The Lean Business Guidebook

How to Satisfy Your Customers and Maximize Your Profit

MJS Bindra, Ekroop Kaur

• Publisher: Productivity Press
• Year: 2022
• eBook ISBN: 9781000568158
• Topic: Business
• Subtopic: Business generale
• Index: Business

This book introduces a powerful system that explains how to run a company with a focus on continuous improvement.

The results are a satisfied customer base, evolving products and an increase in revenue and profits. These factors determine the success for any company because business transformation involves making fundamental changes in how business is conducted to cope with shifts in the market environment. This a comprehensive book for valuable guidance on framing strategy and overcoming challenges for successful and sustainable implementation of a lean production system, daily management system and lean accounting system in companies to empower the managers to serve their customers with timely delivery of quality products while maximizing profits and easing workloads. The main challenge is ensuring operations colleagues in different functions understand the link between their daily work and the profit and loss statement. In addition, it illustrates how finance personnel can assist the operations team and be a part of the transformation journey.

This book is not meant to impart theoretical knowledge of the lean production system, daily management and lean accounting, as there are many books already available that focus on the methodology instead of the implementation. This book empowers people in each function of a company, irrespective of which level they work in the company, and shows them the way to operate on a daily basis to achieve the company's strategy while simultaneously fulfilling their career goals. The book lays out a brief history of the evolution of lean concepts with a focus on lean accounting. This book guides the successful implementation and sustenance of lean and kaizen tools and provides answers to the questions:

• Who should lead the lean and kaizen implementation in the company?
• Where should the lean and kaizen journey begin?
• Which lean and kaizen tools should be implemented first?
• How important is capacity for the company?
• How much current capacity is wasted and how much free capacity is available?
• Where exactly are the resources being wasted in the company?
• How can the company reduce waste to release capacity for more production?
• Why should the daily management system and lean accounting system be implemented simultaneously with the lean production system?
• Why must managers understand the monetary value of their daily activities?
• Is there an easy way of making a profit and loss statement that is understood at each level in the company?
• Why is one-day closing of accounts important and how can it be done?

Chapter 1Why Is Lean Accounting Vital for a Company?

DOI: 10.4324/9781003221746-1

Perfection is not attainable. But if we chase perfection, we can catch excellence.

– Vince Lombardi

In the last three decades, a number of large companies have transformed their manufacturing processes by implementing lean business strategy and kaizen¹. These initiatives, known as ‘point kaizen’, made their manufacturing systems efficient and cost effective. However, the companies have not been able to sustain the benefits achieved through point kaizen. Even today plant teams are unable to compute the financial benefits from kaizen implementation and struggle to correlate them with their day-to-day activities or their influence on the company’s financial statements.

Plant executives are equipped with technical and operational skills, but they are not financially savvy. They cannot comprehend the financial statements or how initiatives for improvement in manufacturing processes on the plant floor are reflected in the profit and loss (P&L) statement or how profits are driven by their day-to-day activities. They are unable to identify opportunities to increase profits within the company. Financial statements exhibiting lower profits in a month when they worked hard and higher profits in a relaxed month leave them perplexed.

If you are a functional manager in your company, can you spontaneously respond to the following business performance indicators?

• Monetary value of average monthly dispatch
• Current energy consumption by the function
• Current cost of raw materials and consumables
• Current yield percentage and its absolute value
• Updated count of managers, engineers, supervisors, staff and workmen in their function
• Updated manpower cost and overtime value for their function
• Reasons for internal rejections on the plant floor, average monthly internal rejections per million and its monetary value
• Average customer complaint count and customer returns in a month and its monetary value
• Month end inventories of raw material, work in progress and finished goods in volume and monetary value
• Slow moving inventory (not used in the last 60 days) in volume and monetary value
• Non-moving inventory (not used in the last 180 days) in volume and monetary value
• Skill set of the supervisors and workmen
• Training hours utilized for skill improvement of workforce

How many could you answer? Functional managers struggle to answer questions that go beyond their immediate work responsibilities but are critical to deliver results in alignment with the company’s goals like those mentioned earlier. Functional managers attend review meetings every month where operational and financial performance is discussed. However, it is often witnessed that functional managers are not well versed with their department’s costs per unit or struggle to interpret the financial performance of their function from the P&L statement even though it is shared with them each month. They implement lean tools in their functions but are unable to translate financial gains from the plant floor into the P&L statement. Thus, they fail to adequately address the queries raised by finance executives.

