Managing Value Streams thru Lean Accounting
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Managing Value Streams thru Lean Accounting

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Lean Accounting provides the strategic tools for lean management by focusing on visual shop floor measures for Rapid Decision Making; coupled with management accounting tools for longer term......

Lean Accounting provides the strategic tools for lean management by focusing on visual shop floor measures for Rapid Decision Making; coupled with management accounting tools for longer term planning. Lean accounting is an integral part of the lean management system, as well as a vital tool for strategic decision making.

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  • 1. Business901 Podcast Transcription Implementing Lean Marketing SystemsManaging Value Streams using Lean Accounting Guest was Ross Maynard, Senior Consultant with BMA Europe Ltd Related Podcast: Rapid Decision Making enabled thru Lean Accounting Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 2. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsLean Accounting provides the strategic tools for lean managementby focusing on visual shop floor measures for Rapid DecisionMaking; coupled with management accounting tools for longer termplanning. Lean accounting is an integral part of the leanmanagement system, as well as a vital tool for strategic decision making. My guest on the Business901 Podcast this week was Ross Maynard, a Senior Consultant with BMA Europe Ltd., and a Fellow of the Chartered Institute of Management Accountants. He has worked as a coach and consultant with a wide range of British and European organizations for over 20 years. He is the author of many articles on lean accounting and business improvement, and specializes in lean accounting, lean service,and process simulation and improvement.BMA Europe is the leading consulting firm for practical LeanAccounting and the management systems supporting the Leanenterprise. The foundations of Lean thinking are very different fromthose of traditional companies. Lean organizations need differentapproaches to accounting, control, measurement and managementsystems. BMA Europe Ltd. and sister firm BMA inc. have nearly 20years experience in assisting organizations making the transition tobecoming a Lean enterprise.Related Website: Lean Accounting SuperGroup (The Meeting Placefor Lean Management) Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 3. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsJoe Dager: Thanks everyone for joining us. This is Joe Dager,the host of the Business901 podcast. Joining me today is RossMaynard who is a senior consultant with BMA Europe, Limited,and a Fellow of the Chartered Institute of ManagementAccountants. He has worked as a coach and a consultant with awide range of British and European organizations for over 20years. He is the author of many articles on lean accounting andbusiness improvement and specializes in that field. Ross, let mestart out here since Ill have a little different flavor of an audiencehere. Is there a difference in accounting between the British andthe Europe and what you practice and then the U.S.?Ross Maynard: Well, what a question to start with Joe and goodafternoon to you. There is not a big difference between what youmight call a western approach as to accounting, so United Statesand Europe. The accounting standards are very much the sameas international accounting standards. There might be somedifferences in other parts of the world, perhaps South Americaand Asia, but between the U.K. or between Europe and Americatheres no big differences, no.Joe: I find Lean Accounting a very interesting field. I thinkaccounting has really taken off in predictive measures andsomething that I think is a integral part of management today.Numbers and data are so important. Have you seen thatinfluence?Ross: Well, definitely. Companies that are moving towards alean environment, they get very much more responsive, theywant to be much more flexible in their approach to customers andinternally within the business. That lays a lot more emphasis ongetting performance data and financial data very much morequickly from their finance processes. So yes, there certainty is agreater emphasis on data, but also on rapid feedback, timelyfeedback. Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 4. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsJoe: When we talked about lean accounting everybody, and Idisdain this approach, I mean it bothers me when everybodyalways just talks about waste first in Lean. However, is that whatLean Accounting is about? Is it just about removing waste, orwhat is it? Whats the purpose of it?Ross: No. Its not just about that. I mean if we sort of start witha definition of lean, Im sure everyone will know the Taiichi Ohnodefinition, which of the top of my head is something of along thelines of we start with a customer order and we are talking aboutthe time-line between the order and collecting the cash from thecustomer. The aim of lean is to remove the waste from thatprocess. So lean is about a process and its about improving thespeed or improving the flow through the process. LeanAccounting provides the management system for that. So LeanAccounting is about aligning your costs and your revenues withthe process or with the value stream as we call it therefore beingable to identify the financial impacts of removing waste, beingable to forecast the financial benefits which will come from leanimprovement in the future.So its very much about aligning our costs with the flow throughthe value stream, and therefore being able to understand thelinkages between flow and between the impact on cost, andimproving the flow by removing the waste and how that willimpact on costs.Joe: When Lean is applied to the accounting field, it