There are many things written about the scholar that invented the term “management consultant” and the study of business management. He transformed the business equation from the behavior of commodities...
GARY KAPANOWSKI: LEAN FUNDAMENTALS FOR ACCOUNTANTS
The goal for this article is to provide accountants with the proper fundamentals of Lean and practical uses for the Lean tools in the office. This article will also provide the reader with quick implementation of Lean tools and techniques to validate the benefits of Lean.
Introduction to Lean:
Lean is a methodology based on the Voice of the Customer (VOC). Everything we do is to bring value to the customer and solve their problem. For every task we attempt to complete, we need to ask ourselves is this task generating value for the customer. If the task is adding value to the customer, we then need to ask can we improve the task and o continuously add more value to the customer. If the task isn’t adding value to the customer, we need to ask how we can eliminate this activity. The premise is to get as close to the customer as possible to understand and satisfy the customer needs. Thus, Lean is built on the fundamentals of capitalism and economics, i.e. supply and demand.
Lean is a methodology that is based on monitoring and controlling, the very nature of the accountant. Reporting metrics to management is a major component of the accountant’s responsibility. Lean utilizes organizational driving metrics to improve both the revenue (top line) and cost (bottom line). The key is to accurately detect the improvements and manage them properly. This article will give you the tools to accomplish this quickly and add value to the organization.
Finally, Lean is a methodology based on the concept of team and synergy. There are two guiding principles that structure Lean for everyone to participate, at any level of the organization, at any organization’s maturity existence. First is the respect for people. As employees participate in Lean, the organization will benefit through their added participation. The realization of strength in numbers is highlighted. This cannot be accomplished if the general workforce of the organization is not positively reinforced to strive to do better and accomplish more. The second is continuous improvement. This basic principle is to allow for the improvements to be built into the foundation of the organization and to move forward with the next improvement to continue the cycle. This will allow for the organization to become closer to the customer. This will also separate the organization from their competitors by aligning with the customers to build a competitive advantage.
In summary, Lean is about involving everyone within the organization in continuous improvement which includes thinking everyday about how to make the process better, cheaper, easier, faster, and safer.
Lean is the identification, elimination, and reduction of waste or non-value added activity within a process as perceived by the customer. Lean has two concepts that make it completely different from other process improvement mythologies: Respect for people and elimination of process wastes with the knowledge that nothing is perfect (Figure 1). Lean is development and utilization of the entire organization to focus on the customer to eliminate waste and continuously improve. The thought process is to have everyone focus to add value to the customer than just the front office.
Lean by definition is for the process flow to be in control, or to be effective and efficient. This means the elimination of waste. The intention of Lean is not to starve a process into control, but to enhance it. Reducing cost is only one lever available, others include balancing demand, continuous improvement, error proofing, and increased throughput (explained within the article).
When reviewing any process, the Lean focus is to always start with the customer. Thus, we try to identify the Voice of the Customer (VOC) with everything we do to understand the customer’ problems.
This leads us to assist team members within the organization to think Lean. In Jim Womack’s “Lean Thinking” book, he describes this thought process as “a way to do more and more with less and less” to provide customers what they want or willing to buy. This includes human effort, equipment, time, space, energy, etc. Thus, anyone can use Lean anywhere from accounting to operations. Part of the change toward Lean thinking is learning to see problems differently as through the eyes of the customer.
History of Lean:
There are many way to view the beginning of modern Lean practices and one is Frederick Taylor’s time and motion studies in the 1880’s, naming him as the “father of scientific management”. Another is Eli Whitney’s development of interchangeable parts in early 1800’s spurring the industrial revolution. What started the Lean concept known worldwide was Henry Ford’s mass production of automobiles. This was directly linked by Toyota executives Taiichi Ohno and Shigeo Shingo in the crafting of the Toyota Way. The goals for improvement are expressed as working: better, cheaper, easier, faster, and safer. Later, this process was studied and the name “Lean” was coined by Jim Womack in the book “The Machine the Changed the World” in 1991. Currently, Lean is being used in non-manufacturing settings such as health care and services (transactional).
