Lean Accounting and

Lean Manufacturing

Prepared By:
 Blal Akram Abd El-Fatah Badr
 Mohamed Ali Ali Elshiekh
 Tarek Mohamed Said Abd El-Satar

1
 Lean Accounting

Abstract1
The most noteworthy evolution of Lean Accounting in recent years is a sharpening focus on
value. While lean has always been centered on creating value for customers, and eliminating
non-value adding waste, the companies deploying Lean Accounting and the researchers
furthering our understanding of it are increasingly moving ‘Value Adding’ and Non-Value
Adding’ from the theoretical realm to a very specific, measurable one. From isolating non-value
adding expenses on P&L statements to using Value Adding Ratios, Lean Accounting is
increasingly enabling manufacturers to specifically measure value in financial terms and to focus
improvement efforts on enhancing value.

Origins and Evolution of Lean Accounting2

September, 2010 marks the fifth anniversary of a momentous gathering in Dearborn,

Michigan of a handful of the leading lean manufacturing practitioners, consultants and
academics to formalize and unify the work they had been doing independently on a radically
different approach to accounting for manufacturing which has become known as Lean
Accounting. Since that time the annual Lean Accounting Summit has grown to include hundreds
of participants and companies, and there are now thousands of manufacturing organizations
around the world practicing Lean Accounting to varying degrees.
The expansion of Lean Accounting from that original small group has driven an
evolution of the principles and practices as more companies are contributing to the body of
knowledge based on practical experience, and a growing number of academic and
manufacturing experts are studying and contributing to the enhancement of the underlying
principles.
Lean Accounting evolved from a concern that traditional accounting practices were
inadequate and, in fact, a deterrent to the adoption of some of the necessary improvements to
manufacturing operations. While manufacturing managers knew that investments in automation
and the adoption of lean manufacturing practices were the right things to do, traditional

1 "The Current State of Lean Accounting - Bill Waddell." 2010. 5 May. 2014 <http://www.bill-
waddell.com/images/Advancement_of_Lean_Accounting.pdf>
2 "The Current State of Lean Accounting - Bill Waddell." 2010. 5 May. 2014 <http://www.bill-
waddell.com/images/Advancement_of_Lean_Accounting.pdf>

2
accounting was often an obstacle to such improvements, yielding numbers that only supported
investments when they could be justified by reductions in direct labor, with little benefit
ascribed to any improvements to quality, flexibility or factory throughput. Adoption of lean
manufacturing practices was treated even worse, as reductions in factory cycle times drove
corresponding reductions in inventories, triggering an under-absorption of overhead expenses
and actually making the company appear to be less profitable as a result of their lean strategy.
The problems presented by traditional accounting reached an especially critical point in the
1980’s as foreign – largely Japanese – competition took a severe toll on American
manufacturing competitiveness. “Relevance Lost – The Rise and Fall of Management
Accounting” written by Tom Johnson and Bob Kaplan in 1991 gave the problems with
traditional accounting a very high level of visibility. A consortium effort coordinated by
Computer Aided Manufacturing – International (CAM-I) brought the leading manufacturers and
the academic community together over the course of a few years in the late 1980’s to develop
solutions, and the concept of Activity Based Cost Management resulted from their efforts. At
about the same time, Eliyahu Goldratt’s Theory of Constraints included the concept of
Throughput Accounting, as another solution to the problem.
Activity Based Costing turned out to not be the hoped for solution, largely because it is
primarily a more sophisticated approach to allocating costs and allocations are at the heart of the
problem with traditional accounting. The solution is to eliminate allocations, rather than improve
them. Goldratt’s Throughput Accounting was much closer to the solution, although it did not
provide sufficient structure and information to drive the elimination of non-value adding
expenses, or ‘waste’ in lean terms.
Throughout the 1990’s a number of people worked to build on these concepts and
resolve their shortcomings, including Brian Maskell and Bruce Baggaley, Orrie Fiume and the
management of Wiremold, Mark Deluzio at Danaher, Jean Cunningham and others. The set of
principles that evolved and was solidified at that meeting in Dearborn is Lean Accounting. That
set of principles was documented in Brian Maskell and Bruce
Baggaley’s 2006 article, “ Lean Accounting – What’s It All About? ” The purpose of this article
is to describe Lean Accounting in its current form, as it has evolved and sharpened in the years
ensuing from that first meeting of the Lean Accounting Thought Leaders.

