The Controller as Lean Leader

A Novel on Changing Behavior with a Lean Cost Management System

Sue Elizabeth Sondergelt

• Publisher: Productivity Press
• Year: 2017
• eBook ISBN: 9781466562264
• Topic: Business
• Subtopic: Operations
• Index: Business

Traditional accounting systems have become inadequate for today's increasingly competitive global manufacturing environment. They are too complex and too focused on past performance. As manufacturing techniques change and become less labor intensive, accounting methods must also evolve. Regardless of what you call it, Lean accounting is a managemen

1

Unbridled, Unproductive Chaos!

It is six in the morning, and I am rolling into the parking lot. I have always believed in getting an early start on the day, but perhaps not quite this early. Although I am new to my job at this plant (but not this corporation), I perceive that coming in at six in the morning will become a necessity. There seems to be so much to do here!

I was brought into this particular plant to help “raise the bar.” By profession, I am a managerial accountant and controller. I like to qualify that and say that I am a Lean controller. I believe that the finance “function” plays an integral role in the Lean management revolution. I believe that effectiveness is more important than efficiency and that finance people can become more effective by getting to know the business “cold.” And I believe that the most important role for the finance person is that of catalyst in a cultural change initiative. I also believe that a business should not focus so much on numbers but rather on behavior.

The chaos that is happening at this plant is not just the result of a lack of “financial systems” as the corporate internal audit group had told me, and it is not just about a “war” between operations (OPS) and accounting. Rather it is about the “learned behavior” of both operations and accounting associates. OPS people have been taught how to “play the game” in their MBA programs at the university. And “the game” is this: you make more product than you know you can sell, and then the rules of absorption accounting allow you to place the full-up cost of all of those products that you cannot sell on the balance sheet as an asset. Thus, you have fewer costs in your P&L (profit and loss) this month, and your operating income looks really good. Wonderful! There will be bonuses this month for everyone! But is the business really any better than it was last month?

Meanwhile, the financial people have been taught to manipulate (OK, perhaps “play with” would be a better choice of words) the numbers of the business in spreadsheets, and to spend all of their time booking transactions and using the “financial” accounting system to attempt to “manage” the business. The financial folks love to “allocate” costs. This month they allocate costs based on what one accountant believes is a “good” cost driver, and next month someone else in accounting believes that another cost driver would be better utilized to allocate costs. And usually the cost driver is labor dollars—even though labor is only 20 percent of the cost of the business today. All they have done is play what I call “the walnut shell game.” This usually implies that whichever product has the greatest revenue gets allocated to it the majority of the costs. Now I understand why some folks today refer to a business as a “social system.”

My earliest degree is in Mathematics and Statistics so I understand numbers, spreadsheets, and analytical models such as regression models (not that any CFO would ever trust a model without an “equal sign” in it). And I know that a person can always “make” whatever number he has been given as a goal. Thus, it is best not to run a business by the numbers, yet this is what we learn at our universities. In both functional groups, OPS and accounting, people are behaving as they have “learned” in academia. I know this because I teach as an adjunct at a university across town in the evening. Therefore, changing behavior, which is the purpose of my life in business, must really start in academia. Will that happen anytime soon? Probably not. And that is why, in my career, my purpose is to highlight behavior and how we change it to make business more successful and more effective. If we are going to change behavior, then our traditional standard absorption cost system (which creates all the wrong behavior) must cease for the purpose of managing the business. However, when one does this—that is, the timing of the removal of the standard cost system for managing the business and the implementation of the Lean cost management system—is critical.

Some in business today would focus on the numbers; others would focus on management. Still others would focus on culture and change. But it is not about numbers; it is about processes and how we achieve success. It is not about management; it is about leadership. And it is not (initially) about culture and change. Instead it is ultimately all about changing behavior. Thus, I choose to focus on behavior in order to “raise the bar” in this business. And so my story unfolds …

As I pull into the lot I see Mark, the COO for this plant—the man who has been chosen by corporate to be my partner in this Lean endeavor. Having been on the job for just a week now, I can already feel that Mark will be my best advocate and business partner in this change management initiative, or what I call a “turnaround” effort. Mark has been in his job for many years, and came here with a wealth of experiences from other successful Lean transformations. Although he is an engineer by trade, I will not hold that against him. And I smiled.