There are many benefits to implement Lean within your organization. In a 2013 study performed by Kaunas University of Technology, the top improvements included the following: return on assets, on time delivery, machine availability, machine setup time reduction, utilization of labor, reduction in floor space, and inventory reduction. Some of the reasons Lean didn’t work included: backsliding to old ways of work, lack of implementation know-how, and employee and middle management resistance. Other studies indicate these improvements: 50% inventory reduction, 50% increase in capacity, 70% decrease in throughput time, 10% improvement in direct time utilization, and 50% improvement in indirect time utilization. Thus, the benefits of Lean include both direct and indirect labor, less money invested in inventory, equipment, and facilities, and added ability to react quickly to changes in demand.
As change agents, accountants can assist Lean succeeding in an organization though supporting team members and top management. We can create an environment to lead by example, fix problems without avoiding the issue, encourage ideas, invest in training, and support continuous improvement.
Toyota Production System (TPS):
The Toyota Way expresses the basic definition of Lean: Respect for People and Continuous improvement (Figure 1). This leads into Jeffery Liker’s 4P Model of the fourteen principles of lean in the Toyota Production System (TPS) (Figure 2). By holding TPS and the Voice of the Customer (VOC) together when solving customer problems, we will continuously improve to provide the best value to our customer.
Describing Lean in a big picture view can be realized understanding the 4P model: Having a long-term philosophy, right process will produce the right result, add value to the organization by developing your people and partners, and continuously solving root problems drives organizational learning. After understanding this view, we can now accept the underlying principles under the 4P model. Implementing Lean requires a long term approach which will match the short term goals, Hosin-Kanri. Since we are utilizing a pull system to avoid unnecessary inventory, we only produce what the customer demands. To optimize the production schedule, we create a balance schedule to level the flow, Heijunka, and expose bottlenecks. Since value added time represents the true price the customer is willing to pay, we do not want to produce defects; thus, we want quality right the first time, Jidoka. Continuing the easy nature of implementing this process, standardization produces continuous improvement throughout the organization. The organization will utilize visual control to identify wastes in the process and utilize proven technology to assist the process in producing the product. To continue the continuous improvement process, the organization will grow their own leaders and develop teams to reduce waste. Extending this Lean process to suppliers and customers will also assist in the elimination of waste. Utilizing the ability to personally see the process, a Gemba walk will expose any non-transparent issues in eliminating waste. As we implement change, we verify that the team takes the appropriate time to understand the issues and then implement quickly, Nemawashi. We also reflect to understand our process and continuously improve or Kaizen. Thus, production is aligned with the customer to eliminate waste.
To teach team members the 14 Lean principles there are several key concepts to understand. Long term goals must meet short term goals for proper alignment of strategy to achieve goals. Quality is free relates to it doesn’t take extra effort or process to perform the standard procedures. The Toyota Way can be applied to every process and industry. We can utilize customer and employee input to improve both product and service. It is why the process failed and not why the team member failed. As we understand more about Lean, the implementation of Lean in an organization is a journey toward the organization’s vison and not a single metric.
Seven Wastes +1:
In Lean, to respect people and continuously improve involves the elimination of Muda or waste. To identify waste, we need to categorize what we determine as waste (Figure 3). To remember each element of waste, we use the acronym of TIM WOODS. Transportation includes the movement of people, machines, product, or information that does not add value to the product or service. Office example is the mailing of files or reports to different locations. Inventory is anything not directly related to the customer’s current orders which occupy resources. Office example is having printed customer reports stored when the customer already received the reports. Motion relates to extra steps by team members that are inefficient. Office example includes printers in suboptimal locations, excess bending / reaching for required supplies, and movement of electronic files. Waiting is the period of inactivity to complete a task or project. Office example is the time the accounting department needs to close the month end which prevents the other users from accessing the network and completing their everyday tasks. Over-processing is the added work performed that does not have value from the customer’s viewpoint. Office example is added formulas or cosmetic details not requested by the customer on data driven excel spreadsheets. Over-production is providing the customer with more product or service than is required. Office example is multiple excel spreadsheets answering the customer’s question. Defect is anything that does not meet the customer expectations. Office example is formulas not adding properly on an excel spreadsheet. Plus one is the waste of human potential, knowledge, and talent. This is also described as the underutilization of team member’s abilities to meet customer’s demand. Office example is allowing security personnel to perform internal audit functions without training.