Even if functional managers can calculate the financial gains from their lean and kaizen projects, they are unable to crack the complexity of the P&L statement. They cannot rationalize why higher profits are generated in leaner months when higher volumes were dispatched and lower profits in the months when they exerted overtime on the plant floor.

Finance executives prepare financial statements for all stakeholders, but functional managers, who add tangible value on the shop floor, work toward continual improvement² and are responsible for profitability of their functions or value streams, cannot interpolate the numbers in the P&L statement. On the other hand, finance executives lack the knowledge of key business drivers that drive each line item in the P&L statement since they are traditionally book-keepers and lack technical knowledge of processes on the plant floor.

1.1 How Do We Bring the Change We Expect?

Our main motive is to break the complexity of the P&L statement to make it more useful to functional managers and stakeholders. Hence, we need a better approach to construct the P&L statement that gives a true as well as relevant representation of financial performance of the company. The P&L statement prepared with lean accounting addresses the aforementioned issues. It makes comprehension of financial jargon easy for functional teams while complying with the rules and regulations of the statutory authorities.

Lean principles promote the concept of ‘value streams’ over ‘departments’³. In lean manufacturing, several mini companies run within a company. To form a mini company, all the managers, executives, supervisors and workmen in a company are grouped into a value stream based on a product family instead of functional departments and are therefore best suited to serve customers. Lean accounting helps to run these mini companies profitably by bringing in more clarity for functional managers. A P&L statement is prepared for each value stream with a different statement for each different product family. The P&L statement is prepared in a way to reflect the performance for the month as well as the output of lean and kaizen initiatives on the plant floor.

Lean accounting⁴ is ideal for companies that have a diverse product portfolio. It helps to understand the adverse impact of inventory on a company. It illustrates the potential gains from lower inventory level, lead-time reduction and better customer service without any stock unavailability. Lean accounting promotes monthly preparation of the P&L statement so that opportunity for improvement can be explored every month because quicker action and higher benefits can be reaped only if improvements are made at the right time.

Lean accounting breaks corporate stereotypes and myths like business control through detailed tracking, profit realization through complete utilization of resources, consideration of direct labor as a critical conversion cost and excess capacity as harmful. Rather, lean accounting advocates that some of the important responsibilities of functional managers are timely delivery of the material, lower throughput time, higher inventory turnover and first time right approach to work and not accountability for machine utilization and cost variances from budget or labor efficiency.

Lean accounting makes the marketing department focus on value added product selling. It ensures that new product development will be a healthy figure as a percentage of total products. It helps to monitor cost structure of new product development as an independent value stream without any revenue till the product is market ready. Until then, only provisions for expenses are made which are borne by other value streams.

Lean accounting promotes that value stream managers must understand the monetary value of their business activities. This requires them to have knowledge of cost per minute of downtime due to breakdowns, changeover time, defects, rework, poor yield and waiting. They should be aware of excessive transport cost due to poor layout and value of slow and non-moving inventory. Lean accounting insists that finance managers should collaborate with functional managers to understand these monetary values and work as a team toward cost reduction and to improve the bottom line.