3
The Vision for Lean Accounting

1. Provide accurate, timely, and understandable information to motivate the lean transformation
throughout the organization, and for decision-making leading to increased customer value,
growth, profitability, and cash flow.

2. Use lean tools to eliminate waste from the accounting processes while maintaining thorough
financial control.

3. Fully comply with generally accepted accounting principles (GAAP), external reporting
regulations, and internal reporting requirements.

4. Support 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.

What is lean accounting?3

Accounting, control, measurement, and management methods that truly reflect lean
thinking and lean practice. Lean Accounting leads to better decision‐making by providing
accurate, understandable, and actionable cost & profitability information. Lean Accounting
saves time and money by eliminating much of the waste associated with traditional accounting
& control systems. Lean Accounting motivates lean improvement over the longer‐term by
providing measurement and reporting information that is thoroughly lean‐focused. Lean
Accounting enables companies to make more money by identifying the potential financial
benefits of lean improvement and developing strategies to realize that profit. Lean Accounting
methods such as Target Costing and SOFP provide short‐term and long‐term focus on customer
value through the value stream, and the team‐based continuous improvement required to
grow the business, eliminate cost, and improve profitability

Why is lean accounting needed?

3 "Corporate Accounting, 5E." 5 May. 2014 <http://books.google.com/books?id=ctOIStjX8JEC&pg=SA3-
PA296&lpg=SA3-PA296&dq=what+is+lean+accounting
%3F+brain+mask&source=bl&ots=D0eHGx8rtA&sig=RBvT_oFkeFlf_odgN1HhR71yWoQ>

4
There are positive and negative reasons for using Lean Accounting. The positive reasons include
the issues addressed in the "Vision for Lean Accounting" shown above. Lean Accounting
provides accurate, timely and understandable information that can be used by managers, sales
people, operations leaders, accountants, lean improvement teams and others. The information
gives clear insight into the company's performance; both operational and financial. The Lean
Accounting reporting motivates people in the organization to move lean improvement forward.
It is often stated that "what you measure is what will be improved." Lean accounting measures
the right things for a company that wants to drive forward with lean transformation.

Where does Lean Accounting apply?4

As with most lean methods Lean Accounting was developed to support manufacturing
companies, and most of the implementation of Lean Accounting has been within manufacturing
organizations. Now that lean methods are moving into other industries like financial services,
healthcare, government, and education there are some initial examples of the application of Lean
Accounting in these industries. There are as yet no published cases of the use of lean accounting
outside of manufacturing.

How Do You Implement Lean Accounting?5

Lean Accounting does not stand alone. It supports lean manufacturing, lean product design, lean
logistics, and so forth. Lean Accounting is the servant of the operation. There is a prudent and
orderly maturity path to the implementation of Lean Accounting. As your company matures with
lean manufacturing (and other lean processes) more and more of the benefits of Lean
Accounting can be implemented and realized.

What Will Lean Accounting Do For Us?6

4 "Lean accounting - Wikipedia, the free encyclopedia." 2006. 5 May. 2014

<http://en.wikipedia.org/wiki/Lean_accounting>
5 "Corporate Accounting, 5E." 5 May. 2014 <http://books.google.com/books?id=ctOIStjX8JEC&pg=SA3-
PA296&lpg=SA3-PA296&dq=what+is+lean+accounting
%3F+brain+mask&source=bl&ots=D0eHGx8rtA&sig=RBvT_oFkeFlf_odgN1HhR71yWoQ>
6 "Lean accounting - Wikipedia, the free encyclopedia." 2006. 5 May. 2014
<http://en.wikipedia.org/wiki/Lean_accounting>

5
There are several tools included in Lean Accounting and they each work together to create a
framework for the control & management of a lean enterprise. The benefits of Lean Accounting
include:
1- Lean accounting increases sales because it provides better information for decision making.
2- Lean accounting clearly identifies the financial impact of lean improvements.
3- Lean Accounting saves money and reduces costs.
4- Lean Accounting motivates long‐term lean improvement through lean‐focused information
and measurements.

