This lean accounting case study is about a multi-plant, multinational publicly traded company in the packaging industry that began its lean accounting transformation in 2019. Periodically, we will check in on its progress to illustrate how lean accounting can be rolled out in a larger, more complex organization.
We are presenting this case study in the form of an interview between Nick Katko of BMA and the company’s lean accounting transformation leader.
Nick: What initially sparked your interest in lean accounting?
Our quarterly MDA (management discussion and analysis) reporting package contained a great deal of plant performance information such as sales, mix, margin, and operating performance using variance analysis. I found the message sent on plant performance very confusing. For example, sales for a plant would be very positive, but the operating performance was negative. In addition, our CFO was not a believer in the variance analysis, and he wanted better information to tie the numbers together in a realistic way.
Nick: What were your initial steps to generate interest in lean accounting?
First, I suggested to our CEO and CFO we read Jerry Solomon’s book Who’s Counting? After completing the book, we decided to explore lean accounting in more detail by getting some training from experienced lean accounting practitioners. In April 2019, I, along with a small team of plant controllers and financial accounting staff, attended a lean accounting workshop conducted by Jerry Solomon and Nick Katko. Besides learning more about lean accounting, we also learned the importance of conducting a lean accounting pilot to demonstrate lean accounting to our organization.
Nick: In the summer of 2019, I facilitated a lean accounting pilot in one of your divisions. What do you consider the most important aspects of the pilot?
We had some operational managers on the pilot team, including the general manager of the division. The general manager got on board very quickly with lean accounting as we developed the new measurements and a value stream income statement. They integrated this new information into their operational management practices rather rapidly. Within the operational management structure of our business, the general manager began using the information to explain operating performance. We engaged in a continuous discussion with key senior leaders so they could better understand lean accounting as it applied to our company and its impact on systems and internal reporting information.
Nick: What did you do in 2020?
Our goal for 2020 was to do a complete lean accounting transformation for the pilot division so we could identify and resolve all the transformation issues based on a goal of turning off the division’s labor and overhead rates in January 2021. We had to work through the impact on our chart of accounts and financial reporting. We addressed all data warehouse issues related to our internal management systems that use standard costing. And, of course, how to value inventory without labor and overhead rates. We also had to work closely with all the managers that used the current information and involve them in the change management process.
We decided to work very methodically and bring others into the transformation process rather than simply trying to push change through. I’m happy to say we are converting our pilot division this month. We plan to move to the next division during Q1-2021 and continue division-by-division. We feel confident the roll-out in other divisions will be faster because we resolved so many issues during the pilot.
Nick: What advice would you give to any company thinking about lean accounting?
I think there are three keys to success. First, get the key company leaders on board. Our pilot was successful because of the support and encouragement of our CEO and CFO. Second, work cross-functionally. We worked with plant management and FP&A because they are the users of operational information and needed to have a voice in what lean accounting was going to mean for us. We also engaged with IT throughout the pilot because of their knowledge of our data warehouse and reporting systems. We decided early on to determine how to “automate” the production and reporting of lean accounting information. Third, work positively inside the company. It takes people time to understand something new. I can’t tell you how many discussions (formal and informal) I had with fellow senior leaders, plant controllers, and plant general managers.
We will check in on this company later on in 2021 and report back on their learnings and progress.