Overview

This chapter is intended for Lean Champions, senior executives, Lean Six Sigma sponsors and project leaders who seek to ensure the financial success of their organizations’ Lean initiatives. A great deal has been published regarding the inadequacy of standard cost systems as decisionmaking tools for managing your business. The idea that it is ill-suited for today’s competitive environment has become mainstream, but the understanding of a clear and effective alternative continues to be elusive.

There seems to be unending debate over the use of Activity-Based Costing and other approaches for allocating costs. We are no further along today than we were 20 years ago on this issue. For those tasked with using Lean initiatives to improve the financial performance of their company, this results in a high degree of frustration and the feeling that daily decision making is based on faulty assumptions.

This chapter aims to provide some direction. It is not intended as an alternative to the standard cost accounting system, but rather as an alternative decision-making system to the one spawned by any allocation-based approach. By tracing the history of the standard cost
approach, we see a clear divergence from the system as an accounting method to its use as a decision-making tool. Our goal is to answer the
question: What is an appropriate model for today’s competitive markets?

This chapter will help you to:

• Learn how to build a Lean accounting model to identify opportunities for improvement and prioritize and track success.
• Use Lean accounting to rationalize your product base.
• Create a quote system that is consistent with Lean principles.

Dude, where’s my profit?

“And as a result of this lean event, we have saved the company $250,000 annually!”

The words were coming from the company’s Lean Champion. We were in the middle of one of their manufacturing plants; I stood in the small crowd next to the president, who smiled with approval. He had invited me to attend the final day of their latest “Lean Event” to show me how advanced they were in implementing a “Lean Strategy.” I waited for the final request for questions and raised my hand:

“I’m confused about the gains you’ve stated. May I ask a couple of
questions?” I asked.

“Sure,” said the unwitting Lean Champion.

“How many direct labor heads were eliminated?”

“Two.”

“Who are they?” I asked, pointing to two people standing off to the side.

“They’re water spiders.”

“What do they do?”

“They keep materials flowing to the assembly cell.”

“Where did they come from?” I asked, trying to drill down to the core of the matter.

“They came from the cell after we did the event.”

“So they are still working in the cell?”

“No they’re working for the cell,” he clarified.

“Do they work for any other cell?” I asked.

“No.”

“Was there any reduction in the cost of materials?”

“No,” he replied.

Are you going to have an increase in sales from this cell?

“No.” I think he was starting to get the hint by this point.

“After the reduction in direct labor, where is the rest of the cost
reduction?”

“Plant square footage. We reduced the amount of square footage that this cell uses.”

“Do you pay rent based on floor utilization?” I asked.

“I don’t think so.”

“Then how is this a cost savings?”

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