6
 Lean manufacturing

Lean manufacturing, lean enterprise, or lean production, often simply, "lean", is a

production practice that considers the expenditure of resources for any goal other than the
creation of value for the end customer to be wasteful, and thus a target for elimination. Working
from the perspective of the customer who consumes a product or service, "value" is defined as
any action or process that a customer would be willing to pay for.7

Origins and Evolution of Lean Manufacturing8

Lean principles are derived from the Japanese manufacturing industry. The term was first coined
by John Krafcik in his 1988 article, "Triumph of the Lean Production System," based on his
master's thesis at the MIT Sloan School of Management. Krafcik had been a quality engineer in
the Toyota-GM NUMMI joint venture in California before coming to MIT for MBA studies.
Krafcik's research was continued by the International Motor Vehicle Program (IMVP) at MIT,
which produced the international best-seller book co-authored by Jim Womack, Daniel Jones,
and Daniel Roos called The Machine That Changed the World. A complete historical account of
the IMVP and how the term "lean" was coined is given by Holweg (2007).

For many, lean is the set of "tools" that assist in the identification and steady elimination of
waste (muda). As waste is eliminated quality improves while production time and cost are
reduced. A non exhaustive list of such tools would include: SMED, Value Stream Mapping,
Five S, Kanban (pull systems), poka-yoke (error-proofing), Total Productive Maintenance,
elimination of time batching, mixed model processing, Rank Order Clustering, single point
scheduling, redesigning working cells, multi-process handling and control charts (for checking
mura).

There is a second approach to lean Manufacturing, which is promoted by Toyota, called The
Toyota Way, in which the focus is upon improving the "flow" or smoothness of work, thereby

7 "Lean manufacturing - Wikipedia, the free encyclopedia." 2003. 5 May. 2014

<http://en.wikipedia.org/wiki/Lean_manufacturing>
8 "Lean manufacturing - Wikipedia, the free encyclopedia." 2003. 5 May. 2014
<http://en.wikipedia.org/wiki/Lean_manufacturing>

7
steadily eliminating mura ("unevenness") through the system and not upon 'waste reduction' per
se. Techniques to improve flow include production leveling, "pull" production (by means of
kanban) and the Heijunka box. This is a fundamentally different approach from most
improvement methodologies, which may partially account for its lack of popularity.

The difference between these two approaches is not the goal itself, but rather the prime approach
to achieving it. The implementation of smooth flow exposes quality problems that already
existed, and thus waste reduction naturally happens as a consequence. The advantage claimed
for this approach is that it naturally takes a system-wide perspective, whereas a waste focus
sometimes wrongly assumes this perspective.

Both lean and TPS can be seen as a loosely connected set of potentially competing principles
whose goal is cost reduction by the elimination of waste. These principles include: Pull
processing, Perfect first-time quality, Waste minimization, Continuous improvement, Flexibility,
Building and maintaining a long term relationship with suppliers, Autonomation, Load leveling
and Production flow and Visual control. The disconnected nature of some of these principles
perhaps springs from the fact that the TPS has grown pragmatically since 1948 as it responded to
the problems it saw within its own production facilities. Thus what one sees today is the result of
a 'need' driven learning to improve where each step has built on previous ideas and not
something based upon a theoretical framework.

Toyota's view is that the main method of lean is not the tools, but the reduction of three types of
waste: muda ("non-value-adding work"), muri ("overburden"), and mura ("unevenness"), to
expose problems systematically and to use the tools where the ideal cannot be achieved. From
this perspective, the tools are workarounds adapted to different situations, which explains any
apparent incoherence of the principles above.

