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Lean Accounting PDF
Lean Accounting PDF
Lean Accounting PDF
A Thesis
Submitted for the award of Ph.D. degree
of
Mohanlal Sukhadia University, Udaipur
in the
Faculty of Commerce
By
Vineeta Arora
full) has not been submitted to any university for the award of a
The researcher expects that apart from being an academic landmark, the
present study will foster and inspire the community of lean thinkers and doers.
(Vineeta Arora)
ACKNOWLEDGEMENTS
First and the foremost, praises and thanks to God, the Almighty, for His
blessings that He has showered upon me throughout my research period to
complete the research work successfully.
Words cannot express that how grateful I am towards my parents late Shri
Krishan Gopal Arora and Smt. Shashi Kala Arora for being like a wall against all
the problems. Unfortunately, my father could not witness the completion and
submission of the thesis but I know he is always there with me and it is his
disguised blessing that made this task possible. I also owe my gratitude to my
parents-in-laws Shri Jagdish Prasad Arora and Smt. Pavitra Arora for all the
sacrifices that they have made on my behalf. Their prayer for me was always
sustained me thus far. More, I express my sincere thanks to my sister Ekta Arora
for her continuous love and affection, and especially my brother Er. Ankit Arora
for enlightening me the first glance of this research.
Vineeta Arora
LIST OF TABLES
Table Table Name Page
No. No.
1.1 Principles, Practices and Tools of Lean Accounting
10-11
Acknowledgements iii-v
1. Introduction 1-36
Appendix 235-238
Bibliography 239-262
CHAPTER-1
INTRODUCTION
Outlines:
Just as companies, throughout the world, are trying very hard to make their
business more responsive towards the customer-needs, both in terms of speed of
response and ability to provide innovative products. It meets the customer needs
in a way which provide for the satisfaction of target customer. This has forced to
re-think on their internal processes so that the process also meets the value
definition of the customer.1 So companies are demanding for an accounting
system which provides accurate, timely and understandable information to
increased customer values growth, profitability and cash flow.
Lean accounting is the general term used for the changes required to a
company’s accounting, control, measurement, and management processes to
support lean manufacturing and lean thinking. 2 It supports the lean culture by
motivating investment in people, providing information that is relevant and
actionable, and empowering continuous improvement at every level of the
organization. It is fully comply with generally accepted accounting principles
(GAAP), external reporting regulations and internal reporting requirements. It
uses lean tools to eliminate waste from the accounting processes while
maintaining thorough financial control. 3
This chapter tries to explore conceptual issues of lean accounting i.e.
meaning, definition, evolution, need, principles, practices and tools of lean
accounting which help the reader to understand the term lean accounting clearly.
In above three, generally Muda can be classified into two types i.e. Type-1
muda and Type-2 muda. Type-1 muda includes non value added work but
necessary for the system to function. This can be reduced but not eliminated.
Type-2 muda includes non value added and unnecessary work of system. Lean
accounting first removes Type-2 muda and then works against Type-1 muda.
1.2 DEFINITIONS
To travel around the world of the lean accounting, some definitions given
by the authors or thinkers of lean accounting are given as follow:
“It was not enough to chase out the cost accountants from the plants. The
problem was to chase cost accounting from my people’s minds.”
The lean approach is not especially new. It derives from the Toyota
Production System or Just-In-Time Production. The term “Lean” firstly coined by
John Krafcik in 1988 but the evolution of lean approach is associated before 19
century when interchangeable parts had been developed by Eli Whitney as
product moved from one discrete process to the next through the logistics system
and assemble at last. In 1890, F. W. Taylor hooks up this chain with Scientific
Management by time study and standardized work.
Although there are instances of lean thinking before 19’s but the actually
work proceed by Henry Ford in 1913. He carried consistently interchangeable
parts with standard work and moving conveyance to create Flow Production. He
lined up the steps in process sequence wherever possible using special purpose
machine and assembled the components going into the vehicle within a few
minutes and delivered perfectly fitting components directly to line-side. It was
apparently lowering costs per process step, but continually increasing throughput
times and inventories and it was really required more sophisticated information
management systems.14
All of this took place between about 1949 and 1975. By the 1990’s, the
whole study phrased by “Lean Manufacturing” and it becomes the world class
manufacturing. Lean manufacturing caught the imagination of manufacturing
people in many countries. Lean implementations are now commonplace especially
in U.S. but in Indian context, it is now in growing condition.
DEFINE
PERFECTION
VALUE
IDENTIFY
EMPOWERMENT VALUE
STREAMS
FLOW
AND PULL
iii. FLOW AND PULL: The production process is designed to maximize the
flow of the product through value stream. It means working on each
design, order, and product continuously from beginning to end so that
there is no waiting, downtime, or waste, within or between the steps. As
flow is introduced let the customer pull i.e., to provide what the customer
wants only when the customer wants it.
TOOLS OF LEAN
PRINCIPLES PRACTICES
ACCOUNTING
Continuously eliminate
Lean & simple Value stream mapping
waste from the transactions
business Kaizen
processes, reports and other
accounting PDCA
accounting methods
Performance
Management control & Measurement Linkage
Continuous improvement Chart
Value stream
performance boards
Box Scores
Accounting
processes that
support lean Cost management Value Stream Costing
transformation Value Stream Income
Statement
Hoshin policy
Contd….
deployment, 5S
Planning & budgeting
Sales, Operations,
Finance Planning
Performance
measurement tracking
Invest in people continuous improvement,
employee training
Profit sharing
Transaction elimination
Internal control based on matrix
Strengthen lean operational controls Process maps showing
internal controls
accounting
Simple methods to value
control
inventory without the
Inventory valuation
requirement for perpetual
inventory records
It is the “language of Lean” which analyzes the current and the future state
for the sequence of activities generate from its beginning through to the customer.
Many companies, pursuing the lean transformations, have realized that
improvement events alone are not enough. Value Stream Mapping with its vision
and plan, analyzes the lean improvements and strengthens as well. It provides the
optimum value through complete value creation process to the customers with
minimum or reduced waste. The purpose of a value stream map is to enable us to
see the flow of materials, information, and sometimes cash, through the value
stream.19
1.6.1.2 Kaizen
The lean Company frequently works for the ultimate object of Kaizen. It is
a technique of lean management which shows continuous improvement. It seeks
to achieve small but continuous changes in processes with the intention of
improved quality and competence in a systematic manner. It is an ongoing effort
to improve products, services or processes where employees work together
proactively to achieve regular, incremental improvements in the manufacturing
process. It combines the collective talents of a company to create an engine for
continually eliminating waste form the process.20
1.6.1.3 Plan-Do-Check-Act (PDCA)
The performance measurement of lean is to make sure all the processes are
exactly following the expectation of strategy goals, and value stream performance
is to initiate continuous improvement and create more benefit in the
organization.22 This tool uses visual techniques to display critical measures in the
workplace and see instantly what is going wrong on the shop floor. It can improve
feedback between performances and results.
Value stream cost is typically calculated weekly and takes account of all
the costs in the value stream. It makes no difference between direct cost and
indirect cost. All the costs within the value stream are considered direct. Costs
which are exterior of the value stream are not incorporated in the value stream
costing. It provides financial information that can be clearly understood by
everyone in the value stream.24
It is a system under which company has planned its product cost and profit
in advance that it wants to achieve for a new product. It is a market driven cost
which is computed before a product is produced through market research and
competitor analysis. Target costs are calculated by using a formula i.e. market
price – required profit margin = target cost. 25 Target costing is used when new
products are being designed or when the value stream team needs to understand
the changes required for increasing value for the customers.
Lean planning starts with Hoshin Policy Deployment and runs through to
the monthly Sales, Operations, and Financial Planning (SOPF) process leading to
an integrated game plan for the organization. These plans are all made at a value
stream level and use lean accounting information. 30 The impact of this lean
improvement can be shown through value stream cost and capacity analysis, and
also current & future state value stream maps. Finally it invests in people through
continuous improvement participation, employee satisfaction, and profit sharing.
1.6.4.2 - 5S
1.6.4.4: 3P
Companies that are using the lean accounting have better understanding of
information rather than a traditional accounting company. It generates some better
information when proper internal accounting control is there. Accounting control
is always important and it is essential that the Lean Accounting improves these
controls and never makes it weak.
1.7.2 Gemba
Gemba (the real place) is a philosophy that reminds the top level
management to get out the offices and spend their time on the plant floor- the
place where real action occurs. It promotes a deep and thorough understanding of
real world manufacturing issues by first hand observation and by talking with
plant floor employees.38
1.7.3 Jidoka
1.7.4 Just-In-Time
1.7.5 Kanban
Kanban is a method of regulating the flow of goods both within the factory
and with outside suppliers and customers. Based on automatic replenishment
through signal cards that indicate when more goods are needed. It eliminates
waste of inventory and overproduction. 39
It is the pace of production i.e. how much time must take to produce a unit.
It gives an idea to align production with customer demand.
These are some tools of lean accounting which work in the direction of
continuous improvement with the ultimate goal of empowering peoples and move
towards perfection.
S. TRADITIONAL COST
No. LEAN ACCOUNTING ACCOUNTING Contd….
Contd…
8. It has full revenues and costs It has narrow focus on the cost side
without allocations. of the ledger, not on revenue or
value.
9. It offers more control through It creates multi-page reports with
visual management. opaque accounting jargon.
12. It produces easy and quick reports In this system, reports are quick and
which integrate easily with box easy to produce, but only after the
scores that show operational and posting table and standard costs have
capacity information alongside the been established. Reports are based
financials. on often huge numbers of accounting
transactions.
13. It is based on maximizing value It is based on minimizing individual
stream throughput. product cost.
14. It seeks to maximize flow through It focuses on standard costs and
the value stream. variances.
15. It is linked directly to strategic It seeks to maximize labour
goals and leads to self-motivated efficiency and machine utilization.
strategic achievement.
16. In this system, companies rely on This system, companies either have a
an integrated system of financial focus or an operational
operational measures, financial focus. If they have both, traditional
results, capacity and flow companies have baffling balanced
information. score cards or other complex
reporting.
Contd…
17. It motivates single-piece flow, It motivates larges batches, high
low inventory and on-time inventories and long lead times. It
delivery. It is designed for flow. designed for mass production.
18. It has few measurements which It has been produced complex reports
are timely and visually displayed. by accounting department and
designed for senior managers.
20. Measurements are gathered by the Measurements come from the ERP
value stream team members. They (Enterprise Resource Planning)
motivate lean improvements and system and are feared by the people.
strategic achievement.
21. It supports empowered operations It supports command-and-control
and accounting people. management.
Contd…
S. LEAN ACCOUNTING TRADITIONAL COST
No. ACCOUNTING
27. Pricing or order taking decisions Pricing or orders taking decisions are
are based on the value created for based on cost plus margins.
the customer.
29. Most decisions are made using the Most decisions are made using
revenues, costs, and profitability standard costs of products or
of the value stream as a whole. services.
1.9.1 Objectives:
(d) To drive lean solution based on lean principal for the problem
facing in traditional volume based costing.
1.9.2 Methodology:
a. Data Source: For present research work, primary as well as secondary data
have been used for covering all the aspects of lean accounting. A
comprehensive and extensive procedure is adopted for collecting data.
b. Sample Selection: The sample has been selected on judgmental basis. Three
different manufacturing companies are selected as sample which produces
different products in their field with traditional system of costing.
Lean accounting itself lean. It can create world class organization through
Total Lean Management. This chapter gives a basic introduction to lean
accounting by answering the questions that what is lean accounting, why it is
important for a company, what are its principles and tools, how it is originated and
why it is better than traditional accounting.
Lean accounting is very wide concept to use. It is still work in progress. Its
principles, practices and tools have been implemented in a wide range of
companies at various stages on the journey to the lean transformation. This
chapter explores the potential of the lean accounting from the view point of
maximize flow and minimize waste in an organization. Also, it highlights a
proven system for measuring and managing the lean enterprise.
References:
6. Womack, P. J., & Daniel, T. J. (2003). Lean Thinking: banish waste and
create wealth in your corporation (1st ed.) (p.11).. New York: Simon &
Schuster.
11. Rother, M., & Shook, J. (2003). Learning to see: Value stream mapping to
add value and eliminate muda. (pp. 6-10). Brookline, MA: Lean Enterprise
Institute.
12. Marshall, G. (2008, Feb 29). No matter what it’s called, lean accounting
measures what matters. Retrieved from http://www.leanaccountingnews.
com/archive/2008-02.asp visited on December 5, 2009.
13. Vinas, T. (2007, Jan 4). Lean Accounting: Focus on the meaning of
numbers. Retrieved from http://www.industryweek.com/software-amp-
systems/lean-accounting-focus-meaning-numbers visited on August 12,
2014.
16. Womack, P. J., & Daniel, T. J. (2003). Lean thinking: banish waste and
create wealth in your corporation (1st ed.) (pp. 13-14). New York: Simon &
Schuster.
19. Maskell, B., & Baggaley, B. (2003). Practical Lean Accounting: A proven
system for measuring and managing the lean enterprise. (p. 341).
Productivity Press.
21. Maskell, H. B., Baggaley, B., Katko, N., & Paino, D. (2007). The lean
business management system; Lean accounting principles & practices
toolkit (1st ed.). BMA Press, Cherry Hill NJ USA.
22. Wang, D. (2012). Value stream in lean accounting and beyond budgeting.
Unpublished Ph.D. thesis. Aarhus University- Aarhus School of Business
Management Accounting and Controlling. Retrieved from http://
pure.au.dk/portal/files/45908958/Compare_lean_value_stream_and_beyond
_budgeting_in_continuous_improvement.pdf visited on May 25, 2014.
23. Maskell, B., & Baggaley, B. (2003). Practical Lean Accounting: A proven
system for measuring and managing the lean enterprise. (p. 147).
Productivity Press.
25. Swenson, D., Assari, S., & Kim IL-Woon (2003). Best practice in target
costing. Management Accounting Quarterly, 4, 12-17.
26. Maskell, B. H., & Baggaley B. L. (2006). Lean accounting: What's it all
about? Target Magazine, 22(1), 35-43.
27. Frampton, J. (2015). Lean accounting and accounting for lean. MAC
Resource. Retrieved from http://www.massmac.org/newsline/0808/
article08.htm visited on Jan 18, 2015.
28. Bell, E., & Davison, J. (2013). Visual Management studies: Empirical and
theoretical approaches. International Journal of Management Reviews, 15,
167-184.
29. Bititci, U., Cocca, P., & Ates, A. (2015). Impact of visual performance
management systems on the performance management practices of
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30. Maskell, B. H., & Baggaley, B. L. (2006). Lean accounting: What's it all
about? Target Magazine, 22(1), 35-43.
31. Akao, Y. (2004). Hoshin Kanri: Policy deployment for successful TQM. (p.
43). Taylor & Fransis.
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about? Target Magazine, 22(1), 35-43.
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for change. Environment Quarterly Management, 97-103.
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for lean thinkers (5th ed.) (p. 83). Lean Enterprises Institute Publishing
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about? Target Magazine, 22(1), 35-43.