“Hi, Mark! Good morning to you! What’s up?”

“I was just thinking about that town hall meeting yesterday,” Mark said. “There definitely needs to be a new management paradigm instigated here in this plant from what I heard yesterday. Nancy, the CFO began and ended by telling people that she had ‘reclassed’ some assets, and so now we are ‘looking good’ for the month. You are the bean counter. What did she mean by that remark, Liz?”

“Hey! Hey! I am not a bean counter. And I am also not what some others call a ‘database banger.’ I have other ‘faces’. What do I have to do to get you OPS people to change your stereotype of financial people?”

“For starters, you need to lighten up, Liz. I was just teasing you.”

“OK, good point. Oh, by the way, do you wear that pocket protector to church?” and I winked. “Now, what is it you want to know about the CFO’s remarks at the town hall meeting yesterday?”

“I want to know what she meant by ‘reclassing’ some assets, and how would that help us—as Jack Welch would say—to ‘make-the-month’? Do we even want to do that?”

“You are correct when you say ‘make-the-month,’ Mark. Even you can see that she likes to just grind away at the numbers, and work in spreadsheets for short-term results. She is what you OPS guys would call a ‘financial superstar’—or I can also imagine you guys referring to her function as one of ‘financial reengineering.’ It will take some effort to get her to change the way she thinks.”

“I agree. But what did she mean by reclassing some assets, and is that even ethical? Ethics is one of our core values, is it not? At least it should be! How does this reclassing impact the financials, Liz?”

“It’s like this, Mark. Most assets on a balance sheet are recorded at their original historical cost, even though the financial powers-that-be would like it better if we change that to record assets at current market value. And, because of all of this, lenders (such as our bank) have come to place a lot of emphasis on balance sheets. Some financial folks—and I emphasize the word some—may ‘play with’ (a better term than reclass) balance sheets. They may do this directly by booking incorrect accounting entries and then reclassing them next month. Or they may do this indirectly by keeping transactions off the books completely. This ‘off-balance sheet’ accounting usually concerns leases, but I do not believe that is what Nancy was referring to in her remarks at the town hall. I believe she was talking about reclassing via the direct method, and I assume this has to do with our bank. You do know that they manage this plant and this business based on a rather large revolving line of credit, right?”

“Yes, I have heard about that, but I know very little about it. This is why I am asking you about it. I find this all most interesting. Keep talking, Liz.”

“Well, the motives for what I would rather call ‘playing with’ the balance sheet relate to reporting requirements established by lenders such as our bank. Our bank revolving loan covenants require that we meet certain financial ratios. If the bank determines that we have not met or have violated any of these ratios or covenants, the bank could accelerate the repayment of our loan or refuse to loan any more money to us. Thus, our CFO and CEO might wish to increase the stated value of short-term assets such as Inventory or Accounts Receivable.”

“Why is she bringing this up in a town hall meeting, Liz?”

“Probably because it is very much on her mind at this time. But you are right. The town hall was not the place for this discussion.”

“If this is unethical, it sounds like it might be difficult to prove,” Mark commented.

“Yes, it may be. Years ago a CFO asked me to inflate inventory by a penny a pound. I resigned from the job. Personally, I prefer to be able to sleep at night. But let’s take an example. Suppose the ratios that the bank requires in the loan covenants are debt-to-equity and the current ratio. The financial person who is putting together the financial statements might fail to record some liabilities, thus keeping the debt-to-equity ratio down. Or they may inflate certain assets, such as inventory, to keep the current ratio up. While there has been talk of changing how we value assets, you might write down an asset (such as equipment or obsolete inventory) but you never would write ‘up’ an asset—especially not inventory! The most common method I have seen to increase the current ratio, or any ratio for that matter, is to ‘play with’ accruals. And you are right, Mark. This would be difficult to prove.”

