March 2020 | Commentary | The Lean Supply Chain

Accounting for Lean

Tags: Supply Chain Management, Finance

While it's one thing to have a lean supply chain, it's another thing to properly account for it.

Paul A. Myerson, instructor, management and decision sciences at Monmouth University and author of books on Lean and the Supply Chain for McGraw-Hill, Pearson, and Productivity Press, 732-571-7523

Let's use the concept of economic value added (EVA) analysis to help explain and consider Lean supply chain accounting. EVA is an estimate of a firm's economic profit, or the value created in excess of the required return of the company's shareholders. EVA is the net profit less the dollar charge for raising the firm's capital.

The idea is that value is created when the return on the firm's economic capital employed exceeds the cost of that capital. Companies can determine this amount by making adjustments to generally accepted accounting principles (GAAP).

CUtting Holding Costs

For example, rather than producing in large lots to spread fixed costs over many units—which in traditional accounting may be a good thing as it lowers the cost per unit—EVA and Lean look at reducing lot size to save on holding costs associated with the excess inventory that has been created.

However, EVA and Lean also consider the capital and other investments—such as reducing changeover times—needed to decrease lot size.

Lean accounting works well with EVA by focusing on the value stream—from customers through to suppliers—for an item or a family of items (or service) instead of looking primarily at the general costs of goods sold.

Lean accounting looks at daily cost reports as opposed to after-the-fact weekly or month-end reports, which are common in traditional accounting. It views capacity as an asset instead of just idle time and sees inventory as a liability rather than an asset.

From Bean Counter to Consultant

The Lean accounting process frees up time for financial people by eliminating a great number of transactions, reports, reconciliations, and meetings. Lean accounting enables financial people to act less like "bean counters" and more like consultants, providing timely, detailed, focused reports regarding costs at any step in customer fulfillment.

When using traditional accounting methods, companies try to break down expenses by determining the cost of each unit produced, and then create their financials based on that through standard costing. Lean accounting is more real time, so you look at what you have sold and what it cost you to estimate your profitability continually.

This can have a huge impact on a company's manufacturing and supply chain processes. Think about it: One of Lean's main goals is to identify and eliminate waste and non-value-added processes, but traditional accounting systems have no ability to measure waste and inefficiency—and don't think in terms of value streams.

Fostering Lean Culture

As consultants, Lean accountants can readily see the impact that expedited shipments and a quarter-end push to meet quotas and targets have on profits. Yet for the most part, today's executives are primarily driven by financial reports, which don't do a good job of modeling the supply chain.

Simple and timely information focused on value streams helps empower people at all levels of the organization. It can also foster a Lean culture centered around customer value.

Together, Lean accounting from an EVA perspective and a Lean supply chain can make sure that everyone is rowing in the same direction to reach the maximum, long-range goals and benefits of Lean thinking.






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