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CHAPTER–2
REVIEW OF LITERATURE
Outlines:
2.5 Conclusion
There are many angles through which a literature review can be
approached. The literature review is like a bridge between the study already done
and the present study to be done. Every research needs to be connected with the
work already done to disclose appropriate theoretical structure of the present
study. Therefore, before proceeding towards analysis of impact of lean accounting
and traditional cost accounting, a sight has been put for the work already done in
this area. This will facilitate to reveal various concepts relating to the study and
the potential relationship between them. It exercises to analyze the area of the
research, which has been resolved in the study and also justifies the proposed
methodology. It will allow identifying the research gap so as to engender new
original ideas and avoid duplicating results of other researchers. Ultimately it will
help to refine and refocus on the study.
This chapter includes the review of research work done on various aspects
of lean accounting highlighting its objectives, methodology and findings. Lean
accounting is one of the most popular areas of research. So the review of literature
has mentioned below shows a number of studies, in India and abroad that have
been conducted to identify the concept of lean accounting and its impact on the
organization. While going through the available literature for lean accounting, it
has been found that not much work has been done on the said topic in India so an
effort has been made to identify research gap especially in context of India.
Therefore, the available researches are classified into three categories according to
their focus on the study namely conceptual review of lean accounting, case
studies, and criticisms of lean accounting.
This category of reviews includes those studies which have the objectives
of exploring the introduction of lean accounting, its behavior for the organization
and comparison with other costing methods. A brief review of researches done by
various researchers is presented below in reverse chronological order:
Bargerstock and Shi (2015)1 examines irregularity in lean accounting
theory and practice related to the use of standard costing in a
manufacturing enterprises of United States that utilizes Toyota-style
process improvement techniques. As lean accounting literature suggests,
when lean manufacturing is properly implemented in the company,
standard costing becomes another form of waste that must be eliminated or
reduced. Because variance analysis in standard costing has been replaced
by work cell matrix in the lean accounting, it is to be considered as
outstanding method for operational control. This article looks inside the
possible reasons for dichotomy including lack of lean accounting
knowledge and also deeply attachment with the standard costing and ERP
systems.
Martinez (2014)5 reveals that the lean is a novel and radically successful
approach for manufacturing development by Toyota. To provide a mean of
accounting with value-addition to the customer, the concept of lean
accounting has been developed. This concept of accounting includes value
stream, pull, perfection and continuous improvement. The author
compares the lean and the traditional accounting and finally concludes that
the lean accounting is a philosophy effectuated through accounting
policies and procedures. The primary objective of lean is to maximize the
value to the customer through development and active use of metrics and
benchmarks which are easy to understand and periodically monitor by the
lean team.
Maskell (2014)7 in the webinar ‘Not Just a Map; Value Streams are How
You Run a Lean Business’ presents the problem of traditional accounting.
Traditional accounting’s departmental organizational structure is designed
to optimize departmental performance and creates artificial barriers in an
organization. But lean companies create processes that rapidly flow value
to the customers. The departmental structure of lean is about flow and pull,
and second is continuous improvement. This can be achieved through end-
to-end perfectness in the value streams. Third one is the empowerment of
employees that can be obtained from cooperation within the value stream
team. Fourth and last is customer value that is sequence of process steps
that create value for the customer. This customer value comes from a
single line of sight to the customer. The presenter includes here, all actions
in the value stream required to create exceptional value for the customers
and all other activities required to support the transformation of the order
into delivery a finished product. The benefit of a value stream organization
is the whole flow consists in one value stream team. This team focuses on
creating customer value, manages flow and eliminates waste and finally
makes lots of money. So really value streams are not just a map, it is about
how to run a business.
Maskell (2014)8 explores four points to increase profits of the firm i.e.
manage spending to reduce cost, manage profitability using hurdle rate,
lean decision making to improve profitability and at last, target costing.
The author favours the Value Stream Accounting to identify and to solve
spending problems with Plan-Do-Check-Act process. First of all, assess
the current situation using actual spending, identify root causes of
spending, change operating behavior, develop new standard work and
reduce costs and increase profits. The presenter uses a hurdle rate which is
the minimum required return on sales, to manage the profitability of value
stream. Finally, the webinar embosses target costing on the surface of the
lean accounting. Target costing is a cross functional improvement
methodology which works on market price less desired profit. So the
target cost less actual cost becomes the cost gap for any type of value
stream. It eliminates waste, and increases value which is helpful to
maintain the value stream profitability.
Maskell (2014)9 shares his views on the lean accounting in his blog ‘It
Fits; Day-by-the-Hour for Long Lead-Time Products’. He posts that every
company which has adopted lean manufacturing, generally uses Day-by-
the-Hour charts. It shows the work must be completed each hour of the
workday on a visual board which is located within the cell or process. The
Day-by-the-Hour report controls the process and offset immediate
problems. It drives long term improvement projects and solves problems
permanently as it is the vital part of lean accounting. But what can be done
if the processes take many hours or days to complete? The author tries to
answer this question by telling a tale of two companies. In the first
company, as a result of using the Day-by-the-Hour report to control the
process, their output has reached 22 batches per week for over one year.
This output has been achieved by the close attention on Day-by-the-Hour
report. As same in the second company, the production capacity of the
value stream has doubled without any significant investment in the
company. So at last, the author suggests in his blog that applying Day-by-
the-Hour report to all companies can make the lean story successful.
Pandya and Shah (2014)10 elucidate that the lean is a wide concept and can
be implemented in all types of different organizations like automotive,
piece of clothing, electronics, ceramic objects etc. The lean mainly
includes involvement of people which tries to reduce waste and improves
quality. The authors have analyzed here different types of wastes in a
Diesel Locomotive Plant Light Machine Shop and implement the lean
programme to identify different factors which are associated with process
and its effects on performance of the process. Finally it concludes that lean
manufacturing concept improves quality and increases production rate in
every type of organization. It reduces waste of all kinds and increases
productivity.
Dan and Judith (2013)12 explore the theoretical link between the lean
companies and the non-lean companies. They narrate that the companies
which adopt lean manufacturing and lean accounting ultimately achieve
better profitability and cash flows in comparison to similarly situated
companies that didn’t adopt lean manufacturing and lean accounting. The
methodology of this paper is random survey. The collected data have been
analyzed through Wilcoxon Signed-Ranks and Matched Pairs tests. The
finding of the study is that lean companies are better result oriented than
non-lean companies in terms of Returns on Net Operating Assets (RNOA),
Returns on Total Assets (ROA), operating cash flows, cash adequacy
ratios, profit margin ratio and financing assets ratios. The existing study
imparts a starting point for future research on the financial performance of
lean companies. The present study stuffs a hole in the academic literature.
This study measures RNOA, which does not mystify operating and
financing activities. Additionally, this study utilizes a line of attack that
provides sensible assurance of the identification of both lean companies
and non-lean companies from publicly available data.
Kahier (2013)13 investigates that the lean practices must be adopted in the
everyday activities by the finance staff and the management staff both.
The author explains that lean helps the accounting and the finance
organization to identify the value which they provide to the customers. It
focuses on the process that delivers value and tries to eliminate wasteful
activities. The lean has remarkable benefits in the finance and accounting
dome. It helps the organization to make its concentration on what’s truly
important by delivering timely and accurate financial information. It helps
to carry out processes with more stability, consistency, and with
significant quality. Lean also helps to know about tasks that consume time
and resources but do not add value. Once the improvements are taken
place, lean provides a pattern for managers to maintain high performance
and continuously increase the organizational value for finance and
accounting department. Finally, the author highlights the essential
ingredients of a complete lean manufacturing process.
Katko (2013)14 explains in the book ‘The Lean CFO: Architect of the Lean
Management System’ that the lean thinking has a new lean management
accounting system which builds up with the four aspects i.e. economic of
lean, manage the spending not the cost, move to the decision and tear
down the standard costing. The presenter shows the economics of lean
with the concept of demand and supply. In any company, there is the
demand for delivering exact customer value and also there is the supply of
resources as to maintain productivity and demand rate. It means how much
the value stream ship and how much the value stream actually spent, is the
basis of managing the spending. The presenter shows that standard costing
is rooted in decision making processes of companies but it conflicts with
the economics of lean. So moving to the right decision through delivering
value to the customers, improve productivity and making flow in the
manufacturing process. Now, at last, the webinar concentrates on tear
down standard costing. The traditional uses of standard costing is
inventory valuation, profitability analysis and operating performance but
in lean management accounting, there is no need to value inventory
because it works on JIT and Standard WIP.
Lohana (2013)16 explains that the lean accounting is actually the milestone
of completely different model of manufacturing management system. Lean
accounting is originally emerged to make factory operations, marketing
and pricing decisions, quality management, application of logistics and
other critical business functions easy. Lean accounting requires less
capital, space, time, material, and human effort to produce products and
services with fewer defects to precise customer desires compared with
traditional modern management system. Finally, the author concludes that
the lean accounting is at early stage of its maturity. It is possible that it will
gain wider acceptance by those companies who are implementing lean
manufacturing. But it has a great challenge that the most of the
accountants take their basic education in traditional costing method and
they are familiar with this, so they may find to change with lean
accounting difficult to implement.
Waffaa and Hanafi (2013)19 have noted that the lean manufacturing system
has been widely accepted by lots of organizations in the world in early
1990s. At the same time, traditional accounting practices were going on
side to properly assess the operational improvements and therefore new
cost management technique is urgently required to support the newly
implemented lean manufacturing system. This paper points out the
drawbacks of traditional accounting methods used in the organizations that
adopt lean manufacturing and presents a costing method that can be
worked with the lean manufacturing processes. Value Stream Costing
(VSC) method is intended to cast light on the operational improvements
where product cost can be calculated by the formula that total value stream
inputs (costs) dividing by total number of unit produced. This method can
be provided a bridge between operational views and financial views of the
lean, which enhances the transfer of information from ground level to top
level.
Salam (2012)23 presents the idea of target costing for new products, which
is one of the props of lean accounting. In traditional costing of products,
the desired profit is added to the cost entailed to build up the product. But
target costing put its concentration on generating value for the customer by
setting the price of the product based on the cost in the market. However, a
number of methods exist for establishing target costs, the exactness of
such methods are critical. In this thesis, a variety of target cost models are
elaborated and compared with other methods in terms of their accuracy.
The models are based on parametric models, neural networks and data
envelopment analysis. The models are then applied to forecast the cost of
commodities at a major Canadian aerospace company. In this thesis, three
different models are developed to estimate target cost, which is applied to
the main landing gear at Bombardier, the third largest company of aircraft
manufacturer and commercial supply. In order to develop target cost, some
cost drivers are identified and finally the necessary steps have been
followed to demonstrate the rigor in obtaining the right cost drivers. The
most limiting factor of this study is credibility of selection of right cost
drivers.
Williams (2012)25 argues that the lean accounting is simply a different way
of looking at the numbers. If company follows the lean manufacturing, it
should adopt the accounting method which follows the same concept.
Lean accounting is better concept for these organizations. Generally,
traditional accounting and concepts do not support lean manufacturing
efforts. The idea at the back of the lean accounting is to optimize lean
performance by providing more significant information for decision
making. The author describes the principles of lean accounting in a very
simple way. He identifies the first principle as customer value that a
customer willing to pay. Second is value stream i.e. what steps are
required to deliver customer value. Flow as how the value streams can be
organized to flow seamlessly from beginning to end. Fourth is, pull, that is
how the value stream can respond to an upstream customer. And at last,
perfection, as how the organization can improve a little bit every day.
Finally, with lean accounting organization itself and its value streams
include everything that contributes to create value for a customer. At the
last, the author is talking about Visual Scorecard Approach which has been
provided by the decision maker in the lean accounting with the exact
measures in terms of operations, capacity, financial results and customer
engagement.
McKenna (2011)28 explores the issue that most of the companies have
adopted the lean manufacturing during the decade of 90’s but they did not
implement lean accounting practices in a lean manufacturing environment.
Generally, lean accounting focuses on two goals i.e. eliminating waste
through continuous improvement and converting financial statements in
plain English statement so that the flow of transaction becomes like a
river. The main difference between traditional and lean accounting is that
traditional statement treats the amount which spends on inventory as fixed
but lean accounting considers these costs as variable by assessing the true
costs of labor and overhead on a case by case basis. It uses value stream
maps, which can give a clear picture of the company to its owners and
executives. While lean accounting provides accurate, easy-to-understand
views of finances in lean manufacturing environment, hurdles to
acceptance of the lean accounting methods remain same. Even though,
because of statuary and GAAP requirements, traditional accounting
practices are still required in the business world.
Darlington and Mackle (2010)32 have tried to answer the three questions,
these are, how much saving is getting from the lean activities? Why is the
lean implementation not showing through on the bottom line? Should the
lean programme continue if company is not convinced with its financial
performance? In fact, traditional accounting systems are based on
especially standard costing method that frequently provides misleading
information leading to poor decision-making. The authors have mentioned
that in the lean accounting, there are a lot of activities as well as lots of
tools and techniques that are well intended to do nothing for fundamental
capacity of business. Rather than, it builds up a complex system of
transactions and allocations of cost in related activity. There are some
efforts should be made to maintain flow in the production so that capacity
and materials are being converted into product. Further, the authors
suggest ‘Flow Accounting’. It is purely a new way of looking at financial
dimension that will tell the real cash outcomes of operating a lean system
and allow supervising performance developments in order to concentrate
improvement activities where a company gets the greatest financial
influence.
Ifechukwude and Spencer (2010)35 take a holistic look at the existing facts
about the human resource optimization in Lean Production Systems. What
is the perfect ratio of human resource in every activity? What would be the
combination of skilled and unskilled worker? What is suitable human
resource to a lean company? These questions are the most asked questions
in lean environment which must be credibly answered. Every lean
organization needs an extensive, incessant, intelligent and self reinforced
human resource. Human resource in the company is the true eyes of
quality, quantity and original face of the lean. Therefore lean finally talks
about empowering people with the quality of well built, skilled, efficient,
effective, united, strategic autonomous, fully focused and motivation. The
effective combination of human resource and automation show a lean
revolution in the aspect of human resource. The findings from the study
will positively make lean production an appropriate world class production
system with a factual human face. The results of the study also develop the
already existing body of knowledge in production.
Waddell (2010)39 expresses that lean accounting has been developed from
a concept that traditional accounting methods were inadequate and a
restriction to the adoption of some of the crucial excellence to
manufacturing operations. He mentions that lean accounting is a
completely different model of manufacturing management because lean is
a technique where quality management, marketing and pricing, operational
decisions, factory operations and decisive business functions becomes
extraordinary powerful. In this article Bill explains that Lean Accounting
P/L statements can be created with comply of GAAP with a simple
addition of a line at the bottom reflecting the transfer of expenses to the
balance sheet in the form of inventory. The advancement of lean
accounting is transformation of traditional management into functional
organizational structure and traditional accounting into Value Streams and
Lean Accounting. While the transition is taking place, there would be
shared people, shared resources, additional time and space and a degree of
allocation of the expenses to the Value Streams. Finally the next five years
will play the leadership role of accounting in the manufacturing
transformation to excellence where lean has come into attention and more
and more accounting proficient are clinching the challenge and grasping
the chance to serve a greater role than simply acting as the record keeper.
Wiinberg (2010)40 points out a case study approach to seize the benefits of
lean in his thesis ‘Benefit Realisation from Lean’. The author explains lean
accounting is actually the milestone of a completely different model of
manufacturing management. Lean accounting is originally emerged to
make factory operations, marketing and pricing decisions, quality
management, application of logistics and other critical business functions
easy. Lean accounting requires less capital, space, time, material, and
human effort to produce products and services with fewer defects to
precise customer desires compared with traditional modern management.
