by The HLH Team
This Can Happen to You…
Imagine this. Executives in your company hear about lean, read up on it, and become enamoured in the potential cost savings. Managers start talking and words like “kaizen” and “muda” start floating around the break room. Several meetings happen where an external consultant discusses processes and continual improvement. Whiteboards with coloured sticky notes pop up around the office.
For a few months it goes extremely well. The executives start invigorating morning meetings that get everyone thinking about finding waste. Inventory levels shrink, the hammers in the shop are outlined with bright tape to indicate their spot, and everyone moves their respective sticky notes across the Kanban board as they finish tasks. Productivity rises, and so do profits.
After a few months, the executives delegate the morning meetings to a senior manager and stop coming to them. They’ve become interested in other new projects and aren’t as visible as they used to be. The increased productivity and profits stop being a novelty; they become assumed. The expensive consultants stop coming. People aren’t as conscientious about moving their sticky notes across the whiteboard. Inventory levels creep up as people think less about processes. Waste cuts back into profits.
Lean is not a Fad
The scenario above has played out in countless businesses. It happens when leadership hears about lean but don’t appreciate the deep, company-wide paradigm shifts necessary for long-lasting process improvement. If leadership focuses on a top-down approach of implementing the tools of lean (kaizen, 5S, etc), the created systems will fall apart as soon as lean stops being new and novel and leadership loses interest.
It’s the wrong approach to think that lean is an assemblage of tools to make you more money. Implementing lean tools without a company-wide inclusive culture of lean will result in short term productivity successes and long term frustration when leadership, inevitably, takes their feet off the gas pedal.
Lean is about people as much as processes. As process improvement breaks down barriers across departments, it must also break down barriers of hierarchy, social exclusion, and lack of respect. In a lean culture, leadership commits to making the shift from Supervisor to Coach, and works alongside managers to create a sense of empowerment and accountability. The entire organization must make serving the customer better their prime focus. If leadership imposes lean with the sole goal of increasing profits, it won’t succeed in the long term.
In the next few posts, I’ll drill down into what elements create a culture of lean. Next week I’ll start at the top, with looking at “lean leadership.”
by The HLH Team
You’re getting your financial statements today. You pour yourself an extra large coffee and amble into the office, wondering how long this will take. The accountant walks you through the line items. As he does, you get the same nagging thought that you wished you know more about what’s behind these numbers. The nagging goes away; after all, these statements are about things that happened months ago. You sign them approved, eager to stop looking at history you already know and get on with managing your business.
Does this sound familiar? It’s shocking how many executives know almost nothing about what really goes into their financials. Statements have evolved to be so complex that it makes the accountants wielding them look like magicians (which is probably why they’re so complex in the first place) and the executives feel like toddlers asking silly questions.
Let’s stop this. The people who run their businesses should know how their dollars are being used as it’s happening (not 2 months after when nothing can be done about it). The accountant’s job should be to empower clients, not baffle them. If the first paragraph reminded you of your accountant meetings, you’re in good company with most executives out there.
We’re going to turn your financial statements on their heads so that you feel empowered to take action when you read them. Let’s find out how…
Lean vs. Traditional Accounting
The first thing to know about your traditional accounting statements is that they aren’t neutral: what they show and what they conceal actively affects the way you think about your business’s financial performance.
Lean is about creating a customer-driven production model, improving processes over time, and generating actionable data. Traditional statements don’t just not show you these things, they will work against you trying to implement lean. They are, to quote lean accounting guru Brian Maskell, “anti-lean.” Here’s how:
1) Traditional statements class inventory on hand as an asset, even if you have no customers. You pay for the labour, the materials, and the overhead to build your widget, and at the moment when you have spent the most money, it becomes an asset, even as it collects dust in the back warehouse.
By this logic, the more inventory we have (even if none of it has sold) the better profit we’re going to show. Lean recognizes that high inventory levels are one of wastes’ favourite hiding places. Excess inventory can be a business killer, and it’s lean’s constant nemesis.
2) Traditional statements measure outcomes and not processes. Focusing on outcomes denies the opportunity to eliminate waste from processes. It also encourages us to increase our outcomes (which are usually assets), even if the process is direly wasteful.
3) By the time your financial statements come along, it’s too late to do anything with them. They’re historical, static documents. Even if they were still actionable when they come out, they’ve evolved to be so complex that they overwhelm more than they empower.
What is Lean Accounting?
Lean accounting motivates lean action. It drives continuous improvement by measuring processes over outcomes and it presents numbers in simple, clear formats so they drive you to do better.
Lean manufacturing pivots production from the company “pushing” the process to the customer “pulling” it. The accounting side of lean operates the same way. It reverses your financials from being about your company to being about the customer (who is, after all, the reason your company exists).
A lean accountant will wade into your traditional statements and reorganize costs into “value-added” and “non value-added.” Value-added is every cost that the custom is willing to pay for (raw materials, necessary labour, etc). Non value-added expenses are costs that customers aren’t willing to pay for. The can include expense accounts, excessive travel (consider online conferencing, instead), and legal fees among many, many others.
