  All accounting systems contain waste. As with any other business process, accounting processes can be improved to eliminate waste and allow for more timely reporting of valuable information.

  The annual budget process for most companies is approached with dread and sometimes, derision. Budgets, however, can be meaningful.

  Understanding lean and how it applies to the entire organization gives a company superior advantage in the world of mergers and acquisitions. By being able to see lean opportunities in target companies, the lean buyer is in a position to outmaneuver companies interested in the same target. The lean buyer does this by recognizing that it can pay a higher premium to the seller while still decreasing the payback period for its investment.

  If all this sounds like alchemy, be assured it is not. It is hard work. In the following pages, you will find concrete examples of actions we took —with the help of many people in our organizations —to achieve these results. We believe that this book will be helpful to the CEO, CFO, and all leaders of those companies that have embarked on the lean journey. Even if a company has not chosen this route, we believe that a CFO can make use of many elements within lean management accounting to better his processes.

  When introducing these concepts to the skeptical, one of the objections we often hear is that of scalability. “My company is smaller than yours and lacks the resources, so we couldn’t possibly do this.” We hear, “My company is muc
h bigger than yours and our complexity prohibits this sort of thing.”

  But we have seen that these principles can be successfully implemented in any company —whether it is manufacturing or service-related —of any size. A smaller company needs to do this because its resources are limited and the hidden waste hinders them. Large companies need to do this because size has introduced unnecessary complexity that must be eliminated before a more agile competitor steals its business.

  In all companies small, medium and large, adopting lean as a business strategy has significant benefits for the customers, for employees and shareholders. Lean manufacturing is not enough. Lean engineering, lean marketing and distribution and purchasing and lean accounting must be implemented if we are to embrace future success.

  The journey is long, but the rewards are many.

  2

  From Bean Counter to

  Business Partner

  When a student of French works toward a college degree, it is not with the goal of simply speaking French. True, they should be able to speak the language, but the real purpose is to teach or translate, or maybe enter the field of international relations. Likewise, the goal of an accounting education is not to prepare for a lifetime of recording debits and credits, but to learn a language and tools to assist a business toward better performance.

  So, we go to school for four years or more to learn accounting techniques and we figure, if universities offer graduate studies in Accounting, surely it cannot be simple. With this in mind, we focus on complexities such as process accounting, consolidation and FASB pronouncements and end up learning and using an entirely separate language. We don’t talk about how many widgets we need to make; we talk about volume variances. That language separates us from our colleagues in operations, sales and other business functions. Because we’re not using simple, plain language, the gap is widened further.

  We accountants are not the only ones creating a protective niche with language and concepts. Engineers, lawyers and IT professionals all create and then protect their own slang. Together, we have created something like a Tower of Babel; with accountants doing a particularly good job laying the bricks of obfuscation. Before we add to the general miscomprehension, we should clearly explain a few of our terms.

  There is a difference between bookkeepers, accountants and financial analysts. Bookkeepers record transactions such as bill payment and money collection. These are clerical positions, usually accomplished without a college degree. Accountants might spend a certain amount of time bookkeeping, but they are also responsible for producing financial statements and some of the other more demanding aspects of accounting. Some accountants specialize in taxes or acquisitions. Finally, the financial analyst interprets information —such as analyzing the return-on-investment of a particular machine or calculating company valuation. There are different ways to look at the work or to break down work responsibilities, but as a group, these are the people responsible for providing all the financial information and activities a company requires. In this book, all of these positions will be referred to collectively as accountants.

  Our goal is to break down the walls between these separate activities, and then break down the walls between accounting and the rest of the organization. We see too many accountants on the sidelines when they are needed as an integral part of the organization. If you work in an accounting department, look at where your department is and where people go during the day. Do the accountants come in, sit at their desk and remain fixed there all day long? Are they far from the rest of the action? Do they ever go to the site where parts are being purchased, where products are being designed? If they do not, if people from throughout the business have to come to accounting to seek information, it is a good indication that the accounting team is sidelined. We cannot remain immobile and hope to be a vital part of the business.