Finally, the author concludes that lean accounting is at early stage of its
maturity. It is possible that it will gain wider acceptance by those
companies who are implementing lean manufacturing. Lean accounting is
a necessary accounting method to give a true picture of the business. To
reflect the correct businesses position, an effective accounting method
must be required in any type of company. The benefits must prevail over
the costs associated with the addition of a new accounting method. While
Even if, lean accounting should not be considered before the production
processes going lean. Finally the author suggests to make a strong effort
with continuous improvement into the daily work activities to make the
organization truly lean.
Merwe (2008)47 concerns with the principles that underlie some existing
management accounting approaches. The author explores the impacts of
implementing a lean production system in the firm that is generally
governed by accounting practices which recognized for production saving
but informally promotes its lean efforts through paying the attention on
“innovative” accounting. The author states three propositions relating to
customers effects of the lean implementation and its financial approaches.
The study found that minor effects on customer behavior and labor rate
variances, fill the gaps in the literature related to government productivity
improvements and enlarge the knowledge of lean in labor saving,
employment effects and work demand also. The research also investigates
a scaffold for examining the dynamics of competitiveness of military
facilities seeking to obtain commercial contracts. Generally, the lean
stands for less time, money, space and also manpower but in the
commercial context, it clearly encourages the decisions related questions
highlighted in this article is without looking closely on the background of
the principle of causality.
Maskell and Baggaley (2006)53 state that lean accounting is still in work-
in-process; there is now an agreed body of experts that is generating the
set approach to accounting, control, and measurement. These principles,
practices, and tools of lean accounting have been implemented in a broad
series of companies at different stages on the flight to the lean revolution.
These methods can be readily adjusted to meet company's definite needs
and they rigorously maintain devotion to GAAP and external reporting
requirements and regulations. Lean Accounting is itself lean, low-waste,
visual, frees up finance and accounting people's time so they can become
actively involved in lean change instead of being barriers. They understand
the accurate financial force of lean changes. Companies focus on the
business around the value created for the customers, and lean accounting
actively impels the lean transformation. This helps the company to grow,
to add more value for the customers, and value for the stock-holders and
owners. Finally, this article review the framework of principles, practices
and tools of lean accounting being developed by a group of lean
accounting thought leaders as a result of the lean accounting summit in
September 2005.
Maskell and Kennedy (2006)54 are noteworthy in that the most of the
manufacturers in the world are looking to the lean thinking as to improve
productivity, greater customer satisfaction, minimum prices, high level of
productivity, better quality, simple process, less stock, fewer defects,
people empowerment and raise profits, cash flow and stock price. These
companies are choosing lean practices as their vital business replica and
want to do everything which makes them succeed. This article
recommends six reasons why accounting methods need to change before
companies adapting lean conversions. It also shows different basic lean
accounting methods and tools that support three aspects of a lean
organization i.e. visual management, value stream management and
continuous improvement. These three techniques of lean have been
successfully employed in an extensive series of companies at various
phases on this flight to lean transformation.
Shah and Ward (2003)58 suggest that contextual factors can produce strong
internal forces within the organization that prevent from any irrational
technique. This paper examines the effects of three contextual factors i.e.
size of organization, age of organization and unionization status, in 22
manufacturing firms where lean production system has applicable. Four
internal factors that the author considers are Just-in-time (JIT), Total
quality management (TQM), Total preventive maintenance (TPM), and
Human resource management (HRM). These four factors are empirically
validated and investigated their effects on operational performance.
Finally, the author concludes that there is a strong support for the
influence of size of organization but the influence of unionization and age
of organization is less pervasive than conventional wisdom suggests.
Rosenthal (2002)61 reveals that there are two pillars of lean. First is JIT
and other is Jidoka. In this paper the author is talking about Jidoka. It
means automation with the human touch. For example, a machine stops
the production after detecting the problem instead of producing bad
products. The author defines it in a four step process that engages when
abnormalities occur. First is detecting the abnormality. In the lean system
Poka-Yoka devices can be used to detect the problem and stop. Takt time
and kanban system are also there to detect abnormalities. Visual controls
also trigger the option for detecting the problem. The second step is to stop
the process when abnormality identifies. This stop is to maintain the
machine, if there is any problem. These two steps can be automated. The
third step is to fix and correct the abnormal condition so that production
can be started. Here, the author presents the solution of the problem.
According to the author, the decision taken for fixing the problem, need to
be made at the lowest possible level of the organization, but no lower. The
last and fourth step is to investigate the root cause of the problem and
install a permanent solution. Depending on the nature of the problem, the
solution could be straightforward, or maybe the solution is regarding six
sigma techniques of the lean production. At the end, the author points out
that if JIT and Jidoka work together, the engine of kaizen that drives the
system, can get better every day.
Kim and Ballard (2001)62 address that Activity Based Costing has more
popular in the decade of 80’s because it prevents cost falsifications and
provides a process view which could not provide in traditional cost
accounting. It is the theory which works on the resources that are assigned
to the activities and the activities are assigned to the cost objects. Lean
concept emerges after the limitations of this theory of lots of cost drivers
and complexity to make assignment on cost objects. This paper is
exploring the relationship between Activity Based Costing and lean
construction and shows that the lean practices can control the cost by
adopting ABC system. The author explains the application of ABC system
in construction by taking an example and explores it potential benefits
with the comparison of resource based costing. ABC system can be
adopted by the lean enterprises because of its flow view by the two ways
i.e. process based costing assumes that resources are assigned to the
activities and the activities are assigned to products. The purpose of the
process based costing is not to misrepresent the cost data but to provide a
process view. It means that it helps to remove the waste or non value
adding activities, which is the main purpose of lean accounting. The most
limiting factor of the study is that the paper deals with only the use of the
information during implementation of the project.
Cooper (1996)63 explores the role of Activity Based Costing in the lean
environment. The general belief that Activity Based Costing cannot be
used in the lean environment but the author argues that Activity Based
Costing can be used to encourage the spread of the lean enterprise. He
addresses the role of Activity Based Costing in supporting a company’s
transaction to be a lean enterprise. By explaining the role of Activity
Based Costing, he says that implementation of Activity Based System in a
firm would reconsider the optimum batch size and quality levels, instead
of causing them to convert to lean production. He points out that there is
no conflict between Activity Based Costing and lean costing. Because
Activity Based Costing supports the shift to TQM and JIT, and the both
ABC and lean enterprise believe in reduced defect levels. In conclusion,
the author mentions the fact that many ABC systems have already been
implemented in companies that are lean or are in going to be lean process
approach. He commits that ABC holds back in the enterprise, which is
already a lean enterprise, or working towards becoming a lean enterprise.
Womack and Jones (1996)64 argue that according to the lean thinking, a
company allows to specify value and creates actions in the best sequence
that can be moved without interruption with more and more effectively.
The author discusses here five lean principles which, are the pillars of lean
thinking i.e. value, value stream, flow, pull and perfection. Value is
defined by the author as capacity provided to the customer at the right
time, on the right place and in the right price. The value stream includes all
the activities from taking order from the customer and to deliver it
properly. Flow is the progressive achievement of manufacturing process
from raw material to finished goods without any waste, stoppage, scrap or
breakdowns. Pull, the fourth principle, defined as a system where product
demand comes from the side of customer not from the factory side. Here,
product is being pulled by the customer. The fifth and final principle is
perfection, defined as the complete elimination of waste in the process and
all activities in the value stream create value. After describing their
concept of the five lean principles in the Part I of Lean Thinking, the
authors then present five case studies in Part II of applying lean thinking
concepts to companies that was in trouble. Each of the case studies meets
with different types and level of success in implementing a lean system
and deriving benefits from it. At last, the authors conclude their book with
an outline for an action plan which any company can use when it is
transforming into lean.
Wiinberg (2010)77 shows benefits realized from the lean by using a case
study approach to seize the benefits. The purpose of this study is to
develop the management’s ability to seize the financial and operational
benefits of lean by examining the pharmaceutical company H. Lundbeck.
The result from the case study shows that the management ability to seize
the financial and competitive benefits of the lean should be improved by
implementing value stream management; produce value stream costs
reports and setting up ground data instructions. This will help the
management to take initiative in their work because by using the lean tool,
a clear picture of instruction sets and the value stream performance helps
the management to make sure that the entire capability of lean
improvement has been consumed.
Abdulmalek and Rajgopal (2007)82 state that lean approach can be applied
more frequently in discrete manufacturing enterprises rather than
continuous process sector. The authors have adopted a case study for the
process sector for application at a large integrated steel mill. As the lean
tool, Value Stream Mapping has been used to identify sources of waste
and to reduce the waste. A future state map has been developed for the
system using the simulation model that is developed to show before and
after situation for the managers in order to quantify the benefits gained
from using lean tools and techniques.
This part of literature review puts a view on the opposite side of the coin
that gives an idea about limitations as well as challenges of lean accounting and
criticism made by the experts. As saying goes, where is good, there is bad also.
This dimension of lean accounting has not very much insight but it presents a
different look for the whole story. The brief elaboration of researches covered in
this segment is presented below:
Womack (2013)87 elaborates that lean consists of three parts i.e. purpose,
process and people. Purpose involves the challenge to implement lean in
the organization. Process is the way out to apply the lean which are
responsible for the maintenance of the lean and see that the changes have
been working correctly. Before, a change is applied in any process value
stream should be identified and various options in place of the traditional
way are looked up by identifying the waste. Various value streams are
identified and best possible way is finally applied. The streams are
selected from the good financial indicators and a good physical metrics.
With the example of the Toyota cars, the author has mentioned to
eliminate management accounting and follow up the lean methods. The
whole process should be broken down in various activities and cost of
particular activity can be identified. This will lead to the perfect pricing of
the particular element in the various flow streams. The cost of the products
in the market was subsequently reduced and thus it helped the company to
survive in the competition. The author has finally concluded that the lean
should be extended to product development, purchasing, customer
management and for policy development in the organization.
Darabi, Moradi & Toomari (2012)90 express the challenges faced by the
Iran industries and there is much need to transform the strategies method
and structure. The main challenge lies behind the transition from the
traditional thinking to the lean thinking. To quantify it, the authors have
collected data in form of questionnaire. Student T-test method is used to
test hypothesis. Cultural, technical, organizational and economic factors
has considered in the hypothesis. To assess the reliability of the study
Cronbach’s Alpha test has been used. In organizational factors,
understanding the long term goals, removing functional structure, creating
operational flow and use of horizontal structure have been recommended.
In the economic factor effective use of taxation laws and regulation to
encourage lean accounting is recommended. Finally, this paper suggests
managers should take lean as a beneficiary in long term and decide to
establish lean that were recommended before.
Rao and Barger stock (2011)94 reveal that despite of the beneficiaries of
the lean management the industries continue to use the traditional standard
cost accounting control system which hinders the lean implementation.
The authors have used the structural theory by using the concept from
managerial accounting to find the possible reasons of lean manufacturing
plants retain standard costing. The authors have elaborated the elements
impacting inventory valuation by the fact that a level of inventory is
indirectly proportional to the cost maintaining it with standard costing.
The author suggests have use of variety of standard survey instruments to
be used in this field. Some of the mature lean manufactures are retaining
standard costing, thus the applicability of the theoretical concept of lean
accounting to the structure cannot be implemented 100%. The test of
proportions can be done by statistical method and evaluating the survey
results. Further research will be done to find the independency of various
factors.
After considering in-depth study regarding the lean accounting, it has been
observed that there is a big research gap especially in the Indian context. This
literature review provides an essential background on the topic and gets
knowledge about the work which has already been written in this sector. Several
authors have contended that the lean concept is very new and contemporary in the
present era of cut-throat competition. But in the Indian sky for the lean concept, is
not very clear blue. The Indian corporates are not daring to adopt the lean
accounting. As keeping all the reviews in mind, the research gap has shown in
between traditional thinking and the lean thinking. All the companies which have
been quoted in the case study reviews adopted lean manufacturing with the
combination of traditional costing methods. But after looking at the results
provided by lean accounting, managers and CEO’s came to know the wrong
decisions which they had taken before. The research will get direction after
getting the pitfall of mental perception, which creates by the accountants. The
following issues identified after reading this portion of literature review-
1. This concept is not very famous in Indian perspective.
2. Very few studies have been undertaken by the Indian authors on the lean
accounting.
3. There should be a gap between the lean manufacturing and the lean
accounting.
4. Can the lean accounting be replaced by traditional financial and cost
accounting?
5. Does the lean accounting fully and properly comply with IASB especially
in the Indian context?
6. Is the lean accounting fully complying with the other accounting standard
boards of different countries and IFRS?
These are some key issues which are to be tried to answer in the present
research work. Therefore, to fill this gap it is decided to carry on this research
with selected Indian companies where lean manufacturing and accounting have
been applied. Furthermore, the accounting procedures have been changed
according to lean method to show the actual impact of lean accounting instead of
traditional cost accounting methods.
2.5 CONCLUSION
But in the third section, which reveals limitations and challenges of lean
accounting, concludes that when lean ideas have been followed by the people with
lack of spirit, it will give some extent negative results. Implementation of lean to
the organization does not mean that it will contribute more profit for the company.
Every method which has lots of qualities, excellence, moral, and traits for
standing in this competitive age, not possible that it would be perfect in every
aspect of the organization. Even, there are lots of challenges ahead, in front of
lean, but some improvements are there to be suggested by the authors to fulfill
this research gap.
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Outlines:
3.1 Introduction
3.2 Lean Pilots
3.2.1 Lean Cell Performance Measurements
3.2.2 Other Cell Measurements
3.2.3 Benefits of Cell Performance Measurements
3.3 Managing by Value Stream
3.3.1 Value Stream Performance Measurements
3.3.2 Value Stream Costing
3.3.3 Benefits of Value Stream Costing
3.3.4 Box Score Reporting
3.3.5 Usage of Box Score Report
3.3.6 Value Stream Income Statement
3.4 Lean Enterprise
3.4.1 Target Costing
3.4.2 Performance Measurement Linkage Chart
3.4.3 Value Stream Mapping
3.5 Conclusion
This chapter covers the whole path associates with Lean Accounting. This
path can be followed by any company to develop a plan for implementing lean
changes. This path is not proven path for lean accounting but this chapter
undertakes an in-depth study of different “Maturity Path levels” of lean
accounting and their methods, stages, issues and practices used in the selected
companies for case study.
3.1 INTRODUCTION
Lean is a journey which starts with customers and ends with customers.
Lean thinking epitomizes customer as AEIOU concept i.e. customer is the person
who Accepts, Evaluates, Inspects, Owns and Uses the goods and services. And
that goods and services must have variety, competitive cost, quality that customer
wants and finally on-time, in-full and error-free delivery. In this changing scenario
the organizations are also seeking for new production and accounting methods to
become the world class organization. In the late 1980s and early 1990s, powerful
and culture-changing methods of the lean Accounting had been introduced to
create a 21st century revolution in accounting, control and business management. 1
There is a Maturity Path associated with the lean accounting. As the company
matures with lean thinking, additional methods of lean accounting will become
useful. The figure 3.1 shows the different “Maturity Path Levels”.
