Watlow Electric Finds Value in Lean Accounting

Watlow Electric Finds Value in Lean Accounting

Manufacturer of industrial electric heaters and components offers best practices for implementation.

For Ed Grinde, business unit controller for Watlow Electric Manufacturing Co.'s Hannibal, Mo., operations, lean accounting (or "value stream management," as the company calls it) has been a boon.

Over the past few years, according to Grinde, lean accounting has given Watlow-Hannibal a better understanding of its cost structure, condensed front-end processing time, broken down functional silos, provided real-time data and driven the business unit to focus on the value to the customer, among other benefits.

Grinde explains that implementation of lean accounting was a necessary step, as the company needed a simpler accounting methodology to reflect the dramatic shop-floor changes that were taking place as a result of its lean manufacturing initiatives.

"And we also knew that we needed real data, not standard cost data, to run our business, and the data had to be timely in order to be relevant and actionable," Grinde says.

St. Louis-based Watlow, which makes industrial electric heaters, sensors, controllers and software, views lean accounting in a holistic sense, reflecting the company's belief that lean accounting is "a lean management system that really effects almost every aspect of your company," according to Grinde. Consequently, Watlow calls it value stream management.

Ed Grinde, business unit controller, Watlow Electric Manufacturing Co.

"If you utilize it properly, [lean accounting] really is a lean management system, with one component being how you report the numbers and how the company uses the numbers itself," Grinde says.

Watlow is in the process of implementing value stream management companywide. With the help of lean consultant Brian Maskell, Watlow business units have been identifying their value streams and posting simplified operational and financial data for each value stream on a weekly basis.

"And even though right now the economy is down, here at Hannibal we're growing the business because we understand our costs better," Grinde says.

Best Practices for Implementation

Based on his experience at Watlow-Hannibal and at other Watlow facilities, Grinde offers these tips and best practices for successfully implementing value stream management, or lean accounting, at your company:

  1. Upper management support is critical. "Without that, it will surely fail," Grinde asserts. "The changes that will ensue, and the subsequent effects to your reporting methodology, will be significant, and if you do not have buy-in from your controlling entity, you will spend much more time trying to maintain two reporting structures and also trying to explain why certain results are happening."
  2. Everyone must understand that lean is a growth strategy-not a cost-cutting strategy. "The true power of lean is to flow more product through your plant with the same resources more efficiently with less waste at higher profits," Grinde says. "This is also why product management and your sales team needs to be solidly linked to your value stream. They will be the pillars of your organization to drive the increased sales."
  3. Properly identify your value streams. "You really need to analyze your products by the product families, the processes they go through and how they flow through your plant," Grinde explains. Create value streams as close to your suppliers and customers as possible. Make sure to include your marketing and customer-facing functions, as they "are critical to the concept of a complete value stream."
  4. Don't try to attain perfection before setting up your value streams. "You will never get there, so spend an adequate amount of time understanding your products and their flow through the facility," Grinde says. Lean manufacturing emphasizes continuous improvement; likewise, you should constantly revisit, rearrange and improve your value streams.
  5. Keep metrics and methods simple and manual in the beginning. "We had multiple existing metrics, and the natural response is to try to duplicate the metrics. This would be a mistake," Grinde asserts. "First of all, many of the metrics could be driven off the old standard cost system. They also could be based on pre-lean thought processes, which would cause confusion and frustration within the value stream and from the corporate level. Also, trying to measure too many metrics could be counterproductive to removing waste."
  6. Do not set hard goals. "When you set hard goals, you set yourself up for failure, which translates into frustration and then potentially backsliding or totally giving up," Grinde says. "There are too many variables that the value stream cannot control to make hard goals realistic." According to Grinde, instead focus on making sure your value stream metrics are trending in the right direction.
  7. Value stream leaders need autonomy to be "little general managers." "If they have people or equipment assigned to their value stream that they do not ultimately control, then it will create undesirable conflict and frustration," Grinde says. " ... The whole group needs to march to one drummer: the value stream leader."
  8. Put as much of your costs as possible directly into the value streams. Expect resistance, particularly in the office areas, to the concept of putting the value stream first. By definition, anyone not in a value stream is waste and something the customer does not want to pay for; consequently, strive for as little non-value stream support as possible.
  9. Use the five principles of lean as your criteria to make decisions. "If you adhere to these principles, you will truly be pursuing perfection-the fifth principle of lean."

Grinde adds that while most companies introduce lean accounting after having some success with lean manufacturing, "there is a strong argument for introducing lean accounting at the very beginning of your company's lean journey.

"If a company introduces thoroughly lean performance measurements and accounting, control and improvement methods built around lean thinking, then their lean transformation in manufacturing and throughout the organization will be much smoother and more thorough."

For more on lean accounting, read "Lean Accounting's Quest for Acceptance."

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