1.2 Operational Excellence for Business Excellence

For any company to prosper, it is important to serve the customers with timely delivery of quality products. But in order to survive, it is imperative to produce and deliver the products at low cost, which can be made possible by reduction or elimination of wastages in the company⁵. These wastages are something that occupy 70% to 80% of manpower’s and machines’ available time. These wastages consist of downtime, defects, machines working at lower capacity due to lower speed and lesser loads, excessive changeover times, poor yields, unwanted produce, excess inventories in the system and warehouses choked with slow and non-moving inventory. There are lean and kaizen tools that aid in reduction of wastes within a reasonable time through existing teams. Companies should aim to internally develop expertise for reduction or elimination of wastes. Initially, assistance from external experts may be required but eventually an in-house team for internal training, monitoring and audit of the continuous improvement lean and kaizen tools should be developed.

With lean manufacturing, daily management, lean accounting and lean ERP, companies can implement a cost strategy that captures real-time product-wise report to analyze profitable and unprofitable products. The profit can be captured for each value stream separately and can be used for company-wide profit analysis. The focus of previous activities is to enhance customer satisfaction by improvements in quality, delivery and cost. The objective is to provide best quality product, on time and at lowest cost to the customer.

Lean production system, daily management and lean accounting can improve the operational and financial health of a company significantly. On an average, companies adopting lean principles may witness the following results on their current state in a reasonable period of time:

• Increase in profit by 30%
• Increase in sales by 20%
• Increase in productivity by 40%
• Decline in defects by 50%
• Decline in throughput time by 30%
• Free floor space by 30%
• Inventory reduction by 50%
• Overall cost reduction by 30%

Case Study

• A company, one of the top three global players, manufactures textile machineries for the cotton industry right from blow room to spinning. The manufactured machines have state-of-the-art technology that makes these machines ultra-reliable. This company implemented the lean production system. After the first phase of journey, which lasted for 18 months, the following results were achieved:
• Value adding ratio increased from 6.6% to 20%.
• Machine under assembly decreased from 86 to 20.
• Space utilized declined by 50%.
• Throughput time for assembly declined more than four times.
• In stores, the inventories decreased from 39 days to nine days of sales.
• Kaizen assessment score grew from 25% to 60%.
• There was a corresponding surge in profits and cash flows.

A company will have to adopt the mantra of eliminate, combine, reduce and simplify (ECRS) techniques to get rid of wastage, which would mean eliminate unnecessary processes, combine or reduce what cannot be eliminated and simplify processes to reduce time. This can be done through the following:

• Optimization of cost of production by reduction in ‘lead time’ (throughput time) of the manufacturing process from order to dispatch or collection from customers
• Standardization of processes to speed up and stabilize output at all work centers
• Getting the work done ‘first time right’
• Reduction in breakdowns on the manufacturing machines, internal and external defects, rejection and excessive changeover times
• Identification of machines running at low capacity (i.e., production per hour is less than capacity or keeps fluctuating).
• Reduction or elimination of excess, slow moving and non-moving inventories in the stores and shop floor

ECRS can be achieved by implementation of lean and kaizen tools to the initiatives mentioned earlier like:

• The kanban system ^6,7 can be deployed in the production flows to enhance continuous and pull flow. This system ensures inventory control and no stockouts because this system is used as a scheduling system that articulates what to produce, when to produce and how much to produce (see Chapter 2 for more details).
• However, it is paramount that a sustenan...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• Foreword
• Preface
• Acknowledgements
• About the Authors
• 1 Why Is Lean Accounting Vital for a Company?
• 2 Revolutionizing Manufacturing Operations: Toyota Production System
• 3 The Lean Way of Doing Business
• 4 Who Should Lead the Implementation of Lean Strategy?
• 5 Bid Adieu to Standard Cost Accounting, Welcome Lean Accounting
• 6 Lean Measures for a Lean Company
• 7 Value Stream Costing
• 8 Plant Capacity Assessment
• 9 Corporate Scorecard
• 10 Lean Performance Measurement System
• 11 Finance for Non-Finance
• 12 New Role of Finance Team
• 13 Budgeting
• 14 Business Plan Review
• 15 Lean ERP for Lean Accounting
• 16 Reduction in Transactions
• 17 System Assessment/Audit
• 18 Lean Transformation Journey of Perfect Gear Company
• Index