Lean
Pilots Figure 3.1:
Maturity
Path Levels
Managing
by Value of Lean
Streams Accounting
Lean
Enterprise
There are three different Maturity Path levels of Lean Accounting 2-
Just In Jidoka
Time
Quality at
Right part the source
Right
amount
Right time
Operational Stability
In the early stage of lean accounting, it does not need to make underlying
changes in accounting, control and measurement systems. This journey of lean
starts with eliminating the huge amount of detail reporting in new lean cells. Lean
cells are time-balanced segments which design in ‘U’ shape work cell to achieve
the continuity of manufacturing operation in the fix amount of time. 5 However, in
the lean production cells, new performance measurements are required. These
measurements reflect the core issues of the lean thinking like managing the takt
time, standardized work, flow and pull. They are visual, timely and action-
oriented. The main objective of these measurements is to guide the production
people what to do and what needs to be done. The Cell Performance
Measurements are presented below-
(a) This measurement keeps the operating people in the cell focused on
maintaining a consistent output of products in line with customer demand.
(b) It provides fast feedback when problems in the cell need to be fixed
quickly.
(c) It gathers data about the problems so that cell’s people can be studied and
permanently correct it.
(d) It shows monthly real time process information in cumulative manner
which enable the supervisors to schedule better and to level the
production.
(e) It gives information to the cell people themselves, the value stream
continuous improvement team and managers or engineers within the value
stream to introduce changes that permanently resolve the problems.
(f) This measurement works towards perfecting the process that leads to
continuously improving process quality.
The foremost objective of lean is to minimize waste and maximize flow
and to achieve this objective a cell must manufacture the product according to the
customer need. In the lean manufacturing, cells are designed to run at the same
rate as the takt time. To maintain the perpetual sequence of production, the cell
people must be trained in standardized work methods; effective handling of parts
and material and also tracking their production rate.7 If people are not trained in
all these, the result of this measurement cannot achieve its benefits. The managers,
supervisors and other in authority regularly have a look on this report, review the
issues, understand the problems, resolve problems and manage the processes
visually, so that workers take this report seriously. Table 3.1 shows the format of
Day-by-the-hour report.
First Time Through is the percentage of units that completes a process and
meets quality guidelines at the first time without being scrapped, rerun, retested,
diverted for off-line repair, or returned. It is a measure of the quality of the
manufacturing process.8 The purpose of this measurement is to observe whether
the cell is manufacturing the products right in the first time or not. It is not the
quality measurement of product but it measures how many goods are produced
correctly without scrap, rework and repair. Finally, it tracks the effectiveness of
the cell’s standardized work. In the lean manufacturing, work must be
standardized. Every step in production process is predefined and mapped that
shows the exact sequence and timing of the production process. Cell’s people are
trained to perform their work exactly in accordance with the standardized work so
that the product is made perfect in the first time and at the right rate. 9
The First Time Through report tells about the percentage of product made
in the cell from start to finish without any rework, rejection or scrap. If the
product is adhered with the standardized work, the FTT will be 100 percent with
zero defects made or passed on.
There is a common belief that more and more production in the production
line is better and it proves efficiency of workers. But Taiichi Ohno, the father of
modern lean, consider this to be worst form of waste. This work is efficient but
not effective and creates overproduction. The lean manufacturing prevents this
practice and work towards work in progress to standard work in progress. This
measurement shows the inventory levels in the cell. It designates minimum
amount of material required to keep the standard work flowing. This helps in
reducing variation and its impact on lead time. The purpose of standard WIP is to
enable consistency in the process.11 The reason behind that if a worker works on
ten units in a batch, eight or twelve units can obviously be fluctuated during
passing that work to the next process.
Cells are designed to produce some amount of inventory in production
process. In lean manufacturing, this inventory is determined by the number of
kanbans (it contains the number of items which are to be processed in a cell at any
one time) between the cell’s work centers. This is called the standard cell
inventory that safeguards the production process in the cell against problems and
delays.
The WIP to SWIP can be calculated by dividing the total inventory within
the cell by the standard cell inventory.
The OEE takes time to track the information so that in the first time, this
measurement should be applied on that machine which has complex and
problematic work process. This bottleneck machine represents the maximum flow
rate and cycle time of the entire cell. When the enterprise has matured in lean
manufacturing and the people have trained in using Operational Equipment
Effectiveness measure, it can be applied to other manufacturing equipment within
the cell.
In the above formula, operating time is the amount of time for which a
machine finally operates for manufacturing. It can be calculated by subtracting the
shortfall time of machine (which occurs by equipment breakdowns, setup and
adjustments, tooling losses, changeovers and other stops) from the net available
time of machine within the cell. Planned production time is the total scheduled
time less shortfall time which is usually set according the management decisions.
Operating time = Net Available Time – Shortfall Time
The above four measurements are primary cell measurements for lean unit.
These measurements motivate the cell people towards continuous improvement
and lean manufacturing goal. There are some more supportive measurements for
lean cell which are not compulsorily to use but they assist the cell people more in
achieving the desired rate of production and also maintain the success of lean cell.
3.2.2.1 Five S
3.2.2.2 Kaizen
The lean company frequently works for the ultimate object of Kaizen. It is
a technique of the lean management which shows continuous improvement. It
seeks to achieve small but continuous changes in processes with the intention of
improved quality and competence in a systematic manner. It is an ongoing effort
to improve products, services or processes where employees work together
proactively to achieve regular, incremental improvements in the manufacturing
process. It combines the collective talents of a company to create an engine for
continually eliminating waste form the process.14
The performance measurement of lean is to make sure all the processes are
exactly following the expectation of strategy goals, and value stream performance
is to initiate continuous improvement and create more benefit in the
organization.16 This tool uses visual techniques to display critical measures in the
workplace and see instantly what is going wrong on the shop floor. It can improve
feedback between performances and results.
3.2.2.8 Kanban
A value stream represents all the things we do to create value for the
customer. The first principle of lean thinking relates to customer value. The value
stream focuses on creating large amounts of value for the customer. And the
second principle of lean thinking is that always work by value stream. 22 Generally
value stream is the sequence of activities which required to design, produce and
provide a particular good or service. It is the movement of material throughout the
process from customer order to delivery. But as the time passes, value stream is
not the physical flow of material but also flow of information as well as flow of
cash. Lean improvement must increase the flow of all three. Figure 3.3 shows a
typical value stream of customer order. This figure shows all the sequential
activities which are necessary to fulfill a customer order.
Figure 3.3:
Collecting the Redesigning
Value Stream
Cash
Structure for
Customer Order
After Sales Quality
Services Assurance
A value stream must include all the activities which are required to create
value for the customer. The organizations those are mature with lean
manufacturing, can extant their value stream beyond the walls of factory. They
include the complete flow of the broader value stream of which they are a part,
they are able to work with their customers, suppliers, and other third party
organizations to eliminate waste and improve the entire flow. 23
Figure 3.3 shows the value stream of order fulfillment that provides
current products to the current customers but there can be different types of value
streams according to need of organization like value stream for acquiring new
customer, value stream for customer development, value stream for new product
development, value stream for service provider organizations etc. These expanded
forms of value stream reflect the best way to maintain the company’s
achievement. Generally a value stream focuses on the following issues-
(a) Waste- Value Stream identifies waste and delays and develops an action
plan to eliminate it. It strives to eliminate existing traditional
departmental organizational structure.
(b) Flow- Value Stream is the best way to understand the flow of material,
information and the flow of cash. It maps the obstacles in the flow and
initiates improvement efforts to increase flow of material, information
and cash.
(c) Value- The primary objective of lean is to focus on those activities
which are adding value to the customers. The value is created within the
value stream process because it is a sequence of value adding activities
from customer order to its final delivery.
(d) Simplicity- Value Stream tries to make all the operations simple. It
identifies the easiest way to process the flow and eliminates complexity.
(e) Accountability- Value Stream generates accountability. Value Stream
manager and his team are responsible for operational and financial
improvements, growth, profitability and success of the value stream.
(f) Continuous Improvement- Value Stream team works as continuous
improvement team. This team reviews the value stream performance
measurements each week and tries to improve this. Finally this team
competes by themselves.
This measurement shows the value created by the value stream in terms of
the units produced by the value stream. If value stream is producing more units, it
means value stream must sell more products with the same or less resources. This
will increase the value. But it is important that value stream efficiency increases
regularly in time.
Sale value includes all the sale orders and products associated with the
value stream and the number of people includes all the permanent and temporary
personnel include in value stream. This measurement makes the people
empowered to set their goals as high as they perform and also accountable the
employee for their outcomes. This measurement is more practical where value
stream manufactures can produce a wide range of products with different prices,
processes and materials. If the company is working with the same product, unit
per person can be calculated. If the company have highly machine oriented
operation, sales per machine hour can be calculated and if the company has more
man power then machines, this measurement can be reported as sales per labour
hour.
This measurement shows the rate of orders that are shipped to the
customer on time. This reflects the control level within the value stream that how
value stream team is serious about delivering the customer order on desired time.
As lead time of a company in lean business is reduced, the company improves its
on-time shipment rate.
If On Time Delivery rate is high, it means value stream is under control
but if the ratio is low, it reveals failure of value stream and the process are not
under control. In the lean accounting, a company manufactures product when it
receives customer order. So this measurement makes the company responsible for
the need of its customer and decreases the time it takes to deliver the product. This
measure is quite important for finance department in the company.
First Time Through is the percentage of units that completes a process and
meets quality guidelines the first time without being scrapped, rerun, retested,
diverted for off-line repair, or returned. It is a measure of the quality of the
manufacturing process.26 The purpose of this measurement is to observe whether
the value stream is manufacturing the products right in the first time or not. It is
not the quality measurement of product but it measures how many goods are
produced correctly without scrap, rework and repair. Finally, it tracks the
effectiveness of the value stream’s standardized work. In lean accounting, work
must be standardized. Every step in production process is predefined and mapped
that shows the exact sequence and timing of the production process. Value
Steam’s people are trained to perform their work exactly in accordance with the
standardized work so that the product is made perfect in the first time and at the
right rate.27
The First Time Through report tells about the percentage of product made
in the value stream from start to finish without any rework, rejection or scrap. If
the product adhered with the standardized work, the FTT will be 100 percent with
zero defects made or passed on.
Material cost + Labour cost + Machine cost+ Facilities cost + Other cost
This measurement shows that how fast a company collecting cash from the
customers. Lean is all about flow and this measurement concerns about the flow
of cash. Due to high importance of cash is a business, it is a company’s interest to
collect cash quickly from customers.
Average Daily Sale = Monthly credit sale / Number of days
A high ratio of this measurement shows that value stream is selling its
product to customers on credit and taking longer time to collect money. Instead of
this, low ratio of this measurement reveals efficient performance of value stream
team and provides assurance for improvement in cash flow. This ratio, ultimately,
works for the lean principle of increasing rate of cash flow through the value
stream.
When company matures with the lean manufacturing and most of the
waste reduces or eliminates throughout the manufacturing process, there must be
requirement for such accounting method which helps the managers to take
accurate decisions. The information required for the lean environment is
completely different from traditional accounting. Value stream costing provides
better information than traditional standard costing. The value stream cost
information contains the real cost of the value stream. The information is not
distorted and complicated by the allocation of overheads. 28
Value stream cost is the cost for whole value stream which can be treated
as a separate organization unit. It includes the cost to operate the value stream and
the cost of products shipped from the value stream. The information generated by
this method is more reliable than any traditional costing method to take decision
of an order or contract, make or buy product, product pricing, profitability, and so
forth. This method is easy to understand therefore it can be used by anyone by the
value stream team as well as the company.
Value stream cost identifies and establishes cost for the process steps
which is required to provide value to the customer. It considers all the costs in the
value stream as direct. There is no distinction between direct cost and indirect cost
within the value stream. Costs outside the value stream are not taken into account
by this method of costing. Finally, it is a process of ascertaining that how much
value is created by each process step.
Value stream cost is to be calculated every week. Figure 3.4 shows all the
cost include in value stream i.e. production material, production labour,
production support, machines and equipment, operation support, facilities and
maintenance etc.
Figure 3.4: Costs included in Value Stream Costing
(Source: Baggaley, 2003)31
Production labour cost includes all the payment made for the employees in
value stream during the week whether these employees are making product in
value stream, engaging in moving material, designing the product, maintaining the
machine, doing planning for production, engaging in sales or doing accounting.
There is no difference between ‘direct’ or ‘indirect’ labour in the Value Stream
Costing, also there is no distinction between the work activities of labour.
Generally, manpower is assigned directly within a single value stream.
Production material cost includes the material payment which has been
purchased for the value stream during the week. This is simply actual material
used by the value stream during the period. For justification of material cost, there
must be low and under control inventory of raw material and work in progress
because the material held in stock will be used quickly and the material cost
reflects only that material which is purchased during the week. But, if raw
material inventory is high, value stream material cost is calculated based on raw
material issued to the value stream. This figure can be calculated from bills of
material of product issued to production or from calculating the month-end
inventory purchases less the previous month-end inventory.32
Production support costs are the cost for purchasing spare part and loose
tools for the machines and equipment, using in value stream. As well as, machines
and equipment cost includes the cost of purchasing machines and equipment
requires for production within value stream. This information can be gathered
through fixed asset purchase account for the period. In addition, depreciation and
repair and maintenance expense for the machines, spare parts and loose tools can
be calculated from an organization’s detailed fixed assets and depreciation system.
If these small machine costs cannot be identified by the value stream, it can
allocate to the value stream.
Operation support costs are the costs of consumables, supplies, and any
other expenses occur in day-to-day business for the value stream. There is a
problem to collect these expenses. Lean Accounting solves this problem visually.
When a job is shipped out, the authorized document, kanban, and a copy of
kanban is pasted on visual board with the information like pricing, lead-time,
expenses incurred and so forth. The same process has to be followed when a job is
received back. This exercise maintains a good record of operation support cost,
and it eliminates the need of invoice.
Facility cost, in the value stream cost process, includes expenses incur for
factory building like rent, depreciation, repair and maintenance, guard and
security expenses, insurance etc. This is the only allocation used regularly within
value stream costing. The only difference from traditional allocation is that value
stream is charged only for the space it uses. Total facility cost is divided by total
square feet or meters of factory and multiplied by square feet or meters used by
the values stream. The square feet or meters occupied by the value stream include
the production area, office area, stockroom area and the area used by the value
stream people.
Other costs of the value stream include spare parts, supplies, consumable
tools, travel and so forth. It is common for someone in the value stream to be
responsible for buying these items. They are mostly purchased from suppliers that
have long term contracts and are paid for by purchase card. The responsible
person keeps track of what he has spent and reports it weekly.33
After applying the all above cost to the value stream, the total value stream
cost can be calculated for the period. To determine an average cost of product,
total value stream cost is divided by the value stream output which is shipped
during the period in units.
Total Value Stream Cost = Production labour cost + Production material cost
+ Production support cost + Machine and equipment cost + Operation cost +
Facilities cost + All other value stream cost for the period
Purchasing
Test/Rework
Quality Assurance
Assemble
Purchasing of Machine
Maintenance, Depreciation
Warehouse
Shipping
Building Rent/Depreciation
Insurance
Accounting
TOTAL COST
The result of this value stream cost statement is used to calculate average
cost per unit as well as to create a value stream P&L statement. This profit and
loss statement includes the revenue from sales of the value stream during the
period less total value stream cost expanded during the same period.
3.3.3 BENEFITS OF VALUE STREAM COSTING
(a) The information generation in value stream is quick and simple. When the
organization is well managed with value stream, gathering of cost and
revenue information becomes easy and unpretentious.
