After being delayed for a few weeks because of Hurricane Irma, Lean Frontiers held its annual Lean Accounting Summit in Savannah, Ga. on October 24-25. This was my fourth year to be invited as a speaker at the conference. This year’s summit was different in that the Lean Accounting Summit was combined with Lean Management and Lean People Development into Lean Leadership to include the people development aspect of being a lean enterprise. Co-founder Dwayne Butcher, said, “It’s about time that the whole enterprise be involved in becoming a lean company. Lean is a business model and must therefore include every part of the business, including those in executive leadership, accounting, HR, sales, product development, supply chain. We need to break down the silos between these departments.”
Between the keynote speakers, there were three tracks related to lean management, lean accounting, and lean people development. Besides giving my own presentation, “Rebuild Manufacturing – the Key to American Prosperity,” based on my new book of the same name, I attended all of the keynotes and some of the sessions in the lean management and lean accounting tracks.
Lean Frontiers is not a consulting firm. Its sole focus is to provide learning opportunities to address: Enterprise-wide adoption of lean and the foundational skills needed by lean companies. Butcher announced a new program, the Lean Learning Pod, that will be taught by Jean Cunningham on lean accounting. Participating companies will meet in a virtual manner on a regular basis, and Jean will be a mentor to the companies.
Jim Huntzinger, said, “The first Lean Accounting Summit was held in 2005, and out of that summit, Lean Frontiers was born. Lean is still perceived as a program with short term results by too many, and we need to make the transition to lean as a business model. We need to traverse unclear territory — trust the process to go from current condition to the target position. We can use XYZ Thinking: If we do X, then we will get Y, but if we get Z instead, then we will learn.”
A Strategy to Remove Waste
He introduced the first keynote speaker, Art Byrne, former Wiremold CEO, author of Lean Turnaround and now a consultant. He has been practicing lean since 1982 when he was a general manager at a General Electric facility. He wrote his book and then wrote the Lean Turnaround Action Plan to show what would happen if a company becomes lean. The reader is supposed to be management of fictitious company - United Gear & Housing. He asked, “What is lean?” His answer was, “It is strategy to run any business to remove waste to deliver more value to customers.”
He described United Gear as a traditional batch company with long set-ups of 2-3 hours, a six-week lead time, and a strong management team. The company is purchased, and the new owner makes it clear that everything has to change with lean as the strategy. They will have to: lead from the top, transform people, increase gross by 5-7%. Puts, reduce inventory by $70 M, increase value, and reduce set-up by 90%. He said, “The present capacity = work + waste., and waste is typically 60%.” I particularly liked his comment. “Think about the stupidity of putting all the same machines in the same department as if the machines liked to be near each other. Instead, we should be putting the machines in the sequence of operations to be performed to go from batch to continuous flow. You could rearrange the machines into cells to go from raw material to finished product. Fewer people would be doing the work, and lead time could drop dramatically from 6 weeks to 2 days.”
He said the Wiremold strategy was to: “Constantly strengthen our base operations, achieve 100% on-time delivery, 50% reduction in defects every year, do 20 inventory turns/year, double in size every 3 to 5 years, use visual control and 5S, do one piece flow and standard work, do kaizen, use a pull system, and stretch targets.”
In his concluding comments, he said, “Standard cost accounting and lean don’t go together. The key is for senior management to function as one team.”
Lean is About Building a Muscle
In her presentation on “Overcoming Barriers to WOW Results,” Cheryl Jekiel, CEO of the Lean Leadership Resource Center, said that the International Labour Organization for the United Nations asked her to develop and teach a class on Lean HR to be taught in 46 countries. She had to develop the course for others to use to teach. In developing the course, she used the following working definition of lean:
- 7 common practices to improve
- It’s about the customer
- Measurable improvement
- Problem solving
- Repeatable processes
- Overall involvement
- Visual management
- Engaging leadership
She said, “HR can make the difference in the results. HR owns the things that are the obstacles. HR has a role in the culture of the company and can weave improvement into activities. HR owns talent strategies: hiring, training & development, performance management, and reword systems. HR can build lean competencies into job design. The greatest is the waste of human development. Most companies don’t tap into the power of their people. We define people by the tasks they do and not their capability. People are endlessly creative. The power of the ideas to solve problems is in people. Lean is about building a muscle — the more you do it the better you are at doing it. Lean is a way of expanding capability. HR tends to engagement, and engagement goes with lean. Studies show that companies are 7-11% more profitable when employees are engaged. Convert categories into dollars to make the connection of engagement into money.”
One of my favorite presenters is Jerry Solomon, who gave the presentation, “Bridging the Gap Between Accounting & Operations.” He spent 40 years in the manufacturing industry and is now retired in Naples, Fla. His last 14 years were at Barry-Wehmiller in St. Louis as CFO.
He said, “Lean is two pillars to eliminate waste in pursuit of perfection in safety, quality, delivery and cost. The two pillars are: respect for people and continuous improvement. Inspirational leadership and a profound cultural and organizational change are required to become a lean company. Elimination of waste is driven by kaizen events, which need to be narrow and deep. The respect for people means no layoffs and requires strong C-level support.”
He explained, “Lean accounting is using lean tools in accounting and “plain English” P&Ls.
