The exercise of overlooking realities that use standard or traditional accounting models highlights distortions and inefficiencies, submerged sometimes in the belief that they are working for the good of the organization:
- measurements and reports of labor efficiency and overhead reversal to justify large production batches and high inventory levels (two of the biggest wastes in Lean Production logic);
- absence of a reliable method for identifying the financial impact of Lean improvements occurring throughout the enterprise;
- strategic decisions based on very complex financial reports that are difficult for much of the organization to read;
- use of standard product costs, misleading when making decisions about pricing, profitability, sourcing, make or buy, product rationalization, and so on, risking making dangerous choices such as turning down highly profitable work or outsourcing products or components that could be competitively made in house.
Even historically structured businesses, with “thinking” organizational charts and detailed job descriptions, often find it difficult to identify an objective link between actual events and those that are translated into the “cold cells” of double-entry bookkeeping. The sales departments plan their goals on turnover, volumes, margins, and service levels, while the operations side of the business is responsible for production cost containment, working capital balance, and adequate maintenance levels. Generally, there are dynamics of non-reciprocal interests in these cases, which often create conflicts and undermine trust between the functional areas, with one inevitable result: less value for the customer.
In September 2005, at the Lean Accounting Summit in Detroit, a group of speakers came together and decided to create a methodological framework of Lean Accounting that is still valid today. The basis of the method is to be found in the key word of all Lean doctrine: value. Here, then, Lean Accounting takes the form of a management control system that follows the flow of value, defined as Value Stream, that the company produces for the customer, that is, the sequence of replicable activities that produce, as output, products or services. Simply put, applying Lean Accounting in business means:
- simplify reporting and analysis by drafting them with a view to use by non-financial functions;
- Facilitate decision making by leveraging value: the Lean Accounting controller tracks costs that are closely related to transactions that the customer is “happy” to pay (so only costs that transform and add value to the asset);
- Calculate the economic and financial benefits of Lean Production;
- Improve productivity, reduce waste, increase quality.
Beware, because this does not entail the elimination of administrative-accounting activities altogether: these must still be manned, so as not to incur the risks of noncompliance with legal obligations.
Lean Accounting is therefore configured as a parallel practice, and should therefore be understood as an investment that the company makes to obtain immediate benefits in terms of cost reduction and data availability, which are essential for making impactful and strategic decisions. In fact, it is characteristic of Lean management control systems to have a direct and immediate link with the underlying concrete activities (an advanced Activity Based Costing ), so they are able to provide on a weekly or even daily basis useful information for company boards.
The path of a company that decides to try its hand at applying Lean Accounting involves first and foremost theidentification of Value Streams.
Starting with a significant product family or a set of services with similar characteristics, processing times, average waiting times, any accumulation of material or paperwork, waste and lost process time are then identified to value an average cost that takes into account all contingencies, which are an integral part of the path but are usually left out and considered only at a later stage.
The actual areas of economic and financial stress identified in the implementation process are used to create a product income statement for Value Stream, i.e., a management report, designed for “non-financial” people, on which to simulate possible process improvement and streamlining actions.
To highlight, the goal of Lean Accounting is not to reduce costs directly, but to lead organizations to create strategies to:
- increaseproduction efficiency without necessarily affecting the number of people;
- increase the customer’s perceived value in terms of quality, reduced lead time (total throughput time of the product or service), and ability to respond quickly to demand;
- reduce working capital, which often hides many inefficiencies and uncontrollable costs such as excessive inventories, asset spoilage, bad debts, debt situations not really covered, and sunk operating costs.
Having identified a functional pathway for the target cluster, the goal is to spill over to other value streams, thus extending theapplication of the methodology-at scale-to all departments in the company.
A key part of the process is to establish goals upstream, share them clearly and transparently with those involved in the process itself and, above all, define management KPIs that can measure their actual achievement by drawing attention to the critical issues encountered: Lean companies do not have the ambition to create a perfect system, but to recognize and work on their organizational limitations, setting more challenging goals for the future.
It is certainly a long process and must be undertaken step by step, with the understanding that applying it basically means hinging the entire organizational structure on the logic of continuous improvement.
