A lean transformation’s impact on accounting and finance

Initial lean efforts at most manufacturers tend to focus on operations, especially the shop floor: a kaizen event here, some 5S there. Except for paying the bills for incremental services or miscellaneous tools and supplies to support spot projects, accounting and finance people, including the chief financial officer, aren’t really involved. Over the long term, though, they can help everyone focus on the improvements that matter most: those that cut costs, add revenue, or do both.

TFC Refresher

Over the past several months we have focused on people in operations positions at a fictional shop called Typical Fabricating Co. (TFC). This month we focus on the leaders in accounting and finance. Let’s consider the role of Matt, the CFO.

TFC fabricates steel products. The business is a mix of repetitive parts (sold to a Tier 1 that then sells to the OEM) and low-volume, high-mix work (structural materials used in construction and major refurbish projects). It has typical issues many small and midsized fabricators experience, including capacity constraints, unpredictable demand, and lots of scheduling and priority changes. And sometimes resistance to change makes implementing seemingly obvious improvements an uphill battle.

The CFO View Before the Lean Journey

What is the CFO’s involvement before and during the early stages of the lean journey? If the person is involved at all, the CFO probably focuses on costs and cost reduction. If the finance department uses a standard cost-accounting system, the CFO may provide information that helps focus improvement efforts. If a shop has no formal costing system, then costing at a product, process, or customer level can be very difficult.

As a result, the CFO may have scant cost information to go on for making informed decisions. If the CFO directs people to cut costs, and the accounting and financial information is only marginally accurate, then operations may go in the wrong direction.

Instead of being taken at face value, costing information should be challenged for accuracy and relevance to ensure it represents what is really happening. Costs need to be associated with the correct actions. Incorrect account assignments can create a disconnect between the action that causes specific costs. This makes cost reporting inaccurate.

Also, is overhead spread on a rational basis? Factory overhead should include costs that cannot be directly applied to a product, like facility maintenance, heating, and cooling. Spreading overhead based on irrelevant drivers can lead to serious problems, like undercosting one product and overcosting another.

Is too much data being collected from the shop floor? Data is necessary to understand how a process is performing, but sometimes we go overboard. We spend so much time collecting so much data in so many places, we end up creating confusion rather than clarity.

All this just scratches the surface, but you get the idea: The CFO can and should have a significant impact on information that drives improvement.

How the CFO Can Be an Enabler

If the CFO and the rest of the accounting and finance folks understand lean methods and practices, they can help identify where it makes the most sense to invest in improvement. For instance, they can define a portfolio of financial measures that go along with the nonfinancial measures. After all, the CFO and his team are in the best position to know what information is available and how it can be used.

They also can assist improvement teams with financial analysis, which will require digging to find appropriate measures and root causes. This is a logical place for operations and finance personnel to work shoulder-to-shoulder.

Those in finance and accounting can train operations personnel in cost management and control. Most people in operations are good at managing flow, busting constraints, and keeping material moving, but cost management is often not a skill set that comes naturally to them. Operations people with at least a general grasp of costing and cost management will be better problem-solvers and process managers.

Accounting and finance employees can develop a deep understanding of the pros and cons behind standard costing and lean accounting. Standard costing relies on standards to be measured against. Variances against the standards provide data to assess whether an operation is performing well or poorly. This tends to be a rather static approach to assessing operations.

Lean accounting is a more robust and dynamic approach to measuring and assessing performance. Who better than the CFO to train the rest of the company in these accounting and measuring approaches?

The CFO should play a key role in the leadership team that generates and deploys lean strategies. He or she can make sure systems are used in the most effective manner possible to support strategy development.

Ultimately, the CFO can educate others about a central tenet of accounting: Costs are the result of work. The question should be, Is this work value-added or non-value-added? If it is non-value-added, the costs are unnecessary and should be candidates for reduction or elimination. Sustainable cost reduction comes from changing the way work is done—because, again, work drives costs.

How a CFO Develops a Lean Strategy

TFC has progressed in its lean journey. Employees look at lean as a way to run the business, not just as a way to run projects. Knowing this, they realize that improvements will affect everyone in the company.

TFC’s CFO is now actively engaged with his senior management colleagues in creating a lean strategy. Matt’s expertise and focus help managers pay attention to the way improvements are recognized. Improvements that reduce costs or increase revenue are communicated in dollars and shared broadly, so all TFC employees understand their work’s impact. Those improvements that cannot be directly tied to financial statements are included in a comprehensive metrics portfolio that balances the financial and nonfinancial metrics, thus providing a complete picture of TFC’s operating condition.

In one meeting, the leadership team struggled to relate how a focused factory and aligning resources to increase throughput velocity would lead to quantifiable results. In other words, what would be the return on TFC’s lean investment?

As CFO, Matt helped the team see the link between financial improvements and implementing a focused-factory approach. One focused factory has dedicated resources (operators, machines, support staff) for repetitive and predictable work. Another focused factory manages one-offs, construction projects, and other highly variable work with unpredictable demand … without disrupting the more routine business. The overall result: higher velocity for the routine business and better focus on the nonroutine business. It’s a win-win all the way around.

Had Matt not invested some of his time earlier in TFC’s lean journey, he could not have led senior managers through this exploration. And without Matt’s “lean-savvy” CFO perspective, company leaders probably would have developed a weaker and less aggressive lean strategy, and would have left lots of areas—those with big potential returns on lean investment—untouched.

Is your company’s CFO onboard the way Matt is onboard at TFC? Are your other support functions taking active roles and ownership in your company’s lean journey? If not, are you leaving returns untouched?

Broadening Ownership

Most just beginning the lean journey focus on spot projects within a function—a vertical approach—and they usually don’t involve people from finance. As the lean journey matures, people start to take a horizontal approach (cutting across functions), which usually involves leaders in accounting and finance.

As Matt became more involved in setting lean strategy, TFC had broader lean participation. As the ownership for TFC’s lean success spread to all the support functions, from Matt’s finance and accounting department to engineering to HR and beyond, it became apparent that lean manufacturing is not just for the shop floor. It affects everyone.