Five Steps in Lean:
In Lean, there are five steps required to maximize the customer value and minimizing waste. This is used every time we utilize Lean tools (Figure 4). Step one is to identify value. When we review a process, we must understand what the customer deems as value and willing to purchase. Anything not identified as value in the process is considered as non-value and considered as waste to be removed. Step two is to identify the value stream to understand the entire process, documented and not documented. Step three is to understand the flow of the process. The goal is to reduce the flow time. Step four is to establish a pull system which will allow our team members to work on the customer’s demand only when needed. Step five is to seek perfection with continuous improvement. By removing waste, we can improve the business performance. In Lean, many small improvements are better than a system wide analysis.
As we understand more about Lean, Lean is a process that is in control. Being in control means that the process is effective and efficient. This leads to a process with little variance which also represents little waste. The questions all Lean professionals will ask when observing a process is: are we effective, efficient, in control? Thus, we train our eyes to identify waste. We call this “learning to see” or “Lean eyes”.
Lean Manufacturing Roadmap:
The basis of Lean is from Dr. Deming. His simple management style of PDCA, Plan-Do-Check-Act, was implementing in the beginnings of Lean with the Toyota Way. After management commits to Lean, the question to management from the customer is can the organization meet the customer’s demand? If yes, we organize the organization using PDCA to meet customer’s demand. If no, we review the process involving the customer demand to verify why the organization can’t meet the customer’s demand.
House of Lean – Lean Tools and Techniques:
Utilizing the Lean tools is as important as understanding the customer demand or Voice of the Customer (VOC). The house of Lean (Figure 5) is used to assist us with keeping our skills up to date and eliminate waste. We will review some of the most important Lean tools and the basics of how to utilize them in an office setting and implement quickly.
Lean Office for Accountants – Examples:
- 5S for the Office
- Kaizen blitz
- Lead Time Reduction
- One Piece Flow
- Run / Control Charts
- Value Stream Map
- Visual Management
5S is the organizing of the workplace by finding an orderly flow of the office and to eliminate waste. There are two phases for this process: first is to eliminate all the items not needed on a daily task process and second is to create a system so everything that is needed to complete routine tasks has it unique location. Although some will advocate the elimination of all non-work related items on one’s desk or workshop, my retort is that Lean is respect for people. If the family picture is not interfering with the completion of the task, I don’t see the reason to remove the item. The actual 5S steps are the following: Sort (Seiri), Set in order (Seiton), Shining (Seiso), Standardizing (Seiketsu), and Sustain (Shitsuke). In practical terms when applying 5S to the office, sorting involves moving everything to where it is needed. When in doubt of the item’s usefulness, remove it from the location. Set in order is to place the item where it can be found or visually seen. Shining is to clean and verify the item is relevant to retain. Standardize is to establish and inforce the rules on the use of the item. Sustain is to incorporate the item in daily or routine usage and continually review the 5S steps for continuous improvement. A good example is Excel files used monthly for inventory reconciliation. First sort all files in question by name. We can then set in order on the network drive, by year, and by month. We can shine the files to have specific tabs or highlighted cells that contain the answers needed by internal customers. Standardize the creation of the new monthly files to keep the filing structure in place. Sustain the practice by reviewing with the internal customers to verify what they need and when they need it to continuously improve the process and eliminate non-value added tasks or waste.
Gemba is a visual walkthrough of a work place, to actually see what is happening when completing a task. This is not management by walking around (unstructured). A Gemba walk is structured, team positive, data gathering routine event to improve the process. The Gemba process is to routinely review an area with another employee, gather information, and reflect on what was observed. This allows for the team to understand the current state of the process and validate any assumptions. An office example is to review how other remote offices close month end and report financial information for consolidation. The team can go to look at groups that perform well and not well to see where improvements can be initiated. Another example is to go and review an area that has experienced large financial metric variances (favorable or unfavorable). By understanding how and why the area is currently working can produce valuable information for continuous improvement and future budget planning.
Kaizen blitz, or change for the better, involves a quick and structured implementation of an initiative to rapidly improve a process and eliminate waste. This is one of the early building blocks for establishing Lean in an organization. This is typically completed in five days: orientation, understand current situation, develop future improved process, make improvements, and report and celebrate results. In the office, we can start such events for improvement with cash reconciliation, month end close, order to payment process in purchasing, payroll reporting, receiving of budget information for planning, and timely payments for receivables.
Lead time reduction (LTR) is the process of identifying and eliminating non-value added activities or waste from the process being reviewed. Lead time is the total time required for processing a product or service from the point the customer places the order to the satisfied delivery to the customer. Value added activities are those which the customer is willing to pay while non-value added activities are activities the customer is not willing to pay. By identifying the value by the customer, we can prioritize on which activity is causing the most waste and analyze how to eliminate it from the process. In the office, lead time reduction can be used for reviewing cycle processes such as the customer payment cycle and vendor approval cycle that incorporate different people and organizations.
