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Lean Accounting is about Respect for People

by Jerry Solomon
July 16, 2020

Lean Accounting is about Respect for People

by Jerry Solomon
July 16, 2020 | Comments (0)

My story as one of the recognized founders of Lean Accounting (LA) is unusual. Unlike my fellow LA founders who have degrees and expertise in accounting, my degree is in engineering. Yet, after I was exposed to LA, I became so excited about its concepts that I wanted to share my passion. I did this by writing three books and speaking at many invited conferences and seminars about the topic. At first, my objective was to make accounting easier for everyone to understand, and to help them know every day if they were winning or losing in the great game of business. I soon realized that the principles behind LA were deeper than my initial perspective; LA is primarily about having respect for people.

In most organizations, the accounting department consists of approximately 2% to 4% of the associates. Accountants process information in adherence to generally accepted accounting principles (GAAP). While their years of training in undergraduate and graduate programs and possibly CPA accreditation are great assets to the company, accountants often appear to speak a confusing language to non-accountants. Without the same type of exposure to accounting rules and regulations, the 96% to 98% of the associates without an accounting background can be at a loss for understanding many of the accounting terms and reports, including the critical income statement.

From the Golden Rule to the Platinum Rule

Growing up, I was taught and tried to abide by the Golden Rule: do unto others as you would have others do unto you. However, at Barry-Wehmiller, Inc. (BW), where I was the vice president of Operations at one of the divisions, we established and adhered to what we believed was an upgrade of the Golden Rule. I will call it the Platinum Rule: do unto others as they would want to have done to themselves.

If you have taken behavioral assessments such as DISC or Myers-Briggs, you realize that all of us have different personality traits. For example, my behavioral results show that I tend to view things through a data lens. That perspective works for me, but not necessarily for many of my fellow associates. When BW provided classes on the different behavioral perspectives, communications improved as people understood how to properly message their ideas and findings. One example I will never forget took place at a bowling alley. Our company started a bowling league to improve camaraderie and get to know each other better. After a night of league play, one of the quietest associates came up to me and said, “Jerry, I know you love data. Look at this scorecard; we kicked your butt!” Now that is effective communication delivered by a non-data person to a very data-oriented person.

How does your accounting department deliver information to the rest of your company? I would be surprised if the information is in a format that recipients prefer or understand. One aspect of LA is to provide information in “Plain English,” so all associates can understand it and use it for decision making. In a lean manufacturing environment, we try to eliminate the proverbial management accounting terms, such as standard costs, variances, absorption, and earned hours. The potential users of this information who create value and can improve operations most likely do not understand how these measures are developed, what they mean, and what actions are needed to improve them. I am sure accounting departments would prefer to provide transparent, insightful, and actionable information that motivates correct behaviors. That is what LA attempts to achieve.

Astounding Results

My first experience in learning first-hand the importance of providing easily understandable information to the people who can and will make a difference was transformative. I was working at a heavy manufacturing company in Vermont that had an electric powered foundry that incurred high electric costs for its seasonal business. The CFO had hired a cost accounting consultant to develop a reporting routine to calculate variances for the earned electric dollars of each part being produced in the foundry. Since this was a seasonal business, reported variances ranged from large favorable variances to large unfavorable variances, depending on whether the company was operating at peak production or scaled-back levels. These large variations in the new variance reporting made the information useless for appropriate decision making.

At the time, I was a financial analyst for the company and frustrated by the standard cost reporting system. Since electricity was a significant expense item, I met with the folks in the foundry to review their comprehension of this cost component. None of the people in the foundry understood how electricity costs were incurred; yet they were all extremely interested in knowing. We called in the local power company to explain the billing, including the various charges, such as usage vs. demand, peak and off-peak, in season and out of season, and time of day. We then asked the power company to measure our energy consumption for each major piece of equipment by minute throughout a typical day. Once the team understood the actual cost structure, it went to work brainstorming ideas. For about a $3.00 expenditure, the team saved the company approximately $250,000 (1986 dollars) annually. I bet that would pass muster with any investment committee!

The team learned that the huge variances reported previously were largely a result of the demand charge, which was determined by the energy draw for the most intense 10 minutes of each day. At a minimum, 80% of the company’s demand fee for the next nine months was based on the peak demand charge. Even though energy volume decreased significantly in the off-season, the charges continued unabated.

By respecting the people who do the work, by sharing information in a way they best understand and making that transparent information timely and relevant in the production area, great improvements will occur.

Team members quickly realized that the demand charge was set during the first 10 minutes of the shift when all the heavy equipment was turned on. They decided to stagger their shift so that the start-up could take place sequentially. A red light was placed on top of the four pieces of equipment involved, and after about ten minutes in the start-up mode, the red light was turned off, so the next piece of equipment in line would initiate start-up procedures. These actions significantly reduced the demand charge. The resultant $250,000 annual savings was made possible by having the people closest to the action fully understand the cost drivers of the business. If the user community is fully engaged, they will amaze you with their ingenuity. This experience changed my entire outlook on management accounting well before the term lean or LA was identified. I realized that, generally, the more sophisticated the accounting system, the less effective it is.

Nobody would be able to make the above improvements by examining monthly or part-by-part variances. The reported variances are a function of the system. If you improve the system, the true costs of every part will improve. The following maxim has been true throughout my career: systemic costs are what need to be examined, rather than part-by-part costs (with possibly the exception of materials).

By respecting the people who do the work, by sharing information in a way they best understand and making that transparent information timely and relevant in the production area, great improvements will occur. That is largely what LA is about and how it should be implemented on a company-wide scale. Changing the presentation of internal accounting information so that anyone can understand the numbers, while still adhering to GAAP, makes everyone part of the business and brings out the absolute best in people.

 

Keywords:  accounting,  respect
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