Accounting is one of the biggest roadblocks to successful lean journey. Lean is about being a cash and capacity generator. We need to change the metrics we use. In the traditional cost accounting pie, overhead is 10-20%, direct labor is 60-70%, and materials are 20-30%. Today in lean accounting, overhead is still 10-20%, direct labor is 10-20%, and materials are 60%. Standard cost accounting is replaced by actual costs and can be understood by everyone. The benefit of lean accounting is relevant information when you need it that is understandable to the 99% of people and not just the 1% who are accountants. It provides real-time information to run the business.”
Trust is Foundation for Continuous Improvement
On Wednesday, the keynote presentation was “The Continuous Improvement Engine” by David Veech, The Ohio State University, author of Leadersights and The C4 Process.
He said, “The foundation of the continuous improvement engine is trust. Two key things are required: clear expectations with standardized work and leader vulnerability and mastery. Challenges lead us to acquire knowledge and skills. It’s how we lead that sets our stretch goals. It’s a process that occurs with repetition. No one is in this alone, so we have accountability. Learning and coaching is required for mastery. The goal is to have a team of experts.”
He explained, “You need a system for problem-solving to find out if ideas work – you can use PDCA, DMAIC, or my C4 system.” He said, “C4 is short for Concern, Cause, Countermeasure, and Confirm. C4 offers straightforward, easy-to-remember techniques for identifying and solving workplace problems. These four steps-clearly identify the concern, find the true root cause, correct the cause with an effective countermeasure, and confirm that the solution worked.”
He added, “Problem solving builds mastery. Mastery results in self-efficacy, and people that have self-efficacy are willing to try new things and keep trying until they succeed. They need to have intrinsic motivation, which comes from the heart. This intrinsic motivation turns into ideas and generates initiative. The “exhaust” of this continuous improvement engine is: satisfaction, meaning, awareness, and responsibility. Building relationships in teams is critical to the process.”
In the first breakout session, I attended “Eliminate Standard Cost Step by Step” by Nick Katco, author of the Lean CFO series. He told us that there is nothing in Generally Accepted Accounting Principles (GAAP) that would prevent using lean accounting methods. He said, “In GAAP, you need to calculate inventory valuation and Cost of Goods Sold. Using Standard Cost Accounting, you often have to make assumptions whereas in lean accounting, you use “Actual expenses incurred to get goods in condition for sale. A major objective of accounting for inventories is the proper determination of income through the process of matching appropriate costs against revenues. In the continuous nature of manufacturing, there are difficulties in matching specific costs to revenue because products not sold in same period as produced, prices change over time, and production costs change over time.”
He explained how to do a lean inventory valuation for material and production cost capitalization using three different methods: days of inventory, units of inventory, and days of conversion cost. He said, “Lean transformation is designed to reduce inventory levels in manufacturing companies — 30-60 days is a good target. There is no GAAP requirement to value every single product. Average costs replace standard costs. Capitalize total costs, not individual products by a journal entry.”
In conclusion, he advised: “Design a lean inventory valuation methodology which works for your company and partner with your auditor to create a methodology they will be able to test.”
The last presentation I attended was “Lean Transformation from the CFO’s Seat” by CFO Pete Gingerich of Aluminum Trailer Co. Last year I attended a presentation by the President and CEO, Steve Brenneman, so I was interested in what Gingerich had to share about their lean transformation. He said, “In 2007, we did $27 million and went down to $10 million in 2009. We had to lay off half of our employees. Steve Brenneman started in 2009, and our first steps were office procedures for handling work folders and then we did 5S on the shop floor. We had lots of problems with material shortages, so we went to a Kanban system. We split into three value streams in 2012 and now have six.”
He explained, “Our big change was in how we pay our workers; we switched from piece rate to hourly and started at a rate of 10% higher than previous year’s rate. We also instituted a profit sharing plan. We didn’t use standard cost accounting, but we did have assumptions for material, labor, and overheads. Now, we know the actual costs for each value stream. Value stream planning is clearer and easier.”
He added, “We thought that our custom trailer was the most profitable, but it is actually our midline model trailer because too many engineers are involved in our custom trailer.
“We have an annual meeting for top management, quarterly meetings for managers, and weekly meetings for team leaders. We have switched to rolling forecasts from budgeting, and we do weekly production planning forecasts and weekly P & Ls. Each value stream has its own weekly P& L with more detail. Lean accounting is based on shop floor metrics. We avoid allocations because if you can’t control them, why do you want to see them. We can close a quarter in one day. We clarified the definition of sales and revenue so employees would understand. We have had to work with suppliers on our kanban system to cut inventory, such as having tires on a rack that is replenished daily. In 2009, we only did five turns of inventory, but in 2016, we did 19 turns.”
It’s always a pleasure to hear about a successful transformation into a lean company rather than just a lean manufacturer. I am a big proponent of lean accounting because standard cost accounting is the biggest obstacle to more companies returning manufacturing to America using total cost analysis. When costs are divided into separate accounts, the purchasing agents and buyers do not have access to all of the actual and hidden costs to be able to do a true TCO analysis. More CFOs need to take the time to attend the Lean Accounting Summit or get training from one of the qualified consultants and learn how to convert to lean accounting.