One piece flow is a basic fundamental principle of Lean. Called a “pull” system, this process enables each operation to complete one item at a time instead of a group of multiple items. The process can complete the item faster and without adding waste to the process. In an office setting, we can incorporate one piece flow for activities such as mail distribution process, customer inquiries, and flexible job tasks.
Run / control charts are used to detect trends and significant changes in the observed process. In accounting, this can be performed for transactions such as the number of days to pay an invoice or respond to a mandatory compliance request. By tracking each instance, the accountant can determine the average response time, % above/below the average, number of consecutive “runs” above or below the average, normal distribution of data, and special cause indicating the process changed and when it changed.
Value stream map is a visual documentation of all the activities and information involved in the production of a product or service to the customer. The value stream crosses all functional departments, lines of responsibility, material / operations, and information flow. We use the map to visualize the true operation beyond a single process level and identify the current and future state with real metrics of cost and time. Thus, it becomes the blueprint for improvement and the elimination of waste. In many Lean organizations, the value stream map for each product or service becomes the standard for costing and planning, i.e. a metric to compare against the actual cost. This is a must for all lean organizations to identify improvements and for the accountant to report the real results to management.
Visual management is the adoption of all lean concepts for the organization to observe if the area is operating in a Lean approach, i.e. in control, effective and efficient, to eliminate waste. It becomes immediately apparent for improvement at any work station, i.e. accuracy, concise, easy to understand, and visual. In an office setting, this includes storing of files either paper or electronic. A key question to ask is how long or how many clicks are required to find a file? This is sometimes called management from 30,000 feet.
Metrics to Drive Performance:
As accountants, reporting on the performance of the organization is an important task expected from all customers. Since accountants are situated in the monitor and control function of the organization, the accountant has the ability to understand the drivers of the organization and how the metrics connect throughout the organization representing synergies. The Lean metrics are no different in that they look to identify waste within the process and improve the flow of the process resulting in the organizations ability to produce more product and services with the same infrastructure or less. Lean provides the organization with the ability for improving the top line (revenue) and bottom line (cost) at the same time. The main issue for accountants is the non-detection of the improvement. Since the Lean metrics are not common for organizations to utilize, the benefits of lean maybe missed or not utilized leading to the statement by management guru Peter Drucker: “If you can’t measure it, you can’t manage it”.
The Lean metrics that drive all business include the following: Classical / Traditional Yield, First Time Yield, Rolled Throughput Yield, Takt time, and Cost of Poor Quality (COPQ). Traditional yield measures quality at the end of the process, i.e. total shipped / total attempted to produce. First Time Yield measures good parts that did not get reworked at any process and used to determine the quality level at individual processes. The formula is just as easy, total number of completed parts without rework / total number of parts worked in the operation. Rolled Throughput Yield is the probability of a part making it all the way through every process step without ever being scrapped or reworked, cumulative quality level of the process. The formula is the product of the individual operation’s first time yield. This is also called the “hidden factory” cost of the operation. Takt time is the time (pace) required to produce a product based on customer demand. This is used to synchronize the pace of production with the pace of sales. Thus, the formula is the work time available / customer demand. To summarize these metrics are utilized to identify waste, understand the process flow, and identify the financial impact or Cost of Poor Quality (COPQ). This will explain to management the cost of inaction or not implementing continuous improvement initiatives (Figure 6).
Comparison of Improvement Programs:
When considering Lean for the office, the methodology of Lean is the focus on satisfying the customer by respecting people and continuous improvements by removing waste. Lean concentrates on the flow of the process. By removing waste in the process, the performance will improve. Overall, the attempt for improvement is through small improvements. Other methodologies have different focus (Figure 7). Six Sigma is focused on elimination of variance through statistical problem solving methodology. Theory of Constraints is focused on managing the constraints through increasing throughput. As you can see for the accountant, there are many tools that can be used to assist with improving operational performance. Lean is just one to utilize.