(b) There is no or little allocation of overheads. So the cost information is
direct and accurate. It is helpful in taking any type of decision regarding
product.
(c) The information collected in value stream is weekly. This means recent
financial information is in the hands of value stream managers. They can
control or reduce their cost timely and frequently.
(d) Value stream costing provides real information because it is not based on
any traditional assumption. So it provides a real base for taking routine
decisions like quoting, make or buy, capital acquisition etc.
(e) Value stream cost is the summary of direct cost of a certain period. This
cost can be collected by using very few and significant transactions. So
there is no need to study detailed and complicated transactions in all.
(f) Value stream costing supports team work. This encourages the lean
principal of ‘empowerment of people’. Value stream team, work as a mini-
entrepreneurial organization within the organization and concentrate
completely on the product.
Box Score is a fundamental and decision making tool for lean company
which gives a summarized view of the value stream performance in three modes
i.e. operational performance, financial performance and capacity usage. These
three dimensions of box score assess that how the value stream is performing
operationally, how the value stream is performing financially and how the value
stream resources are being used. Box score data for the operational performance
can be collected and maintained through visual boards and through value stream
performance measurements. The financial information can be gathered through
value stream P/L statement. Capacity information is calculated through job card or
labour summary as work done by the people and machines in the available time or
resources. Table 3.4 shows a typical illustration of box score.
Last This Next Next to
week week week next
week
Operational
Non-productive
Available capacity
Revenue
Financial
Material cost
Conversion cost
Value stream gross profit
Box Score is generally used for measuring value stream performance and
making some operational and financial decisions. There are three big things about
using the box score for decision-making. (i) The decisions are made having
impact on the whole value stream, instead of looking at the individual product or
production cell. (ii) The box score shows a through view of the value stream. It
takes into account the impact of the financial changes, as well as the changes in
capacity and the operational outcomes. All of these issues must be addressed for
sound decisions to be made. (iii) The box score shows simple and clear-cut
information. Anybody using this information will spend their time addressing the
important business decision.35 Following are some extreme usage of box score-
Non-productive
Available capacity
Revenue
Financial
Material cost
Conversion cost
Value stream gross profit
Table 3.5 Example of Box Score using for Evaluating Weekly Performance
The first section of table 3.5 contains operational information which is the
value stream measurements. ‘Unit per person’ shows productivity of value stream.
‘On-time shipment’ shows process control within the value stream. As same,
‘Dock-to-dock days’ reveals flow of material and information throughout the
value stream. ‘First time through’ exposes quality and standardized work.
‘Average product cost’ discloses linearity and overall improvement of value
stream. Finally, these all measurements motivate ‘Continuous Improvement’ to
achieve the planned future state.
The primary purpose of the weekly box score report is to focus the
attention of the value stream team on the areas that can benefit from continuous
improvement efforts. The improvement in value stream results can be tracked
weekly as an indicator of the effectiveness of the continuous improvement
efforts.36
The third section of box score shows financial information which is the
summary of value stream cost. The value stream cost is the sum of all expenses
incurred within the value stream. This cost is subtracted from weekly revenue of
value stream and finally obtain value stream gross profit. Through this reporting, a
lean company can analyze its gross profit weekly, instead of getting annul gross
profit according to traditional accounting methods.
On-time shipment
Dock-to-dock days
Operational
Productive
Capacity
Non-productive
Available capacity
Revenue
Financial
Material cost
Conversion cost
Table 3.6: Format of Box Score for Showing Effect of Lean Improvements
The box score here can show the future effects of lean improvements. The
current state map depicts value stream as it in present and the future state map
shows what figures will look like after improvement in kaizens. When lean
improvements occur on floor and kaizens take place, non-productive capacity and
productive capacity have decreased. The impact is increasing in available
capacity. A lean company can use this freed up capacity in manufacturing new
products, expand their business, rent the space, sell or lease out the space etc.
Box Score is also useful in taking routine type of decisions like make/buy
decision, profitability decision, quotation price decision, outsourcing decision and
so forth. It is one of the most important features of the box score that any decision
can be taken by using simple yet powerful information that is already available in
box score. There is no need to use standard costing. Table 3.7 shows a format for
decision making related to outsourcing of a new product.
Non-productive
Available capacity
Revenue
Financial
Material cost
Conversion cost
Value Stream gross profit
Non-productive
Available capacity
Revenue
Financial
Material cost
Conversion cost
Value stream gross profit
Current 3 6 1 18 2
Months Months Year Months Years
Operational
Non-productive
Available capacity
Revenue
Financial
Material cost
Conversion cost
Value Stream profit
Additional people used
Additional machine used
Table 3.9: Format Box Score for Evaluating New Product Progress
The Box Score is simply presentation of goals and targets in a same format
to explain all levels of lean organization the effectiveness and improvement of
lean programme and also what need to be done for future improvement. Every
person in the lean organization uses the box score for talking about lean
performance. Value stream managers use the box score to evaluate value stream
performance and further planning. Kaizen team managers use the box score to
know the efficiency of their continuous improvement programmes and also their
impact on financial and operating results. Top level managers use the box score
for evaluating business performance and for decision making.
The Box score is flexible to meet the needs of different kinds of decisions,
yet it proves itself to be very versatile in reporting the value stream operations,
lean improvements and impact of strategic changes to the business. 37
Sales
Material Cost
Labour Cost
Machines Cost
Operation Cost
Facilities Cost
Support Cost
Other Cost
Total Value
Stream Cost
Value Stream Profit
(Sales – Total Cost)
NET PROFIT
Value Stream Income Statement looks different from the regular traditional
income statement but it depicts true picture of company’s financial position for
the period. An income statement based on standard costing mixes the financial
accounting adjustment with operating income which makes it very difficult to
explain by the operating people.
3.4 THE LEAN ENTERPRISE
(a) A lean enterprise has maximum value for the customer. It understands
not only the customer’s requirements but also their expectations for
product’s the quality, delivery and price.
(b) This type of organization is apparent with its vision, mission and
strategies that where it wants to go, what to do and how to do.
(c) The People are the engine of the lean company. All the people involved
in this process have a common understanding of the organization’s
purpose and also practical understanding of the consequences of failure
and success.
(d) The visualization is the specialty of a lean enterprise. It translates
performance of every process into expected versus actual. It provides the
opportunity to immediately mark and take action at the earliest possible
that performance has not been achieved what was expected.
(e) A lean enterprise has flexible workforce. It maintains redundancy and
flexibility both within the core competency.
(f) It works as team not individual, internally between employees and
externally with suppliers.
(g) A lean enterprise supports simplicity. It can be achieved through the
avoidance of complexity and then by rationalization exercises.
(h) It is always unhappy with its progress and is always looking for more
improvement. Thus it emphasizes continuous improvement.
Target Costing
Performance Measurement Linkage Chart
Value Stream Mapping
It is a new costing technique where cost is derived from the target prices.
Target price can be determined according to the features and characteristics of
products, services and other value added issues. It may be the market price of
same product or price predicted to achieve a desired market share or existing price
+/- value of feature added or deleted in current product. Target price involves
assessing the market and individual customers’ wants and/or needs and what they
might pay for the tentative product, evaluating competing products, their prices,
and estimated costs, and agreeing among the team members as to an appropriate
target price.40 The second step in the target costing is to determine target profit
margin. Target profit margin can be a percentage on sales or percentage of cost or
it can also be a whole amount that is decided by the company.
When target price and target profit margin are determined, the next step is
to ascertain target cost at the production level. The target cost is the selling price
or target price less the profit percentage required for the product. Figure 3.5 shows
ascertainment of target cost.
SELL PRICE
DESIRED TARGET
OR TARGET
PROFIT COST
PRICE
The target cost is the allowable cost for the company as actual value
stream cost can never be exceeded this target cost. Once the allowable cost is
fixed, it has been compared with current average value stream cost and finds the
difference. If the actual cost is within or below the target cost, production can start
at any movement. But if the actual value stream cost is above the bandwidth, there
is a great need to establish lean improvements to bring the actual cost in line with
the allowable cost. This overview is defined in figure 3.6.
Target costing ensures that products are the best match with the customer’s
need. It reduces MUDA to the maximum extent possible and also it reduces
manufacturing cost significantly. It shortens the development cycle of a product as
well as it increases teamwork among all the internal parties associated with
developing, planning, manufacturing and selling a product. 40
Preliminary Product Design Establish Lean Improvements
Production
Target costing incorporates with the lean accounting process. It focuses the
value stream team’s attention on the customer value. It recognizes the critical
process and closes the loop of value stream management. It encourages the firm
for its desired profit and makes money. Finally, it is never ending process of
pursuing perfection.
3.4.2 PERFORMANCE MEASUREMENT LINKAGE CHART
Generally cell level measures guide the production people what to do and
what needs to be done within the cell. Instead of, value stream measures ensure
continuous improvement within the value stream. These measurements generally
reported weekly to show its achievements and performance throughout the period.
Performance measurement linkage chart starts with the company’s strategy, goals
and objectives. The success of these strategies, goals and objectives are related to
value stream goals. Value stream goals are related to cells performance measures
within the value stream.
There are some steps for creating performance measurement linkage chart.
These steps work very well in a lean company.
(a) Value stream mapping is a tool that allows identifying waste within the
value stream and planning to eliminate it.
(b) The financial impact of lean improvement can be explained from the
current state and future state value stream maps.
(c) Lean organizations having improvement events alone are not enough,
Value Stream Mapping connects all improvement activities and
reinforced the benefits of lean by providing future plan.
(d) Value stream map gives detailed information about each step in the
value stream at a glance.
(e) Value stream cost and capacity analysis use the information provided by
the value stream maps.
(f) Lean organizations use value stream map as living documents, source of
continuous improvement etc.
Value stream maps are very useful in the wide lean accounting. But it is
useful when it must be completed with appropriate and true information of
production and non-production steps within the value stream. It should not be too
busy and complex so that it can solve its purpose of continuous improvement.
3.5 CONCLUSION
“Maximize flow and minimize waste” is the ultimate tenet of lean. This
chapter discusses about lean Accounting pathway at all. This maturity path
enables the lean accounting team to develop an action plan for each stage of firm
which is divided into different value streams and eliminate the waste. When
company is an initial stage of lean accounting, lean pilots work as Total Lean
Management (TLM). Company is now divided into different small cells to
perform special type of work. Lean cell performance measurements evaluate their
work in the form of Total Quality Management (TQM), Total Flow Management
(TFM), Total Productive Management (TPM), Total Service Management (TSM)
and Total Employee Management (TEM). TQM is the 100% people involve for
100% development with 100% responsibility. TFM means material and
information is flowing like river throughout the firm. TPM is the integration of
production and quality system through the machines, equipments and employees.
TSM indicates to control process to become best in class by flexible working
conditions, optimization, process improvement, co-operation and self
organization. TEM is the empowerment of people through self assessment system,
lean counseling, training, safety and morale. These all components work together
as Total Lean Management.
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November 22, 2015.
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Outlines:
Type of
S.No. Issues Comments
Waste
Cleaning
5 5S & Visual Needs strong Visual Management.
Area wise
and audit
(a) The production layout was incapable and ineffective to meet the
customer demands, also Muda of Transportation and Muda of Motion
was on high side.
(b) The real effective machine utilization was not possible with the current
layout, which led Waterman to increased man power, delivery time &
outsourcing.
(c) Due to ineffective work oriented layout, waterman had never utilized
production capabilities and that swallowed the profit for the long time.
(d) Lack of visual Management
The above loopholes have been identified in the initial process of lean
journey. Each of these elements can offer several challenges that must be conquer
to achieve a truly competent lean manufacturing system. These key issues are vital
building block for developing the lean implementation plan.
The company has diagnosed before applying lean idea on the basis of four
parameters i.e. productivity per month, space utilized by the company, total
inventory per month and manpower employed in the presented company. Table
4.2 displays the report generated on different parameters.
Based on the above diagnosis, the Company has defined the lean strategy
to overcome its loopholes identified. It integrates the lean principles and tools
with the corporate strategy to deliver breakthrough improvements year after year.
Out of the different tools of lean, company has adopted the following road map-
4.1.4.2 5S Methodology
Needed List of
Needed and Red tag area
/un-needed needed Un-needed
un-needed created, all
Unsafe items items items items are
Sort items found un-needed
in work area. separated, developed, not allowed
in work items
un-needed maintained, in area.
area. removed.
tagged. posted.
Needed
Needed and
Needed items can be
un-needed Method for
Needed items have retrieved
Placement of items are adding/delet
items dedicated within (cell
Set in items causes placed -ing
stored in an positions target)
Order unsafe randomly indicators
organized that are seconds and
conditions. throughout for needed
manner. clearly (cell target)
the items
indicated. number of
workplace.
steps.
Work area
Root cause
Spills, waste, and
Area and Standard Daily sources of
trash, etc. machines
equipment work layout inspection of dirt, grease
Shine produce are not
cleaned posted and plant and & spillage
unsafe cleaned on
daily. maintained. area occurs. have been
conditions. a regular
eliminated.
basis.
Methods of
Methods of work posted Methods of Methods of
Methods of
No work work and work work are
work not
Standa- methods or documente consistently consistently regularly
completely
rdize procedures d but not used by used by all reviewed
document-
documented. consistently some cell cell team and
ted.
used. team members. improved.
members.
5S Root causes
5S assessment of problems
No routine 5S
Occasional, assessment conducted revealed by
review/ activities
unschedule conducted on a regular 5S
Sustain correction of conducted
d 5S occasionally basis and assessment
unsafe on regular
activity. and results recurring are
conditions. basis.
posted. problems are identified &
identified. eliminated.
No colour coding for water lines Visual waterlines & valves for ease of
& valves operation, Maintenance & repair
No visual, no fix location for the Colour coding size wise leads to
attachment search, error free
Contd…
Before After
No fix place & fix quantity for material Visual marking on floor to fix place
& WIP control
No visual & coding for Jig fixture Visual colour coding for Jig fixture
product wise
Contd…
Figure 4.4: Visual Management in Waterman
Figure 4.4 depicts that there is not any visual management or control
throughout the company before applying lean. Waterman was in practiced with
traditional skills of material and process handling. But after applying lean,
company has complete visual signs and signal to communicate information for
making effective decisions. These decisions may be process oriented or safety
oriented or may give reminders as what steps can be followed in occurrence of
any problems. Visual management makes the control and management of the
company as simple as possible. When any deviations are visible, required action
can be taken immediately to correct the problems. Waterman displays the
operating or progress status in a given format to provide instructions and to
convey information along with the component where immediate feedback is
provided by any level of management.
4.1.4.4 Cell Performance Measurements
= 6.23 Minutes
First Time It reveals the percentage of units that complete a process and
Through meet quality guidelines at the first time without being
rework, rejection, repair or returned.
2.
= 0.99 or 99%
Contd…
3. WIP-to- This measurement reflects the inventory levels in the cell.
SWIP Report It helps in reducing variation and its impact on lead time.
= 1
Projected company has per day 8 hours (480 minutes) of working. Its per
month average customer demand is 2000 nos. (approx 77 nos. per day with 26
working days, assuming 4 Sundays in a month). Thus, takt time of the cell is (480
minutes/77 nos.) 6.23 minutes or simply 6 minutes. It shows customers need this
product in every 6 minutes. The efficiency of cell depends on that how they match
this time with actual practice of manufacturing the product. The Day-by-the-hour
report maintains and monitors this rhythm of production. To achieve the benefits
of this report, Waterman has trained its cell people in standardized work methods
with effective handling of parts and material. The supervisors regularly review
this report and resolve problems and manage the process visually. Figure 4.5 is
the Day-by-the-hour reports using by the company for a particular day where per
hour planned production is 10 units according to takt time. This report required
reason if production is not according to plan.