“Liz, I really do not believe that Nancy is smart enough—or experienced enough—to know how to ‘cook the books.’ These little tricks must be coming from Jim. I will remember to bring up this banking stuff casually the next time we play golf.”

“That would be good, Mark. We cannot have a leader with poor or unethical behavior,” I said. “And Nancy should have better things to talk about in front of the entire workforce. How did we really do last month? Where are we headed next quarter? How can anyone here help improve the business? These are things I would be interested in hearing … rather than the skinny on loan covenants! And I would be more interested in seeing the company P&L rather than this calamitous balance sheet. Balance sheets are the main focus of external users of business information. For you and me and other internal associates of the company, the income statement, or P&L, would be of greater interest.”

“Are you ready for the plant walk-through today, Liz?”

“I sure am, and I hope that this will be the beginning of the end of managing strictly based on the numbers, and I hope we do get some of these management folks to start to see what is really happening here.”

“I am going to get organized, and then I will meet you at the entrance to the shop downstairs at seven o’clock. Remember, Liz, lighten up. The OPS people will like you more!”

This had all started my first day on the job. The HR manager, of all people, wanted to see in a spreadsheet the reason why the plant efficiency rate is only 37 percent. At the end of my first week, I concluded that I could not show this in a spreadsheet—nor did I want to. So we are meeting a few of the top management people this morning at the start of the first shift for a walk-through the manufacturing operations. While seeing an HR manager on the shop floor could make workers nervous, I can think of no better way to illustrate our poor efficiency rate.

“Hello, Helen. How are you this morning?” Helen is the HR manager. She is an older and very traditional person. Already I have perceived that Helen’s core values do not include communication or diversity of people and ideas. Serving the customer and having fun doing it would also not be a core value of hers. And Mark thinks that only finance people need to lighten up.

“Good morning, Liz. Just what are we all doing here?” “We” included Helen, Mark, Tom, the plant manager, and me.

“We are just starting up the plant,” said Tom. “Here is where we ship finished product. This is as close to the customer as we can get. We will start here and work our way to the beginning of the manufacturing process where they are making the first batch of parts.”

“Why do we have to do this? Why can’t you just give me a spreadsheet to explain the poor efficiency rate of 37 percent?” asked Helen. HR in this plant, as in most plants, does not want to deal with a manufacturing revolution. But is it not the job of HR to talk with people? Rather, they seem to prefer to detach themselves from the plant and the workers, and to look in spreadsheets for solutions to problems. I guess they are no different from so many others here.

“OK, let’s walk the line,” said Tom. First, we see a lady with her head down on a table. Helen tapped the woman on the shoulder, and asked her what she was doing.

“I am waiting for that first batch to come down the line,” she replied.

“When do you expect that to happen?” asked Helen.

“Well,” the worker said, “that first batch usually comes through about one o’clock in the afternoon, right after lunch.”

We continue our walk, and come upon workers sitting outside a break room, drinking coffee. Next, we see a group of people reading the morning paper, talking about how they should really be back home “hayin’.” Did I mention that this plant is situated in a small farming community? Now we are back to the top of the line, where they were making a batch of parts—which they are at the moment scrapping, and starting over!

“Now do you see why we have an efficiency rate of 37 percent?” I directed my question to no one in particular. “How many people did you see adding value to the product?”

“OK,” said Helen, “but what do we do to improve this situation?” I was waiting for Tom to answer this question, but he was obviously not going to touch this issue with a forty-foot pole or a pitchfork.

