Question: How should operations approach the finance function to win their support for a continuous improvement journey?
Answer: Any of us in operations has likely experienced how tone deaf the accounting organization is to our notion of change on the shop floor, i.e. getting help with our CI journey when it involves the accounting function. Many an initiative has been stunted, if not totally derailed, because of the strong paradigms in accounting and active resistance by the CFO and the entire function. The whole idea of changing how to more effectively build the standard costs most often receives a complete lack of interest. Breaking paradigms relative to traditional standard cost systems is the most frustrating barrier I’ve ever tried to overcome in all my years in the arena.
At my last employer we were finally able to get the genie out of the bottle. The CFO wasn’t interested but he didn’t get involved, which was a real plus. He also knew the CEO had my back so he wouldn’t actively resist. Instead, the VP of finance for operations, who had a dotted line to me, and all of the plant controllers were involved from Day 1 as we launched our CI initiative using my 12 Principles of Manufacturing Excellence as the path. They received the same training, communications, tools training, etc. as my VPs of manufacturing and plant managers. This was key to their buy-in later when we needed to begin smashing some paradigms re: value stream costing. Because they were seeing first-hand what and how we were transforming the plants, they had the mindset to play their positions effectively in support of manufacturing. They, of course, continued to receive all of the usual technical advice from the CFO function and followed all of the required accounting protocols. But on a day-to-day basis they worked to the operations’ priority set and supported our journey.
At the plants we really didn’t need a lot of accounting help the first couple of years. The main thing was to get their assistance in formatting and providing actionable reports for our use to identify the largest opportunities for short-term wins. Then my team went to work on harvesting low-hanging fruit and significantly improved our performance on quality, flow (inventory reduction) and service.
After a couple of years we had made major improvements to the company’s bottom line and balance sheet and used that credibility to accelerate our plans to organize all North American factories into value streams. Note that the support for this spending happened after we’d earned credibility by delivering significantly improved performance. Within five years the 20+ plants' processes had been transformed into value streams, and we embarked on what I now call “Value Stream Accounting” (VSA). Our stated purpose was to improve the accuracy of the costing process, i.e. replacing the traditional heavy use of “allocated costs” with actual costs that were now identifiable to each value stream and the products each produced. The allocated part of the cost often shrinks by as much a factor of 10.
Here’s the approach I recommend to connect and garner a partnership with your accounting leadership:
- NEVER utter the words “lean accounting”! That term has such negative connotations that the conversation will likely end right there. Instead,
- Approach your accounting counterparts with the objective to improve the accuracy of the cost accounting process. What professional accounting person will throw you out of the office with that as a manufacturing objective? Instant common ground.
- Show a real life example of the traditional standard cost of an “A” item product compared to the same item costed by the VSA method. In contrast to that, show the standard cost of a special product and/or a “C” item from standard products inventory vs. its more accurate cost using VSA. In every case I’ve ever examined, the outcome clearly shows that the “A” items, i.e. the life blood of the business, are subsidizing the dogs and cats of “C” items and complex special products.
- The conclusion for accounting is clear: We are improperly using higher standard cost for the high volume/fast movers and understating the real margin being generated. On the other hand, we are overstating margins and understating costs on all the others. In the larger scheme of things, inaccurate standard costs are encouraging the sales organization to sell short orders and hard-to-manufacture orders that drive up engineering costs, sales costs and manufacturing costs while consuming capacity that could be utilized on higher margin items. The organization is not in proper alignment because of the costing system and the business is being hurt.
- For those familiar with Eli Goldratt’s book from the 1980s, The Goal, you know that the real objective of any business is to find ways to “make more money.” Who in accounting and finance are going to argue against that? It’s the natural outcome of continuous improvement.
- Close your discussion with accounting leadership by recapping what your team has already added to the income statement, the balance sheet and the customer service report of the business since your CI journey began.
- Finally, after completing the mind-meld with accounting leadership, take your presentation to the senior leadership team so that all businesses and functions understand the positive impact manufacturing can continue to have on the business if each function understands and begins to execute how they can also help to further align and impact the business as well. Additionally, challenge them to find opportunities in their own areas for improvements. If you’re the senior operations leader you might even get an audience with the board of directors. Maybe it's time for an enterprisewide CI journey, not just manufacturing.