When to implement Lean tools:
Having a quick guide to utilize the Lean tools at the beginning stage of a Lean journey can be challenging. Here are several tips to assist you with this process:
Process produces too much compared to customer demand
- ü Implement Pull System – One piece Flow – to link output directly to customer demand
Process is not producing enough compared to customer demand
- Review capacity constraints
- Focus on removing non-value add activities though lead time reduction
Process is meeting customer demand but has long process lead times and high overhead cost
- Use 5S to improve the cleanliness and organization of workspace
- Implement Pull System – One piece Flow – to stabilize then reduce process steps to reduce lead time
- Reduce batch sizes to the minimum safe batch size for the given process parameters
- Lead Time Reduction for identifying non-value added time
- Total productive maintenance – downtime
- Mistake proofing – errors
- Process balancing – workload is uneven
- Safety stock – variation in demand
Process steps have uneven workloads leading to labor inefficiencies
- Process balancing
Process involves too much movement of information or material; process flow inefficient
- Value Stream Mapping – process flow improvement
- Work cell optimization
Process flow is efficient, but has too much non-value add time
- Lead Time Reduction for identifying non-value added time
As a fundamental review of Lean, this article skims the surface of the full implementation of the Lean mythology. For the accountant, there are many ways to implement Lean. This article provides for several quick implementation initiatives. As with any new concept, the more you try the better you become; the more you do, the better you are. I wish you the best success in your Lean journey.
Five Lean Key Facts:
- LEAN = RESPECTING PEOPLE
- LEAN = CONTINUOUS IMPROVEMENT
- LEAN = CUSTOMER FOCUS
- LEAN = ELIMINATE WASTE
- LEAN = FLOW; IN CONTROL, EFFECTIVE, EFFICIENT
Five Lean Sayings:
- Is our process in control? Effective? Efficient?
- “Lean Eyes” to identify waste
- Provide a way to do more with less
- Process continuous improvement: better, cheaper, easier, faster, and safer
- Coming closer and closer to providing customers with exactly what they want
Five Lean Tools to start:
- One Piece Flow
- Value Stream Map
As published from Journal of Cost Management, Jan/ Feb 2016.
Gary Kapanowski, CLSSMBB, is cost accountant for Moeller Manufacturing, a leading aerospace part supplier, and Lean Six Sigma Master Black Belt Lecturer at Lawrence Technological University Professional Development Center. Utilizing experience with metrics and Balance Scorecard, Gary earned the 2006 Financial Executive of the Year award from Robert Half International and Institute of Management Accountants. His current focus is to assist office workers with easy techniques for adopting Lean in the office to eliminate waste.
FIGURE 1: Lean Definition
Continuous Improvement < — — — > Respect for People
FIGURE 2: Toyota Production System (TPS) 14 Principles of Lean – 4 P Model: The industry Lean standard (Jeffrey K. Liker, The Toyota Way: 14 Management Principles from the World’s Greatest Manufacturer, McGraw-Hill, 2004)
1P: Philosophy: Long-Term Philosophy (#1)
- Long Term Focus Hosin-Kanri – long term meet short term goals
2P: Process: The Right Process Will Produce the Right Results (#2 – #8)
- Create Flow Bring issues to the surface
- Pull Produce only what is needed to avoid overproduction
- Leveling Heijunka – Balance out demand
- Do It Right Jidoka – Quality right first time – stop, fix, do it right
- Standardize Build improvement philosophy to ensure continuous improvement
- Visual Control Do not hide anything
- Technology Rely on proven technology to serve the people and process
3P: People and Partners: Add Value to the Organization by Developing Your People and Partners ( #9 – #11)
- Leadership Grow your own leaders and embrace the TPS
- Teams Develop people and teams who follow the TPS
- Help Others Extend Lean to partners and suppliers, respect
4P: Problem Solving: Continuously Solving Root Problems Drives Organizational Learning (#12 – #14)
- See For Yourself Gemba Walk – Go and See yourself to understand the situation
- Decision Making Nemawahsi – make decisions slow, implement fast
- Reflection Hansei – Reflect and Kaizen – Continuously Improve
Figure 3: Eight Wastes: The real life obstacles preventing an organization from profitability
- Transportation Unnecessary movement of material or product
- Inventory Material or product that is used to cover for inefficiencies
- Motion Unnecessary movement of people; multiple hand-offs
- Waiting Elapsed time between processes when no work is being performed
- Over-Production Producing in excess of customer requirements, service not needed
- Over-Processing Adding unnecessary steps to a process; redundancies between process
- Defect Anything that does not meet the accepted customer requirements
- Resources De-motivating the workforce by not asking for input or recognizing success