“Helen, it is not just a ‘numbers’ problem, although that would make it easy to keep score. And it is not just about machines—although ours are very old and have never been maintained. Nor is it just about inventory, which is really hard cold cash—even though we have much too much of that stacked everywhere but in the bank. It is about people! So it is also a ‘culture’ problem, and we simply cannot explain that in a spreadsheet,” I replied, “even though machines and people and inventory translate into cost. Efficiency, Helen, implies keeping people busy doing anything—just to cover the overhead. Efficiency means having good people do wrong things well. We should be concerned with effectiveness. Effectiveness looks at what is and what could be! Effectiveness means having people do the right thing well, and that adds value.”

“I think we need to revisit our core values,” said Mark. “People here do not feel empowered. The factory has been run with the philosophy of ‘do your job, do what you are told, and keep quiet.’ I know that is not your Lean philosophy, Tom.”

“No, it is not my business philosophy, Mark. But how do we empower people? Do we just sprinkle them with pixie dust? How do we get the whole company to work together as a team?”

“Well,” I answered, “it might start with our HR system where we appear to be managing people by fear. I would like to talk to you sometime, Helen, about a systems merit approach to people as opposed to the pigeonhole system we have now. Perhaps we could discuss this—just the two of us—and then, if you agree, bring this up in a meeting with all key management players.”

“Good idea,” said Mark. “Gotta run! Will I see you all at the board meeting later this afternoon?”

“You bet,” said both Helen and Tom. “We have more problems than we can count. And our supply management and purchase price variances are just one of many problems to be addressed at this meeting.”

“And I am sure we will see some great spreadsheets at this meeting!” Mark said to no one in particular, with a smile on his face.

After some time with the staff in the accounting office, I asked the CFO, Nancy, if she would like to get some lunch across the street. “Sure,” she replied. Nancy was, in my opinion, in over her head. She had a BA degree which she had earned over thirty years ago, and she had never updated her education nor worked anywhere other than at this plant. And, when anyone challenges her, her first response is to cry. Perhaps none of this is her fault. Perhaps she is the by-product of the CEO, Jim, who also utilizes the same business philosophy on her as on the shop people, “Do your job, do what you are told, and keep quiet.” Jim seems to truly believe that the CFO’s job is an accounting job, period. He has no idea of the many “faces” of a modern-day, world-class financial manager, and he has admitted that to me in private.

I had started working on Jim the very first day on the job, suggesting to him that a financial manager is more than just a bean counter or bookkeeper, running numbers in spreadsheets and booking debits and credits. I brought this up with Nancy over lunch. I wanted to hear her response. “Nancy,” I said, “I see all financial persons falling into one of three categories: first is the typical bean counter or the person who just runs with numbers in spreadsheets and books debits and credits; second is what some call the database banger or the financial person who really is talented in analyzing data to get information, and knows something about the overall business; and third is the financial person who is acting as business partner to Jim and other top management people. Into which of these three categories do you see our accounting associates fitting?”

“I suppose we fit into the first category of the numbe...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• Preface
• Author
• Chapter 1 Unbridled, Unproductive Chaos!
• Chapter 2 Systems of Merit
• Chapter 3 Steering Team Offsite Meeting
• Chapter 4 The CEO’s Office after Hours
• Chapter 5 Henry Ford, the Father of Lean
• Chapter 6 Let’s Get Started! Surfing atop the Breakers of Change
• Chapter 7 Accounting’s Glass Slipper Does Not Fit
• Chapter 8 Mother Comes to Visit
• Chapter 9 The CFO and CEO Push Back on Lean Cost Management
• Chapter 10 How Will the Lean P&L Work?
• Chapter 11 Which Comes First: The Chicken or the Egg?
• Chapter 12 Mary, Our Intern, Speaks Up
• Chapter 13 Lack of Metrics Is a Recipe for Failure
• Chapter 14 A Behavioral Revolt! Bring in the Sales Guys!
• Chapter 15 Target Costing for Profit Management
• Chapter 16 Town Hall Meeting—One Year Later
• Chapter 17 The Role of Controller as Lean Leader
• Index