Figure 4.5: Day-by-the-hour Report using by Waterman
As same First Time Through (FTT) of the company is 99% that means
99% units out of total units proceed in a week, meet quality guidelines at the first
time without being scrapped, rerun, retested, diverted for off-line repair or
returned. FTT is the measure of quality of manufacturing process. Waterman
employed lean approach in 2012. After successful completion of lean
manufacturing, company is moving towards continuous improvement in
production process. Consequently, every step in production is predefined and
mapped that shows the exact sequence and timing of the process. It makes the
product perfect in the first time and at the right rate. Now company is trying for
100% FTT with zero defects policy.
Value stream is the all necessary value adding activities from receiving
order to delivering goods to the customers. Figure 4.6 is indicating the sequence
of activities for a particular product (i.e. V3 and V4 motor) for the Waterman.
This is the value stream for customer order which include all the activities that are
required to create value for the customer. Currently, company is working with
different types of value stream like value stream for new product development,
value stream for sale service development, value stream for acquiring new
customers etc. Moreover, company is extending its value stream with its
customers, suppliers and other third party organizations to eliminate waste and
improve the entire flow. According to the requirement of this thesis, only the
value stream of customer order is defined in figure 4.6.
1. Unit Per Person This measurement explains how much units have been
produced by a person. It makes the people empowered to
set their goals as high as they perform.
Contd…
2. On Time This measurement shows the rate of orders that are
Delivery shipped to the customer on time.
=1
3. Dock-to-Dock
Days It is the measurement which defines the days between the
unloading of raw materials and the discharge of finished
goods for shipment or delivery.
= 3.96 or 4 days
Contd…
4. Average Cost Per
Unit It shows the overall direction of value stream that real
changes for improvement are taking place in the value
stream or not. If more units are shipped, average cost per
unit will decrease.
= 12,118
The first measurement, Unit Per Person calculates how many products
have been produced by a person. This shows the efficiency of personnel included
in value stream. Waterman produced 500 units in the projected week and total
person involved in value stream was 62. This presents, at least 8 units (500 / 62)
have been produced by a person in the given period. This motivates people to set
their goals as high as they can perform. Waterman value stream team manager
tries to increase efficiency of people regularly in time.
Value stream income statement in table 4.6 expresses the sale value of
goods shipped during the projected week. This figure has been collected from the
sale book of that period. It also contains total value stream cost i.e. material cost,
labour cost, machines cost, operation cost, facilities cost, support cost and other
cost. These informations are generated through related vouchers in the company
for the projected period. The value stream profit for Waterman is Rs. 1,04,500,
evaluated through value stream revenue less value stream cost. Altogether, this
statement works with information generated from different value streams existed
in the company. But as per requirement of this study, only customer order
fulfilling value stream information has been taken into account. If necessary, this
statement can show additional breakdown of the information but it is always best
to keep this report as simple as shown above in table 4.6.
Box Score is a fundamental and decision making tool for lean company
which gives a summarized view of the value stream performance in three modes
i.e. operational performance, financial performance and capacity usage. These
three dimensions of box score assess that how the value stream is performing
operationally, how the value stream is performing financially and how the value
stream resources are being used. Table 4.7 shows box score for the projected
company.
Non-productive 34%
Available capacity 15%
Revenue Rs. 61,63,452
Financial
Box score is the summary of all the information generated to know the
lean improvements. It shows a through view of the value stream. It takes into
account the impact of the financial changes, as well as the changes in capacity and
the operational outcomes. All of these issues must be addressed for sound
decisions to be made. This information, presented in the box score, can be
compared with the next week, next to next week or planned future state box score
report, for showing continuity in the value stream performance.
Sr.
Parameter Before After Benefit
No.
2. Space Utilized 2100 Sq. Ft. 1000 Sq. Ft. Rs. 1.2 L / Year
Waterman Industries Private Ltd. has closely impacted by lean idea. Lean
is a never ends journey so company continuously trying to compete itself to be a
world class organization.
Raw cotton
Carding &
opeing & Lapping
Rolling
cleaning
The manufacturing process for the absorbent cotton involves the following
stages of production:
Opening and clearing: Raw cotton is loosened and dust and other particles are
removed. The cotton is then sent to a kier where it is steamed, boiled for about 3-4
hours after adding chemicals such as caustic soda, soda ash, detergent etc. This
treatment removes much of the natural waxes and oils and softens and
disintegrates any foreign matter that may remain after cleaning operation.
Washing: After cotton is boiled it is removed from the kier and taken to the tanks
for washing.
Drying: The cotton, so opened is then passed through dryer. Where drying
machine is not there the cotton is subjected to the sun drying. This method,
however, restricts the capacity of the unit besides the cotton getting mixed up with
dust.
Lapping: After the cotton is dried it is again sent to the blow room where it is
thoroughly opened and made into laps.
Carding & Rolling: The laps are then fed into the carding machine where cotton
comes into thin layers. Paper is inserted under the laps and the cotton is rolled and
simultaneously compressed.
Weighing and cutting: The rolls are then weighed and cut according to the
required size. The cut rolls are then further packed in a polythene roll after
labeling and putting the weight mark and then sent for final packing.
During packaging, company puts its registered marka on the product and
sends it for delivery.
Figure 4.9 has proposed that the material flow must be in linear layout where
material flow is continual without any obstruction. Here, raw material is lodged in
store room and issued to the production department with kanban card. This card is
the indication of material requirement at production floor. With the required
quantity, material is supplied according to the convenience of issue department.
After cleaning, bleaching and drying of raw cotton by hydro extractor machine, it
is kept for sun drying at terrace. The dried cotton can be collected through a
window from terrace to store room. This window could be helpful in bad weather.
This dried cotton is refined, rolled and packed. Finally, finished goods are stored
with visual signal of unique colour code for every product. In this layout, Material
is flowing smoothly so there is no need of rework and re-movement of material as
well as man. The delivery time has been reduced. The firm has quick traceability
of job and manpower. It has single point supervisory as well as small batch
production. Hence, Bhansali Industry tries to reduce seven deadly waste i.e. muda
of transportation, muda of motion, muda of waiting, muda of rejection, muda of
over processing, muda of over production and muda of unused human potential.
4.2.3.2 5S Methodology
5S Methodology
Sort Set In Order Shine Standardize Sustain
Unnecessary All unneeded Identified the Standard 5S is
and unneeded items are items that cause practices have implemented on
items are eliminated from contamination. established for daily basis.
identified on the workplace. regular work.
the shop floor.
Unneeded items According to Preventive Standardized Senior authority
are red tagged work flow, it is action has taken process has makes periodic
and once stored decided that to stop root visually review of the
in holding area. which item to put causes of such displayed at status of 5S.
where. contamination. work place.
Needed items Needed items are 10 to 15 minutes Methods of Problems and its
are sorted out set in order as it has allotted to work has root causes
and a list can be retrieved every person to documented identify and
maintained for within seconds clean and and eliminate
it. with minimum inspect his consistently regularly.
steps. workplace. followed by
people.
Holding area’s Everybody has Cleaning and Responsibility Owners
items are informed about inspection of has assigned to (operators)
evaluated and positioning of workplace individuals for conduct 5S
disposed, if items. adopted as his work area Kaizen activities
required. regular practice. or machine. at shop floor.
No unneeded Needed items are Plan has Methods of 5S results
items are set in order with developed and work are displays
allowed at shop labels. responsibility regularly regularly at
floor. has distributed. reviewed and work place.
improved.
In the journey of lean accounting, the projected firm has become visual
factory. In this process of visualization, Kanban as well as Gemba tool of lean
methodology has been adopted. Kanban is a visual sign that activates an action.
Bhansali Industry is using this card for supplying its raw cotton to the production
line with displaying a sequence of specification and instructions. Initially this card
has tagged outside the store with required quantity of material before time. The
store department, according to its convenience, supplies the required material to
the production line and a pink colour card has been tagged for completion of work.
Figure 4.10 explains the use of Kanban card at Bhansali Industry.
Kanban card and red tag for material Pink card for completion of work
requirement
Figure 4.10: Use of Kanban Card at Bhansali Industry
This chart shows the performance of the firm in overall activities from raw
material received to finished goods prepared. For executing this report, the whole
process has been converted into activities. These activities are the actions which
consume certain time of production. After that Standard Allowance Minute (SAM)
has been calculated by capturing the cycle time through stop watch. The cycle time
is the time of completion of one activity. This cycle time is converted into basic
time i.e. cycle time * efficiency percentage. It is assumed that workers are doing
their work on 75% efficiency constantly. Figure 4.11 exhibits a performance
measurement report of Bhansali Industry.
Preparing the fibers- Firstly raw fiber are shipped in bales and opened by hand
or machine. The workers loosen and separate the lumps of fiber and clean it. If
raw material is required in mix fiber, quantities of each type of fiber have been
measured carefully and their proportions are maintained.
Carding- The raw fiber is carded with carding machine. The carding machine is
set with fine wires that separate the fibers and make them in parallel form. This
thin web of fiber passes through a funnel shaped device that produces a rope like
brim of parallel fibers. Laps of different fibers can be joined, if requires.
Combing- This process has been followed when a smoother, finer yarn is
required. A comb like device sets the fibers into parallel form with short fibers
falling out of the brim.
Drawing out- After carding and combing, the fiber is sent to sliver. A number of
slivers are combined before this process. A series of rollers revolving at different
rates of speed, drawing out the sliver into a single more uniform thread that is
given a small amount of twist and put into large cans.
Twisting- The sliver is fed through a roving frame machine where the thread of
fiber are further drawn out and given additional twist. This is the single yarn
thread which sends for packing.
TFO (Two For One)- The roving yarn is fed from the spool through rollers.
These rollers elongate the roving. The roving passes through the traveler. The
traveler moves freely around the stationary ring with 4000 to 12000 rotations per
minute. The spindle turns the bobbin at a constant speed. This turning of bobbin
and movement of traveler twists the yarn in one operation. This double twisted
yarn rolls in big reel and sends for conditioning.
Conditioning- This process is especially for giving moisture to the yarn. This
moisture gives weight and robustness to the thread. A steam room is set up for
conditioning purpose.
Packing- The finished goods have been packed with big containers and transport
for shipping.
Waste identification is one the most complex and responsible deed in lean
process. As same, waste elimination is one of the most effective ways to increase
the profitability in the lean process. The projected company has done both of work
very effectively. It has identified lots of waste on its production floor and for each
waste, company has adopted lean technique to eliminate or reduce its impact on
the company. These wastes are waiting in production, lots of rework and scrap in
manufacturing process, unnecessary movements of material and men at
production floor, overproduction, inventory etc. Except of these wastes, the
company has mainly elucidated four types of waste i.e. sliver waste, roving waste,
hard waste and stained cone. Table 4.12 delineates these wastes.
S. Name of Description
No. Waste
1. Sliver Waste When fiber has processed in carding and draw frame
machine, it generates output as sliver. But when the
output is not according to standard, it is called sliver
waste.
4. Stained Cone The final yarn is packed in cone shape. When this
cone has stained with dirt, smudge etc., it is called
stained cone waste.
The above table marks out some typical wastes that have been identified in
the company. To get improvement in overall performance, there is an urgent need
of lean system to reduce and eliminate these wastes because according to lean,
customers pay for the value added work, not for the waste.
The lean accounting methods which are appropriate for the company is
completely depend on the company’s maturity with lean manufacturing and the
issues they are facing. As the company matures with lean thinking, more methods
and practices become useful. Reliance Chemotex Ltd. has linked up with lean idea
in the year 2014. Company has a good practice of lean methods particularly in 5S
and visual management. Some other tactics have also been suggested for the
company. The adopted lean methods and the suggested tactics are as follow-
(a) 5S Methodology
(b) Visual Management
(c) Cell performance Measurement
(d) Value Stream Performance Measurement
(e) Value Stream P/L Statement
4.3.3.1 5S Methodology
The projected company has taken on a follow up process of 5S. This is the
5S audit plan which has put in the practice by the people of cross departments.
Here, 10 marks is decided for each ‘S’ with definite activities. This report has
been maintained by each and every section of the company so that every
department can be the part of continuous improvement in the lean journey. Table
4.13 shows 5S programme in Reliance Chemotex Industry.
S. No. 5S Activities Followed
1. S1 - SEIRI
-Unwanted spares, tools, scrap and other items in the area
(SORT)
are identified.
-Personal belongings left on racks, floor, machines are
identified.
-Any safety hazards items present in the area are sorted out.
2. S2 - -Needed machines and items are identified.
SEITON -Production data board has been updated.
(SET IN -Label the place which is not labeled.
ORDER) -Items are placed on labeled area.
3. S3 -
-Cleans the work area, floor, racks, walls and partitions
SEISO
every day.
(SHINE)
-Lines, marks, labels are cleaned daily.
-Machines are now free from fly, dirt, excess oil and grease.
-Inspect that S1 and S2 are maintained regularly.
4. S4 - -Work instructions are displayed for every process.
SEIKETS -5S instructions are tagged at production floor.
U -Internal audit reports are prepared.
(STANDA -5S checklist, charge register and verify register has been
RDISATI maintained regularly.
ON)
Before After
No fix place of raw material Raw material has placed with proper manner
Contd…
Before After
Waste has kept in unarranged manner Waste has packed and put at proper place
Loose tools are tousled and disseminated Tools are placed properly
Unarranged work area Baskets and trolleys arranged with proper place
Contd…
Before After
Fire extinguisher machines are out of order New machines have been brought and
maintained
1. Day-by-the-
This measurement shows what and which work must be
hour report
completed during each hour of production. That means how
many products to be made in each hour.
2. First Time
It reveals the percentage of units that completes a process and
Through
meets quality guidelines at the first time without being rework,
rejection, repaired or returned.
= 0.99 or 99%
3. WIP-to-SWIP
This measurement reflects the inventory levels in the cell. It
Report
helps in reducing variation and its impact on lead time.
= 1
Table 4.14 presents the results of the cell performance measurements that
are calculated on the basis of collected data through questionnaire. The projected
company has 3 shifts per day with eight hours each i.e. company works total 1440
minutes in a day. As information collected by the company’s representative, it’s
per day average customer demand is 35 Tonne. So production takt time is approx
41 minutes (1440 minutes/35 tonne). It means company must produce its one
tonne production within 41 minutes. The efficiency of cell depends on how they
match this time with actual practice of manufacturing the product. This takt time
is beneficial to make Day-by-the-Hour Report. This report maintains and monitors
this rhythm of production. It is prepared daily where per hour planned production,
according to takt time, has written and also actual production for the hours has
noticed hour by hour. This report required reason if production is not according to
plan. The supervisors regularly review this report and resolve problems and
manage the process visually.
As same First Time Through (FTT) of the company is 99% that means
99% units out of total tonnes proceeds in a week, meet quality guidelines at the
first time without being scrapped, rerun, retested, diverted for off-line repair or
returned. FTT is the measure of quality of manufacturing process. After successful
implementation of 5S technique, company is moving towards continuous
improvement in production process. Consequently, every step in production is
predefined and mapped that shows the exact sequence and timing of the process.