  Changing the financial function, even radically, is not a new concept. The Financial Executives Research Foundation (FERF) has been publishing studies on this subject for years. “Finance people can be more effective by getting to know the business and helping their manufacturing and marketing colleagues make better decisions, instead of being functional stars concerned with purely financial matters,” one study stated.1

  1 “The Empowered Organization: Redefining the Roles and Practices of Finance” Financial Executives Research Foundation, 1994.

  “Finance people have sometimes suffered under the image of ‘naysayers’ and ‘bean counters’ that were primarily concerned with control and budget variances.

  “The emphasis of financial practice is shifting away from control and more towards business advocacy and providing value-added services.”

  The following year, another study found that, “true reengineering demands a radical rethinking of everything that is done in finance. The challenge is not simply to ‘tweak’ and ‘tinker’ with functional processes. Reengineering requires focusing on structural change and looking at the various activities within finance from a broader, cross-functional perspective. The vision is one of driving down transaction processing costs, redirecting the flow of work toward more valuable kinds of analysis, and earning for the finance staff an expanded role in strategic decision making.”2

  2 “Reengineering the Finance Function,” Financial Executives Research Foundation, 1995.

  These studies were published in 1994 and 1995, respectively. Still, the message seemed lost. In a 1998 follow-up, “Changing Roles of Financial Management: Integrating Strategy, Control, and Accountability,” the authors found that financial executives see themselves in a more positive light than their non-financial peers:

  “In follow-up discussions with executives and managers (especially non-financial managers) at other firms…many of these managers indicated that the command-and-control and conformance orientations were alive and well within their firms. This feedback led us to wonder if a ‘rhetoric/reality’ gap might exist between the perceptions of financial managers and non-financial managers.”

  This study included the results of a survey of non-financial managers, in which only 32 percent believed that their financial people were actually involved in the business and just 11 percent believed that their financial people were responsible for integrating business operations.

  However, 29 percent believed that their financial people were in place for “oversight and surveillance purposes.” Another 27 percent thought financial people “exist to enforce compliance with the firm’s policies and procedures.”

  Which makes accountants something like the business police.

  A recent survey by Robert Half International, Inc., one of the largest staffing firms specializing in accounting and finance personnel, entitled “The Next Generation Accountant” stated that “…today’s CFOs say they expect nontraditional accounting functions to occupy 37 percent of a senior accountant’s time in five years…” It also stated, “An increasing corporate reliance on cross-functional teams is creating the need for cross-functional professionals…In addition to a firm grasp of marketing and operations, accounting and financial professionals must recognize the impact of financial data on the business as a whole and on individual departments.”

  Meantime, our colleagues in operations have been closer to the cutting edge. Over the past decade, the U.S. economy has benefited from big productivity gains in the manufacturing and, to some degree, service sectors. In his comments regarding a 2001 rate cut, Alan Greenspan referenced the dramatic reductions in stock and inventory manufacturers had achieved in prior months. With less inventory and quicker reaction times, Greenspan pointed out, manufacturers had responded very quickly to the fluctuation in demand and we all felt the economic slowdown in real time. The e-commerce influence is driving many businesses to house smaller quantities and make more frequent shipments, even if they do not understand lean. The demands on business have been tremendous and U.S. manufacturers have been meeting the challenge. But like an island in the stream, the accounting areas have rem
ained rooted to the methods that have been taught in business schools for decades.

  When Jean attended business school to receive her MBA, she was in a program with managers who all had 10-20 years of business experience. These were all successful business people, but when they were asked on the first day why they were pursuing an MBA, more than one third answered, “So I can understand the numbers.” This was preposterous, and a little disheartening. Jean had an undergraduate degree in accounting, so her goal on entering an MBA program was to learn how to lead, motivate and strategize. To earn an MBA, she believed, meant you were preparing to be a leader in your field, with a focus on learning to evaluate competitive challenges for your company, to learn national and international management techniques and to develop long-range strategies. But one third of her fellow students said they needed an advanced business degree to learn to understand the numbers that accountants generated.