8
Lean manufacturing techniques are based on the application of five principles to
guide management’s actions toward success:

1. Value: The foundation for the value stream that defines what the customer is willing to pay
for.
2. The Value Stream: The mapping and identifying of all the specific actions required to
eliminate the non-value activities from design concept to customer usage.
3. Flow: The elimination of all process stoppages to make the value stream “flow” without
interruptions.
4. Pull: The ability to streamline products and processes from concept through customer usage.
5. Perfection: The ability to advocate doing things right the first time through the application of
continuous improvement efforts.

The Four Thrusts of Lean Manufacturing9

Lean manufacturing organizations focus on four thrusts to support their lean manufacturing
designs:

I. Solid leadership that:

· Communicates the vision.
· Facilitates and models the behaviors of leanmanufacturing.
· Sets the standards for the organization.
· Assists the workforce in adapting to the change.
· Builds trust and inspires commitment.
· Coaches and develops the workforce.
· Constantly challenges the system.

II. Team-based cultures that:

· Use project-oriented, team-based structures that focus on empowerment concepts.
· Leverage knowledge by using highly skilled workers.
· Promote employee accountability and responsibility for work.

9 McGivern, Michael H, and A Stiber. "Lean Manufacturing Techniques." Development Dimensions

International. URL: http://www. ddiworld. com/DDIWorld/media/white-
papers/леанmanufacturingtechniques_wp_ddi. pdf.

9
 · Advocate the continual development of the workforce
· that employee ownership of the final product is shared throughout the process.

III. Communication systems that:

· Advocate and develop processes to identify critical design issues as early in the process
as possible.
· Encourage “on-the-spot” decision-making processes that use the fewest resources to
resolve critical design issues.
· Promote knowledge sharing between hourly workers, management, and design
personnel.
· Drive the behaviors of internal operations, as well as focus on the behaviors of
suppliers and customers.
· Accept formal and informal communication behaviors.

IV. Simultaneous development and continuous improvement processes that:

· Design the product right the first time.
· Use continuous improvement processes to identify the non-value-added problems.
· Drive commitment to eliminating problems (controlling them is not enough).
· Advocate just-in-time material control systems.
· Promote constant improvement throughout the supply chain.
· Leverage the knowledge of the organization with the knowledge bases of suppliers and
customers.
· Continually train and develop highly skilled workers.
· Use scoreboards or measurement systems to monitor progress.

Why do organizations want to use lean manufacturing techniques?10

· To significantly improve overall productivity
· To increase market share
· To improve speed-to-market with new products
· To reduce manufacturing and engineering labor costs
· To eliminate non-value-added operations and processes

10 McGivern, Michael H, and A Stiber. "Lean Manufacturing Techniques." Development Dimensions

International. URL: http://www. ddiworld. com/DDIWorld/media/white-
papers/леанmanufacturingtechniques_wp_ddi. pdf.

10
Lean manufacturing techniques focus on:11

· Equipment reliability
· Balanced or level production
· Just-in-time material control techniques
· Stop-the-line to correct the problem and in-station process control
· Continuous improvement processes
· Statistical Process Control techniques for quality consistency
· Developing human systems to support the technical processes

How do you sustain lean manufacturing techniques?

· Create a solid business case

· Align systems and processes
· Share the vision
· Empower the workforce
· Ensure the use of proper measurement systems

Roadblocks to implementing lean manufacturing:

· Complacency; no reason to change

· Using lean manufacturing to facilitate downsizing efforts
· Role clarity issues from senior management
· Opposition from middle management
· Poorly defined measurement systems
· Short-term versus long-term thinking
· Inadequate union involvement
· Lack of commitment and ability to “just-do-it”

11 McGivern, Michael H, and A Stiber. "Lean Manufacturing Techniques." Development Dimensions

International. URL: http://www. ddiworld. com/DDIWorld/media/white-
papers/леанmanufacturingtechniques_wp_ddi. pdf.

11