It makes the product perfect in the first time and at the right rate. Now company
can try for 100% FTT with zero defects policy.
A value stream can consist of all the value creating activities that are
required to bring a product from concept to market launch. To measure the value
stream performance of projected yarn manufacturing company, a value stream of
product development has been identified. This value stream has demonstrated in
figure 4.14. This is the value stream for customer order which includes all the
activities that are required to create value for the customer.
After Sales
Packaging and
Services
Shipping
The people, included in the above value stream, work as a team. Every
person who is the part of this value stream is responsible for the value stream
measurements results. The person who leads this value stream is treated as value
stream team manager. He is the person who instructs and motivates the value
stream team members and supervises the results, generated by the value stream.
Value stream measurements which are suggested for the projected yarn
manufacturing company are represented in table 4.15.
=1
Contd…
3. Dock-to-Dock
It is the measurement which defines the days between the
Days
unloading of raw materials and the discharge of finished
goods for shipment or delivery.
= 12.97 or 13 days
The projected company has good practice of 5S lean technology. Thus, the
value stream is well managed and systematic. Even the company is not very much
mature with the lean tactics, but its practice towards 5S management, has made
possible to generate data from the value stream. Table 4.15 has carried out some
value stream results regarding the company. The information used for the above
measurements are completely based on the data collected by the company’s
representative through questionnaire. These value stream performance
measurements are calculated weekly and the interpretations of these results are as
follow-
The first measurement, Unit Per Person calculates how many products
have been produced by a person. This shows the efficiency of personnel include in
value stream. The company produced 245 tonnes in the projected week and total
person involved in value stream was 1200. This reports that at least 0.20 tonnes or
200 kilograms (245 / 1200) have been produced by a person in the given period.
This motivates people to set their goals as high as they perform.
This is the statement to show value stream profit or loss. It is simply value
stream revenue minus value stream cost. The value stream revenue is the sum of
total unit shipped during the period and the value stream cost is the sum of
expenses occurs on performing value adding activities for producing the product
during the period. This statement has been created in plain English language that
can be easily understood by anyone. Table 4.16 depicts value stream income
statement for the projected company.
Table 4.16: Value Stream Income Statement for Reliance Chemotex Ltd.
Value stream income statement in table 4.16 expresses sale value of goods
shipped during the projected week. This figure has been collected from the sale
book of that period. It also contains total value stream cost i.e. material cost,
labour cost, machines cost, operation cost, and finance cost. These informations
are generated through related vouchers in the company for the projected period.
The value stream profit for Reliance is Rs. 17,55,102, evaluated through value
stream revenue less value stream cost. Altogether, this statement works with
information generated from different value streams existed in the company. But as
per requirement of this study, only manufacturing value stream information has
been taken into account.
4.3.4 Benefits Achieved
0.50
0.00
AT JUN JULY AUG SEP OCT NOV DEC JAN FEB MAR
START 15 15 15 15 15 15 15 16 16 16
Figure 4.15: Changes in Lot Change Time
RUN CHART OF RING TRAVELLER CHANGE TIME IN
Hrs./Machine
‘B’ SECTION (UNIT 1)
0.60 0.50
0.50
0.40
0.30 0.24 0.23 0.24
0.20 0.20 0.20 0.20 0.20 0.20 0.20
0.20
0.10
0.00
AT JUN JULY AUG SEP OCT NOV DEC JAN FEB MAR
START 15 15 15 15 15 15 15 16 16 16
1.5
1 1 1 1 1 1 1 1 1.02 1
1
0.5
0
AT JUN JULY AUG SEP OCT NOV DEC JAN FEB MAR
START 15 15 15 15 15 15 15 16 16 16
(a) The lot change time is the time which workers are taking to change the
fiber lot. At beginning, the overall lot changing time was 1.5 hours per
machine per month but as depicted above it has reduced to 0.8 hours per
machine.
(b) The ring travelers are an important tool for manufacturing yarn. Through
it, thread can move smoothly during the process. But it must be changed
when it gets wear down to maintain its flow. This changing time can be
treated as waste if it is more than standards. This time was observed 0.50
hour per machine, at the beginning, but lean impact reduces it to 0.20
hour per machine per month.
(c) As same above, machine cleaning time has been reduced by 50%. It was
noticed 2 hrs per machine per month before applying lean but now it is
reduced to only 1 hour per machine per month.
(d) Except of all above, company reduces its sliver waste from 0.60% to
0.48%. Also the stained cone has been reduced by 1.2% to 0.40%.
(e) Company’s roving waste percentage has been decreased by 0.68% to
0.44% and hard waste percentage has been decreased by 0.57% to
0.53%.
4.4 CONCLUSIONS
While exploring the lean accounting in all three firms, the operational as
well as financial results have been measured through lean methods like cell
performance measurements and value stream performance measurements. The
Waterman Industry gets its productivity improved. It saves manpower as well as
space with total flow management. Rework has been reduced and the production
work becomes visual. Bhansali Industry reduces waste especially through visual
management. After applying lean, the factory becomes visual factory where every
steps, instructions, orders, cautions have been written on visual boards which were
missing before. With the use of other lean techniques of gemba, kanban, flow
management, the company improves its productivity and eliminates waste. As
same, the Reliance Chemotex Industry, with the implementation of 5S, identifies
its loopholes as waste in lot changing time, ring traveler time, machine cleaning
time as well as hard waste, sliver waste etc. The company reduces these wastes
after a good practice of lean throughout the organization. Further, the cell
performance and value stream performance measurements reveals satisfactory
adherence of standards at all.
Outlines:
In this chapter various reviews have been classified into three categories
namely conceptual review of lean accounting, case studies, criticism of lean
accounting. After paying attention to the conceptual review, it is observed that the
most of the studies related to the lean accounting have been done regarding
foreign countries and by foreign authors. The studies with reference to India are
found rarely. These reviews give an eye for the lean accounting practice.
According to the views expressed by most of the authors, the lean accounting is
focusing the business around the value created for customers. When an
organization moves from mass production to lean thinking, the accounting,
control and measurement system need to be changed.
But in the third section, which reveals limitations and challenges of lean
accounting, presumed that when lean ideas have been followed by the people with
lack of spirit, it will give some extent negative results. Implementation of lean to
the organization does not mean that it will contribute in more profit making for
the company. Every method which has lots of qualities, excellence, moral, and
traits for standing in this competitive age, not possible that it would be perfect in
every aspect of the organization. Even, there are lots of challenges ahead, in front
of lean, but some improvements are there to be suggested by the authors to fulfill
this research gap.
This chapter discusses about lean accounting pathway at all. This maturity
path enables the lean accounting team to develop an action plan for each stage of
firm which is divided into different value streams and to eliminate the waste.
When company is an initial stage of lean accounting, lean pilots work as Total
Lean Management. Company is now divided into different small cells to perform
special type of work. Lean cell performance measurements evaluate their work in
the form of Total Quality Management, Total Flow Management, Total
Productive Management, Total Service Management and Total Employee
Management.
This chapter covers the actual field work done regarding lean accounting
in the selected enterprises of India. It deals with the case studies of Waterman
Industries Pvt. Ltd., Bhansali Industry, Reliance Chemotex Industries Ltd. This
chapter inaugurates the detailed application of lean accounting tools and
techniques over the data collected from the companies.
While exploring the lean accounting in all three firms, the operational as well as
financial results have been measured through lean methods like cell performance
measurements and value stream performance measurements. The Waterman
Industry gets its productivity improved. It saves manpower as well as space with
total flow management. Rework has been reduced and the production work
becomes visual. Bhansali Industry reduces waste especially through visual
management. After applying lean, the factory becomes visual factory where every
steps, instructions, orders, cautions have been written on visual boards which were
missing before. With the use of other lean techniques of gemba, kanban, flow
management, the company improves its productivity and eliminates waste. As
same, the Reliance Chemotex Industry, with the implementation of 5S, identifies
its loopholes as waste in lot changing time, ring traveler time, machine cleaning
time as well as hard waste, sliver waste etc. The company reduces these wastes
after a good practice of lean throughout the organization. Further, the cell
performance and value stream performance measurements reveals satisfactory
adherence of standards at all.
Potential for the lean accounting can be found in the five principles i.e.
value, value stream, flow and pull, empowerment of people, and perfection
through continuous improvement. The lean approach begins with creating value
for the customer through value stream. The value stream links with flow and it
pulls the customer towards the product. It encourages empowerment of people and
creates perfection in the process. It has been observed that all three projected
companies are having homogeneity regarding admission of lean principle in their
regular practice of business. The variety of tools, methods and measurements have
been applied to increase the value through elimination of waste and to identify
operating and financial improvements. Table 5.1 summarizes the results obtained
in the selected enterprises.
Contd…
S. PARAMETERS WATERMAN BHANSALI RELIANCE
NO. CHEMOTEX
4. Waste Reduction Waste of trans- Waste of Especially sliver
portation, motion, waiting, waste, roving
motion, trans- portation waste, hard
inventory, over have broadly waste, stained
production have reduced. cone waste have
reduced. reduced
averagely from
0.76% to 0.46%
It is clear from the table 5.1 that lean accounting improves the numbers. It
provides lean performance measurements, which can replace traditional
measurements. It supplies methods to identify the financial impact of lean
manufacturing improvements. It offers a better way to understand product costs
and value stream costs. It eliminates large amounts of waste from the accounting,
control and measurement systems and frees up time and resources to work on lean
improvements. Finally, it is a way to focus the business around the value created
for the customers. Thus it can be said that lean accounting is better result oriented
than traditional accounting practice. It accepts the major research hypothesis
which has been made by the researcher before.
These above findings of lean accounting may have important implications
for an organization which is going to be transformed into lean enterprises. The
organization can remove huge amounts of unnecessary work like gathering and
analyzing data, producing unhelpful reports and generating additional non-value-
adding tasks. These findings also lead to support the researchers who are studying
lean practices and its effects. They may be able to suggest idea for improving
traditional strategies to be adopted in lean practices.
Apart this, the study is based on the figures of a certain period. These
figures are gathered by the company’s representative only on observational basis.
It is worthy to mention here that these results are not the ultimate factor which can
be applied by any other organization in India. The lean measurements and its
practices are not the perfect measurement system; it may differ from one
organization to another organization. It completely depends on the company’s
issues that it is facing. Similarly, there is no end to the lean journey and any model
for the implementation of lean manufacturing and lean thinking is not adequate.
The researcher supplies here a simple model that can address the changes needed
to make lean accounting a reality within an organization. Thus due care should be
taken while interpreting the results of the study.
Esteemed Respondent,
The researcher is pursuing Ph. D. on the topic “Lean Accounting: A Case Study of
Selected Enterprises in India” under the supervision of Prof. G. Soral in
Department of Accountancy and Statistics, UCCMS, MohanLal Sukhadia
University, Udaipur. This questionnaire is aimed to collect information regarding
your company to know the impact of lean implementation. The information
provided by you shall be kept confidential. The information collected through this
questionnaire is purely meant for research purposes. The researcher shall be
grateful to the respondents for sparing their valuable time.
Part-1 Introduction
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
9. Would you like to give any further suggestions in the field of Lean practice?
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
Part-3 Operational Information
10. What are the per day working hours in the company?
______________________________________________________________
_______________________________________________________________
_______________________________________________________________
13. What is the per month/day average customer demand of your frequently
selling product?
_______________________________________________________________
_______________________________________________________________
15. What is your average no. of units that require rework or rejection per
day/month?
_______________________________________________________________
_______________________________________________________________
17. What is the average inventory (Average raw material + WIP + Finished goods
inventory) per month in stock?
_______________________________________________________________
18. What is the average number of units per month that you shipped or deliver to
the customer?
_______________________________________________________________
19. How much time you take to deliver the product or fulfill customer demand?
_______________________________________________________________
20. How much average time (in days) taken in Raw Material unloading to
releasing finished goods to the customer?
_______________________________________________________________
21. What is the total floor space of your factory for production?
_______________________________________________________________
THANK YOU
BIBLIOGRAPHY
Outlines:
(A) Books
(B) Articles
(D) Others
BIBLIOGRAPHY
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Lean Accounting being a new and emerging concept of accounting, this paper
seek with major concept of lean accounting and concentrates that how lean
accounting is better decision making technique. This is done through conducting a
case study of a world leading company where standard costing technique is
applicable for determining the cost of product.
Objectives:
(1) To focus on the conceptual review of Lean Accounting and its major
aspects.
(2) To review the literature available on Lean Accounting to identify the
current state.
(3) To analyze a case study based on lean principle for the problem facing in
traditional standard costing.
Research Methodology:
This research is derived from a specific challenge facing by the companies that
what kind of costing and accounting approach is required to support the accurate
product costing. In order to address the issue, an extensive literature survey has
been done to understand that what is lean accounting and what are its tools,
principles and practices. Also this literature survey identified the problem created
by the continued use of traditional costing and accounting methods.
To capture the last objective of the study, a case study is conducted of a world
leading company of US where standard costing is using as its decision making
technique. The name of the Company is kept anonymous as per agreement with its
management to keep it confidential. Consequently, the studied company is
referred to as Anonymous Inc. It is a leading manufacturer and exporter company
of US. The required data have been collected through convenient sources like e-
mails, e-resources available and annual reports of the company.
(I)-CONCEPTUAL REVIEW
Lean is getting the right thing, to the right place, at the right time, in the right
quantity to achieve the right work flow while minimizing waste, being flexible
with greater customer satisfaction. Lean accounting is a support to the business by
controlling the waste, loss and defects. (Ross Maynard, 2009).
In short, Lean Accounting is a Japanese approach that focuses all activities that do
not add value to the production process such as holding of stock, repairing faulty
product and unnecessary movement of people and product around the plan with
Continuous improvement by the shortest, fastest route possible is the ultimate goal
of lean accounting (D. Muthamizh Vendan Murugavel, 2011).
The five steps process for guiding the implementation of lean techniques is shown
in figure 1. These principles are easy to remember but not always easy to achieve.
1. Identified
value
Principles of
lean
accounting
4. Establish
3. Creat flow
pull
1. Specify value from the standpoint of the end customer by product family.
2. Identify all the steps in the value stream for each product family,
eliminating whenever possible those steps that do not create value.
3. Make the value-creating steps occur in tight sequence so the product will
flow smoothly toward the customer.
4. As flow is introduced, let customers pull value from the next upstream
activity.
5. As value is specified, value streams are identified, wasted steps are
removed, and flow and pull are introduced, begin the process again and
continue it until a state of perfection is reached in which perfect value is
created with no waste.
Lean principle if followed and lean program if implemented properly will add to
the profit and profitability of an organization through all-round improvement in
the whole cycle from manufacturing to product delivery with less inventories, less
wastage, less space utilized, less cost on the one hand and better quality and
greater customer satisfaction on the another hand.
Tools of Lean Accounting:
Cell
Value Stream
Performance
Measurement
Measurement Box Score
Elimination of Financial
Transaction Benefits of
Lean Change
Value Stream
Plain English Value Steam Cost &
Financial Costing Capacity
Statements
Figure 2: Tools of
Sales, Target Costing
Lean Accounting Operations &
(Source: Brian H. Financial Plan
Maskell, 2005)
Life Cycle Capital project
Costing justification
Lean accounting reports and tools actively support the lean transformation. The
accumulation of all of these tools creates continuous improvement. The financial
and non financial reporting affects the overall value stream flow, not individual
product, job or process. Lean Accounting focuses on measuring and
understanding the value created for the customers and uses this information to
enhance customer relationship, product design, product pricing and lean
improvement (Brain H. Maskell and Bruce L. Baggley, 2006).