Why it’s Essential
Whether you’re retail, service, manufacturing, or government, it’s going to be very difficult to implement lean in your business without switching to lean accounting. Your traditional statements will discourage any progress you’re making. It will be like trying to quit smoking while in a house full of smokers.
Lean accounting not only creates a system that makes waste visible, it acts as a motivator for all other processes. Once a lean accounting system is set up, it acts as a neon sign of what is wasteful and a reminder/ motivator for management to commit consistently to lean.
Lean accounting statements are like business coaches in your ear, challenging you to act on the waste that has been made visible in front of you. The accounting meetings I described in the first paragraph will be replaced with meetings that you walk out of motivated and excited about the changes you’re making and will continue to make.
by The HLH Team
Origins
Reading this article is a process, as was when you woke up this morning, brushed your teeth, and commuted to work. Everything we do, from changing diapers to climbing mountains, is a process. Lean philosophy teaches us that all processes involve a certain amount of wasted resources, and that there are actionable ways to reduce that waste to make the processes more efficient.
Lean was developed by Toyota to eliminate “muda”, or non value-added work, on their assembly line but the term wasn’t coined until 1988. The “Toyota way” was about improving the flow/ smoothness of work and eliminating “mura” (unevenness) in the system.
It’s a common myth that, because lean’s origins was with Toyota, it’s a strictly a “manufacturing thing.” The beauty of lean is its elegantly simple methodology, which can be applied to any company or system that uses processes. In its eyes all processes, from the movement of materials to the development of information to the delivery of services, operate essentially the same.
While a manufacturer will use lean to make widgets faster, with fewer defects, and to be about producing to meet customer demand instead of to creating inventory for its own sake, an office manager could use it to streamline file handling or a retail owner to tighten up merchandise planning.
Lean has applications in everything from software development to start ups to the service industry. One of the most important applications, lean accounting, is a foundational tool that drives lean forward in every company using it (more about that in the next article).
Lean Philosophy
At its heart, lean is about maximizing customer value by producing the same product with less waste. Visibility is key. Waste hides in all companies, tucked under inventory and as an engrained part of habitual processes, slowly eating away at profits. Lean knows where waste hides; it exposes waste and eliminates it. Visibility enables actionability.
Most businesses are organized into segmented departments which operate semi-automously from each other. While efficient in some ways, this segmentation creates hiding places for waste.
Lean punches holes through these segmentations by mapping a company’s value stream (i.e. production cycle). Value streams bring together separate parts of the business and organizes everything into a horizontal flow encompassing all aspects of production.
When processes are unified in a value stream, everything becomes visible. Imagine moving a ship though a system of locks, as in the Panama Canal or the Rideau lock stations. Moving from one lock to the next slows down the entire process and any number of things could go wrong. Compare that to sailing down an open river, where rocks and obstacles have been removed. That’s the power of lean.
Lean may sound like a mammoth undertaking, but it thrives on small changes accumulating over time. You can implement it quickly and the first wastes you eliminate are usually right in front of you. You can start with lean right now by looking around your workspace for “things that bug you” (i.e. inefficiencies that have been nagging at you because they feel like obstacles in your routine), and dealing with them.
You won’t see the benefits of lean if you practice it one week and forget it the next. To be truly effective, it needs to become cultural in your company. Get the entire team involved and it will begin to change the way people in your company think about waste.
Don’t expect your successes to be individually large; the whole point of lean is to create a culture that recognizes waste and makes small changes that add up over time. Be consistent and you can expect improved productivity in the short term and increased profit (and morale once everyone is involved) in the long term.
The 5 Principles
Lean relies on iteration (repeating a process again and again to get closer to a desired result) to smooth out processes. Imagine your company’s production process as a bumpy wheel that become incrementally smoother as it turns.
The 5 core principles of lean are circular. As the wheel turns, the principles cycle again and again (which is why careful measurement and alterations are key to success). Measure well, expose waste’s many hiding places, and your bottom line will improve as the wheel keeps spinning.
5 Principles of Lean:
1) Define the value of your product (think of your product from your customer’s perspective and think about what they’re willing to pay for)
2) map every step in your value stream and eliminate all steps that don’t contribute to the end value
3) tighten up the value stream steps so that the flow gets smoother and faster
4) as your flow gets established, make it customer-driven, so that customer demand “pulls” the entire process instead of you “pushing” it.
5) repeat the process again and again, taking a data-driven approach to creating smoother flow and a process with no waste.
While that articulation of the 5 Principles focuses on creating products, let’s look at what it would look if your “product” is an idea (ie. if you’re a lawyer or a marketer).
1) Define what the value of your idea is to your customer
2) Review the entire process that leads to your deliverables, mapping each process along the way.
3) Redesign your process to be as smooth and efficient as possible
4) Remember that it’s about the customer, not about you. The river doesn’t start flowing until the customer, way downstream, opens the dam.
The “pull” of water creates the flow.
5) Get feedback. This is vital. Lean is about analyzing and repeating processes again and again.
by The HLH Team
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