QUESTION: What do you do when the CFO and finance team are skeptical about -- in fact, resistant to -- engaging in lean, Six Sigma or other operational excellence initiatives?
ANSWER: Wasn’t it refreshing last time to have a question from a CFO who wanted to help drive excellence but couldn’t get his operations counterpart to engage? That was an easier one to swing at than the more typical reticence of the CFO et al.
Not unexpectedly we got some immediate feedback and follow-up questions regarding how to cope with the more normal situation. I submit that there is so much common ground here where logic and good business sense should make strong partnerships between operations and finance. The improvement opportunities are simply enormous.
So why is it so difficult in reality to make it work? I choose to take the position that it’s simply a broad-based case of ignorance on both sides and decades of mind-numbing paradigms that take time to overcome. That said let’s get to the typical situation of conflict between finance and operations.
The more “normal” situation is that the CFO and the finance team are skeptics at best and actively resistant at worst. My guidance is for us in operations to park our defensiveness at the door and walk into the finance leader’s office and ask them for both barrels on what concerns/skepticism they have. That’ll start a great list of joint projects to work on that will serve everyone’s purpose. It will also create the opportunity to help educate away their ignorance on the requirements for operational excellence and begin to attract some believers.
We can provide them with a whole new vision of why their work is so important to improving the business. The worst possible outcome is when operating people get discouraged and throw up their hands and abandon the journey.
As operations leaders we should approach our discussions with our finance counterparts along these lines:
1. First, go back and read my last entry, which responded to a CFO who was frustrated by the lack of interest on the part of his senior operations counterpart. As you read it again simply reverse the roles as if the question came from an EVP of operations. The counsel provided there is equally valid.
2. Include key finance people in your education and training sessions with the CEO's support. They all need a basic understanding of the thinking behind the CI journey, the collaborative team culture that is necessary across all functional areas, how integrated all of the business processes are and, thus, how integrated all our behaviors and process improvements need to be.
Provide 'Introduction to Lean' Course
They should also be given a “Lean 101” course so they are at least conversational on basic terms/tools such as: value streams/maps; the importance of flow and constraint management; the purpose of kaizen events and how they are planned, executed and documented; the thinking behind 5S and visual management; the data-driven processes to be used for problem elimination e.g. DMAIC; problem-solving tools such as fishbone diagraming, Pareto analysis, 5 Whys, poka-yoke, etc.
Using an exercise such as with Legos or the like is useful in providing simple but powerful hands-on learning about the positive impact of new thinking and new tools on the business. This experience is also a great catalyst for cross-functional team building.
3. Invite finance leaders to participate in your CI steering team at the business and/or plant locations. Also invite them to your conferences to stimulate more positive working relationships as well as to continue to “drip on the rock” with learning opportunities.
4. Be open and straight-forward in conveying your understanding of why they are skeptical. In many cases they have good reason to be. For example:
• Traditionally there are serious problems with data integrity -- the old “garbage in/garbage out situation -- because of poor data accuracy. Operations is griping about getting incorrect data to work with and the finance teams knows that operations is the source of much of the wrong data. Our response: “Guilty as charged….and here’s what we’re going to do about that with your help Ms. Finance Mgr.” Launch a joint project, analyze the key processes that aren’t working, find and eliminate root cause and move on to the next one. Then build on the success project by project.
• Traditionally, if the factory and accounting people even knew what the accuracy was for bills and routers, it wasn’t nearly good enough to maintain accurate cost or inventory records. So accounting requires that the business shut down and take a physical inventory every quarter and/or year so they can reconcile the books. Why? Because a physical inventory had better accuracy (at least in the minds of the accounting folks) than to reconcile against the book value of inventory. Why? Because there is no confidence in the accuracy of bills and routers not to mention the reporting accuracy issues noted above. Again, operations is typically guilty as charged.
• Who in accounting, sales, marketing, engineering, operations, etc. doesn’t want more accurate costs? Of course everyone does. Standard cost systems are notorious for providing costs that subsidize the “dog orders,” i.e. hard to make “B” and “C” items, high scrap, short orders, etc. while penalizing the “A” items where competition is the most fierce. Well with engineering, production scheduling, accounting, marketing, operations help let’s clean up the bills and routers, reporting accuracy, etc. as noted above so that we have the best information possible under the traditional cost accounting system. That said, there are typically lots of “allocated costs” that don’t necessarily tie directly to all the products taking the allocation. It’s done because the standard system does not know -- because we don’t know -- what the true costs are.
• Enter the discussion about improving flow and the accompanying performance benefits; convert operations from running large batches through a series of “traditional departments” into smaller batches that have organized products by common routings, i.e. creating manufacturing cells wherever possible and “virtual cells” when there are “monuments” in the process that simply aren’t economical or practical to move. The general positives that begin to appear on day # 1 are many. Who doesn’t want less working capital, (read CASH) tied up in unnecessary inventory? Who doesn’t want excess inventory eliminated so problems can be seen and solved closer to real time? Who doesn’t want improved cycle times to improve service to customers? Who doesn’t want more accurate costs that are now tied to discrete value streams with far fewer allocations? Who doesn’t want skilled operators, mechanics supervisors and engineers all working in a line-of-sight flow to spend more time improving the process instead of chasing down missing materials, mechanics who can’t find parts, missing supplies, etc.
Elevate Finance Team's Thinking
We could of course go on and on with more examples but the key take away is this: We are challenging several decades of traditional factory mindsets and practices that were wrong-headed and stodgy on their best day. The finance team, top to bottom, has justifiably grown up in their own paradigm over this period much like the inspectors in the old factories. “We can’t trust those manufacturing guys to do the right thing and they don’t want our help so we’ll create as many controls as we can” to reconcile the books every quarter and satisfy the audit committee, the IRS, the SEC, GAAP, FASB, Sarbanes Oxley, etc. etc. etc.
We need to help them elevate their thinking about the important contributions they can make to actually improving the business!
With the huge progress that results from the collaboration and focus described above, we will have changed our relationships with our finance team counterparts. Why? Because we have set the example with holistic business thinking (not “silo” thinking) that we’ve brought to the table on issues important to the company.
Big Mistake: Lean Accounting Too Soon
At that point it is my strong belief that we can engage in a very positive discussion, for example, about using the standard cost system to create a much more accurate value stream costing system for all products.
I think one of the biggest mistakes companies make is to start pushing “lean accounting” too soon. To think CFOs and audit committees are going to go from the current paradigm to lean accounting the first year or two of the journey simply isn’t going to happen. So don’t expect it and, most importantly, don’t throw in the towel because of this. It may take years to transform this part of the business infrastructure.
Work harder at getting the things done that are important to the business and that require a joint effort. My experience has been that value stream accounting only makes sense when the correct process infrastructure is in place … and that most companies have much work to do there before they worry about changing the cost system.
I’ve spent much of this response trying to understand and defend the finance team’s lack of interest in our lean revolution. Now that our finance leaders understand that we understand, I’d ask one thing of them: Please grab an oar and start rowing!