( II )- REVIEW OF LITERATURE
A brief review of work already done on the subject reveals the following findings:
Manjunath H.S. Rao and Andrew Bargerstock (2011) exploring the role
of standard costing in lean manufacturing enterprises. The author indicates a three
stage path to lean transformation that should be accompanied by corresponding
changes in accounting. Ideally in stage second of lean transformation, the
company must move away from traditional standard costing accounting and
variance analysis.
Womack and Jones (1996) in the book “Lean Thinking”, provide a simple
description of lean principles-value, value stream, flow, pull, and perfection-along
with stories of companies beyond Toyota that are applying them successfully in
North America, Europe, and Japan. The final section presents an action plan for
any company to follow toward a lean transformation.
Susan lilly and Nick Katho (1995) compared lean accounting with volume
based traditional accounting and specify how can we solve any problem using the
Plan, Do, Check and Act process. Lean accounting focusing on more cash flow,
more profit and profitability and delivery of better value added products and
services.
After this background in view, we can say that with launching of the concept of
lean accounting during the mid 1990’s, most of the organizations, irrespective of
their capability and understanding of the concept, wanted to jump on the
bandwagon in an attempt to trim the excess out of their organization and improve
their bottom line. Now it become a magical costing and decision making
technique with no indirect cost, which are going to improved and adopted by the
society of world. Finally there is a broad implementation framework for
application of lean accounting
$30/unit
Quoted price
$25/unit
Standard cost
$5/unit
Gross margin
16.67%
Gross margin %
23%
Current gross margin %
Table 2: Lean Profit Statement for existing business
Direct cost ($)
Shared cost ($) Total cost ($)
Sales
100,000 -- 100,000
Material
20,000 -- 80,000
Direct costs
18,000 -- 18,000
Shared cost
-- 39,000 39,000
62,000
Total (39,000) 23,000
Revenue
300,000
Material
60,000
Variable margin
240,000
Direct cost
40,000
Profit
200,000
67%
Gross margin %
Table 4: Lean Profit Statement showing old and combined business
New total with
Lean profit statement of existing
10,000 additional
business
units ($)
Direct ($) Shared ($) Total ($)
Sales
100,000 -- 100,000 400,000
Material
20,000 -- 20,000 80,000
Variable
margin 80,000 -- 80,000 320,000
Direct cost
18000 -- 18,000 58,000
Shared cost
-- 39,000 39,000 39,000
Gross margin
62,000 (39,000) 23,000 223,000
Gross margin
% 57.5%
Conclusion:
References:
Baggaley, B. and B. Maskell. (2003). Value stream management for lean
companies, Part I. Journal of Cost Management (March/April): 23-27.
Fullerton and Kennedy. (2009). Lean manufacturing: costing the value stream.
Industrial Management & Data Systems. Vol. 113, issue 5
Kennedy and Brewer. (2006). The Lean Enterprise and Traditional
Accounting-Is the honeymoon over? Journal of Corporate Accounting &
Finance. Vol. 17
Abstract
In today’s global market, a change in strategic and manufacturing practices to a more customer
focused system such as the lean manufacturing/lean management system becomes crucial to help
companies achieve a good competitive position. At the same time, the current traditional costing
system is almost obsolete with respect to lean manufacturing systems. The development of a lean
accounting system may have resolved the problems faced by lean firms due to their traditional
costing systems. However, the suggested lean accounting Value Stream Costing (VSC) tool
proposes another dilemma with respect to the conditions required for its effective implementation
especially when it comes to the necessity of eliminating shared resources. Also, very few has
been written on the management accounting tools to be used in a lean environment, which
indicates that the management accounting literature seems to lag behind lean transformation
specially in India. This study sets a framework that integrates Value Stream Costing (VSC) in a
lean environment in a condition where shared resources are still present. This has the objective of
computing accurate product unit costs in order to assist a lean manufacturing system enhance
organizational competitive stand. A case study is conducted on one kind of a manufacturing
company operating in Ahmadabad (Gujarat) which has recently moved to lean manufacturing.
The suggested VSC framework is used to compute the product unit cost for one of the factory
product. Within the implementation of the suggested framework different approaches of lean
manufacturing are being compared with before conditions and also various empirical
implications are being discussed. The findings of the study gives positive implications of the use
of lean manufacturing and VSC in the studied factory - given a condition of shared resources –
that the effect of lean implementation improves the efficiency and productivity of company and
the integration of Value Stream Costing system in a lean company results in more accurate
product cost given a condition of shared resources which shall help the studied factory to achieve
a good competitive position.
Key words: Lean Accounting, Lean manufacturing, Value stream costing, 5s.
Introduction
Today’s worldwide open competition in market has raised expectation of more heterogeneous
product choices to be offered to them at high quality level, low prices and reasonable delivery
times. That is why companies now seeking the movement which provide best customer focus and
would be able to sustain a good competitive position, requires the cooperation of both the
company’s operating and accounting systems (Kennedy and Widener, 2008). Over the past two
or three decades there has been a tremendous development in terms of managerial terminologies,
methodologies and productivity tools in trade and commerce both. Managers are now found
themselves as warriors of accounting battle which is bubbling up around the world that has broad
implication for how to run a business. The battle begins when a manager starts to think that
Literature Review
A brief review of work already done on the subject reveals the following findings –
D. Muthamizh Vendan Murugavel (2011) comparing Traditional Manufacturing to Lean
Manufacturing and concluded if the lean production is carried out through efficient planning and
effective management, the manufacturers would surely achieve competitive advantage of this
global market.
Manjunath H.S. Rao and Andrew Bargerstock (2011) exploring the role of standard
costing in lean manufacturing enterprises. The author indicates a three stage path to lean
transformation that should be accompanied by corresponding changes in accounting. Ideally in
stage second of lean transformation, the company must move away from traditional standard
costing accounting and variance analysis.
A. Lakshminarasimha and Vivek Krishna K. (2010) provide an introduction to lean
concepts and discuss the impact of value stream costing on lean. Suggestions and pointers for
further study are indicated, which would go a long way in practical sustained implementation of
lean practices.
Dan Woods (2009) examines the implications of lean philosophy with standard cost
accounting and got the core difference i.e. Lean Accounting attempts to find measures that
predict success and standard cost accounting measures results after the fact.
P.K. Chakraborty (2008) highlights different aspects of lean thinking as a way to success.
He concluded that lean implementation aims at getting the right things, to the right place, at the
right time, in the right quantity to achieve the right work flow while minimizing waste being
flexible with greater customer satisfaction focusing on more cash flow, more profit and
profitability and delivery of better value added products and services.
Objectives:
In order to test the postulations of the study framework presented, the study proposes the
following objectives:
(1) To test the effect of lean implementation that improves the efficiency and productivity of
company.
(2) To explore the role of Value Stream Costing system in a lean company that result in more
accurate product cost given a condition of shared resources.
Research Methodology:
As already mentioned that Value Stream Costing requires almost perfect condition of lean
manufacturing system and this study also attained an environment of shared resources. In order
to address the issue, a case study is conducted on one company operating in Ahmadabad
(Gujarat). The name of the Company is kept anonymous as per agreement with its management
to keep it confidential. Consequently, the studied company is referred to as Company X.
Company X is a leading manufacturer and exporter of water handling pumps. It manufactures
varieties of water handling pumps. This condition best serves the research objective of shared
resources. The Company has adopted Kaizen, Kan-ban and the 5S system of management. The
supply of raw materials / components is streamlined with adoption of two-bin system. The
workplace is designed in such a way that the operators need minimal supervision and gain
expertise in the work assigned to them in no time. This company has chosen for conducting the
study because this is the manufacturing factory that has moved to lean manufacturing.
The data collection process takes two stages; the first stage includes conducting interviews with
the factory plant head. In order to collect information on the manufacturing process flow, the
3 Vol. 01 Issue 03 June 2014
ISSN 2348-6775
Sr. No. Parameter Per month (in units) Per month (in Rs.)
1 Production/Productivity 1800 (1000 V3 & -
V4)
2. Space Utilized 2100 Sq. Ft. -
3. WIP / Total Inventory - 3.25 Cr.
4. Manpower 148
5 5S & Visual Area wise Need Visual, Plant will become visually very
cleaning and strong to the customer and visitor.
control
Lean Strategy
Traditional manufacturing system serves only cost of product. It is almost obsolete current
manufacturing innovations that are customer oriented, such as lean manufacturing (Fullerton and
Kenney, 2009). Based on above diagnosis, following road map has used to overcome above
issues-
1. Flow Management – To reduce the Muda of Transportation & Muda of Motion.
2. 5S and Visual Management – To improve work environment, control WIP, Search free,
count free ergonomically improved store and work place.
(1) Flow management- Flow management is the movement of material from first process to last
process. It is the result of perfect flow of material which reduces wasteful activities from the
production process (Tracey, D. L. and J. E. Knight (2008).
Figure 1*: Flow layout of Company X before and after lean implementation
This figure shows that company was using very haphazard flow of material process which
consuming much time for production but after implementation of lean manufcturing, a systematic
process of material flow has been designed that make the production process flowing like a river.
(2) 5S Assessment: lean manufacturing principle ultimately targets in waste elimination. This is
the aim of 5s technique i.e. Sorting, Setting in order, Shining, Standardizing and Sustaining
(Schiemann, W. and J. Brewton, 2009). Simply 5s system will find unnecessary things in the
system. Then it will sort and sorted items will be kept in order. Then there will be a regular
(3) Visual management: “The visual language is capable of disseminating knowledge more
effectively than almost any other vehicle of communication. Visual Communication is universal
and international; it knows no limits of tongue, vocabulary, or grammar. Visual language can
convey facts and ideas in a wider and deeper range than almost any other means of
communication” (György Kepes ,1944). This quote applies in lean approach which defines the
visual symbols for systematic work. Visual management is a cornerstone of lean management.
Lean accounting requires visual presentation of both financial and non financial measurements
(Brain Maskell and Bruce Baggaley, 2006). Figure 2 shows some visual changes made in
company X after implementation of lean manufacturing as explored the real situation.
Figure 2: Before and after analysis of visual management of company X
Before After
No Visual, No labeling, No segregation of color Visual marking on the floor to fix position
and Metal scraps color coding for each items
No fix place & fix quantity for material Visual marking on floor to fix place & WIP
No visual & marking for FG stock Visual marking on floor with FG stock control
The traditional accounting system gives results that contradict the improvements achieved by
lean manufacturing (Brosnohan, 2008; Crandall and Main, 2007). It even motivates various non
lean behaviors that are grounded in the mass production (Maskell and Baggaley, 2004). As the
solution of above problem table 4 concluded the result of Before – After analysis. It shows the
impact of lean manufacturing on productivity, utilized space, rework reduction as well as
manpower of company X.
Table 4: comparison of result before and after lean implementation
Sr. No. Parameter Before After Benefit
1 Production/Productivity 1000 Pump (V3, 1200 Pump Production
V4) (V3, V4) Increased By
20%
This table shows the result that on applying the lean manufacturing, company has increased its
productivity by 20%. This result is positive towards the first objective i.e. the effect of lean
implementation improves the efficiency and productivity of company.
In order to develop an answer to the second objective that intended to test the effect of applying
Value Stream Costing (VSC) on product in a lean company, given a condition of shared
resources, manufacturing data are being analyzed to elaborate how the current manufacturing
status leads to the creation of a condition of shared resources. And for the convenience of the
study, only one product of different sizes i.e. submersible motor (3”, 4”, 5”, 6”, 8” and 10”) has
been analyzed. The value stream map for Company X is illustrated in Figure (3).The production
process starts at the receipt of a customer order. The purchase department sets quotations and
gives purchase order to suppliers. The production process includes the manufacturing of stator
and rotor which is the main component of product, through different process. All the motors from
3 inch to 10 inch go through the same production process. That is why – only one value stream
identified. At the same time the different power and size of the motor produced entail that they
actually take different processing time in each production process. This means that the different
types of motor use resources differently and as a result they cannot be assigned the same
production cost per unit as done by the company with the traditional costing method, after
observing by the interview of accounting authority.
The Company X is using traditional costing method which calculated almost all the overheads
cost on the basis of the production units. Due to the confidentiality of company, it provides only
cost data of 4 inches submersible pump, which is the highest sell product of the company, i.e.
87,100 Rs. During 2012-13, company X received a total of 600 orders of which constitutes 2,400
submersible pumps. During the year, 1800 pumps produced of which 1400 units were shipped to
customers.
Preparation Final
of insulating testing
material (L)
(QC)
QC – quality control
(L) – labour based production process
Core slitting (M) – machine based production process
(L) (M) Complete
assembling
and furnishing
all parts
(L) (M)
Core cutting Pressin Machining Winding and Active parts
g stator and painting cable joining assembling
(L) (M) (M)
(M) (L) (L) (M)
In order to test the second research objective, the cost of 4 inches submersible pump is first
computed using the Value Stream Costing method. The application of Value Stream Costing to
compute product unit cost results in an average cost per unit of Rs. 1,39,217.35 (Rs.
19,49,04,287*/1400 units ). Table 5 showing traditional and Value Stream Costing (VSC)
approach to product costing computed for Company X in 2012-13.
References :
Baggaley, B. and B. Maskell. (2003). Value stream management for lean companies, Part I.
Journal of Cost Management (March/April): 23-27.
Fullerton and Kennedy. (2009). Lean manufacturing: costing the value stream. Industrial
Management & Data Systems. Vol. 113, issue 5
Kennedy and Brewer. (2006). The Lean Enterprise and Traditional Accounting-Is
the honeymoon over? Journal of Corporate Accounting & Finance. Vol. 17
Kennedy and Widener. (2008). Functional lean: A new approach for optimizing internal
service function value. Journal of Cost Management (July/August): 5-14.
Kennedy, F., L. Owens-Jackson, L. Burney and M. Schoon. (2007). How do your
measurements stack up to lean? Journal of Strategic Finance (May): 32-41.
Maskell, B. H. and B. L. Baggaley. (2006). Lean accounting: What's it all about? Target
Magazine 22(1): 35-43.
Mahapatra, S S and Mohanty, S R. (2007). Lean manufacturing in continuous process
industry: An empirical study. Journal of Scintific and Industrial research, Vol.66.
Searcy, D. L. (2009). Using cost management and lean tools to improve AMG's rental
operations. Journal of Cost Management (November/December): 24-33.
Schiemann, W. and J. Brewton. (2009). Functional lean: A new approach for optimizing
internal service function value. Cost Management (July/August): 5-14.
Silvi, R., M. Bartolini and P. Hines. (2008). SCM and lean thinking: A framework for
management accounting. Journal of Cost Management (January/February): 11-20.
Staats, B. R. and D. M. Upton. (2011). Lean knowledge work: The "Toyota" principles can
also be effective in operations involving judgment and expertise. Harvard Business Review
(October): 100-110.
Tracey, D. L. and J. E. Knight. 2008. Lean operations management: Identifying and bridging
the gap between theory and practice. The Journal of American Academy of Business 12(2): 8-
14.
Womack, J. P. and D. T. Jones. (1994). From lean production to the lean enterprise. Harvard
Business Review (March-April): 93-103.