reallymakes people or makes accountants get out of the office. Doesntit? It makes them get out on the floor.Ross: Thats one of the wonderful things about Lean accountingin my view. I started off as an accountant, qualified 20 years ago,in front of spreadsheets and computers and things. Leanaccounting is about getting the data and the finance people intothe work areas, into the value stream, helping the value stream Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 5. Business901 Podcast TranscriptionImplementing Lean Marketing Systemsteam understand the data, understand the implications of thedata, and maybe model what some of their improvements mightlook like in financial terms. Its very much about the financeperson getting out of the office and working with the teamtowards improvements.Joe: Can you be lean without lean accounting and can you applylean accounting without being lean?Ross: Well, I guess you can be lean without lean accounting.The difficulty is if a company is using perhaps a traditionalapproach to cost accounting, standard cost accounting lets say,that is in conflict with the lean philosophy. So at some pointduring the lean improvement the organization will be gettingconflicting results from the lean processes and different resultsfrom the finance processes, because the concept of standardproduct cost, concept of variances tends to encourage people tobuild stock, build inventory and also to run large batches in orderto absolve overhead.There is going to be a conflict at some point. Therefore manyorganizations as they get better at lean start to realize that theirfinance system is in conflict with the lean philosophy, and start toneed to adapt their finance system.The second part of your question was lean accounting withoutlean. Well, I guess there is not a huge point in doing leanaccounting unless you really want to implement the leanphilosophy. I mean, sure, you can align costs with processes;sure you can build in performance metrics to that. But its onlygoing to drive improvement as part of a lean philosophy, I wouldsuggest.Joe: The lean attitude of building a value stream, I think thatsone of the complaints Ive heard about lean accounting is its allabout value streams and its all about dividing them up to assign Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 6. Business901 Podcast TranscriptionImplementing Lean Marketing Systemscost to things. Its rather cumbersome and its rather difficult andvery timing consuming to do. Do you feel thats a fair appraisal?Ross: No, I would disagree with that. I would agree that it is achange of mindset, that an organization involved in lean needs tostart looking at its organizations structure and move from sort ofa departmental functional form of structure to a more valuesteam based organization. That of course has ramifications formanagers, for lines of responsibility and all that sort of thing. Somoving towards lean certainly requires a mindset change, aculture change. Thats true of lean generally not just leanaccounting. Lean accounting is designed to be much simpler thantraditional costing methods. So we are not trying to allocate orapportion overheads to value streams when they cant becontrolled in the value stream.For example we are trying to look at the direct costs of the valuestream, we are not trying to be cumbersome and come up withdifferent methods of allocating overheads. Lean accounting is theopposite of activity-base costing for example.Joe: Is my value stream the way you look at it as an accountantdifferent than what my value stream is for workflow?Ross: No, certainly not. Lean accounting would be part of thelean process. You would move towards a value streamorganization and the lean accounting philosophy can help youdefine what that organization might look like or even what thedifferent alternatives might be for value streams. Because itsoften not entirely clear at first what an organizations valuestreams should be. And then, it will be concerned with aligningyour cost centers with the value streams, so that we can collectthe direct costs very straightforwardly, and therefore start toreport financial data on a weekly basis to get the rapid feedbackthat I mentioned earlier. Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 7. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsJoe: Am I keeping a different set of books? Am I doubling mycosts as I do this?Ross: Certainly not. I would accept that in the initial period ofmoving over towards lean accounting, most organizations that wework with want sort of the comfort blanket, of perhaps running inparallel to what theyre used to, so that they can compare andcontrast and see the impacts or the changes of moving over tolean accounting. But certainly within six to 12 months you canthen be beginning to transfer to lean accounting without yourtraditional standard costing approach. It is fair to say though atthe end of the financial year you have to reconcile to theaccounting standards that we mentioned at the beginning. Sothere will be some adjustment required at the end of the financialyear, or whatever the reporting basis is. But this can be donefairly straightforwardly, and again we would develop standardwork to enable that to happen.Joe: You bring in some good lean terms in there when you aretalking here. We talk about Value Stream and Standard Work. Inyour process of doing lean accounting, do you need an account tobe trained in Lean? Hes not going to just pick it up from thebook. Hes going to be a practiced person to be able toaccomplish this, isnt he?Ross: Yes, and no. Nowadays, students of accounting,particularly management accounting, study lean accounting andother methods of direct costing. Contribution costing is anexample. These are approaches which will be familiar to peoplethat have gone through accounting studies. We often find,working with accountants, that it gives them a new lease of life.We talked about getting the accountant into the work areasworking on improvement. Thats a great experience for people.Its very empowering; its very motivating to work with the team. Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 8. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsSo it gives accountants a whole new raft of opportunities toexpand their skills and work with different groups of people. Inmost cases accountants take to it very, very readily because itsbroadening their mindsets and their skill sets.Joe: What have you seen the obstacle for most people, andmaybe from lets say different CFOs, to take on lean accounting?Ross: There are a number of difficulties, obstacles toimplementing lean accounting. Perhaps, particularly, in very largeorganizations, organizations that have many locations, perhapswork across different countries or different continents. There thenbecome issues of tax boundaries, for example, betweencountries. That means that we have to negotiate with thedifferent tax authorities and the different duty authorities aboutat what cost products will be transferred between locations. Sothats one difficulty that requires examination and work.Sometimes large organizations, again, are very committed totheir computerized accounting system that they have, and ittakes quite a lot of work to start to adapt that accounting systemto the lean philosophy.So again, that can be a bit of a barrier. Its also the organizationchange aspects that lean, or so, is concerned with moving to avalue stream organization can have an impact on managementand on management structures.Joe: I find it interesting, the value streams, because thats reallyhow I practice marketing. I try to divide things up into valuestreams. So one of my interests in lean accounting because Ithink it makes so much sense of building the organization fromthe value you provide a customer. Is that your take on it?Ross: Oh absolutely, yes. In fact, in terms of the lean measuresthat we use in lean accounting, I would always encourage a clientto think of what measure of customer value can they build intotheir value steam accounts. What measure, what is the customer Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 9. Business901 Podcast TranscriptionImplementing Lean Marketing Systemslooking for, and how can we measure that in a sensible andtimely manner to focus on the customer value aspects. I can givea small example of that, if you are interested?Joe: Sure.Ross: For example; We are working with, I wont name thecompany, but a company in the aerospace industry at themoment, an involved engine manufacturer. They weretraditionally looking at the cost per product for the pieces thatthey produce. And then when we began to analyze the customervalue aspect, they began to realize that the customer actuallyvalues the time that the engines are in the air. They dont wantthem to be always being maintained, always having to bechecked and refurbished. So they came up with the concept ofcost per flying hour as a measure for the value stream. Becausein actual fact, you dont necessarily want to be reducing theproduct cost of these engine components. You want to be addingvalue, which is flying hours for the airline companies or theaircraft companies. That can mean a higher cost per part to givemore flying hours.So that became a key measure of customer value through theirvalue stream.Joe: You talk about the key performance indicators. One of mythings is I always look at velocity. Is there a way to measurevelocity?Ross: Flow, yes. We measure flow through the value streamthrough a number of measures. In the manufacturingenvironment you can measure manufacturing lead time, forexample, customer lead time as well if an item is built to order.In a service environment, customer lead time is appropriate. Wecan also measure the amount of inventory in the process, so rawmaterial inventory, work in progress, and finished goods. Theamount of inventory is an indication of the amount of flow time Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 10. Business901 Podcast TranscriptionImplementing Lean Marketing Systemsthrough the process, as you can imagine. So those are areas ofmeasures of flow that we would typically use.Joe: From a costing aspect, are you a proponent of a certaintype of costing method, like target costing?Ross: Well target costing is indeed a key tool in lean accounting.Again coming back to the customer value that you mentionedearlier, when you are developing new products or perhapsconsidering re-engineering products and services of course, youwant to be looking at the market price, the market value andworking back from that market price. Whats an acceptable levelof profit, and therefore what is the target cost we need to try andachieve for this product or service through the value stream? Soyes, target costing is a key tool in lean accounting.Joe: You talk about value a lot, but how do you measurecustomer value?Ross: Thats a big question, and that comes down to the leantools of voice of the customer. For example most products have acommercial market, apart from perhaps kind of defense products,and therefore there will be a range of alternative products,competing products in the market place. We can analyze howthose products and those competitors deliver value to thecustomer and we can look at where we rank against those interms of perhaps service, delivery, quality, etc. We can begin toanalyze the customer value in our product or service on a kind ofspectrum compared to the competition. And that gives us somepointers in terms of how we can improve our customer value, andtherefore that helps drive process improvement.Joe: So you really have to, lets say, get in bed with themarketing department, dont you?Ross: Well, Im sure its always pleasurable to be in bed with themarketing department. But yes, sales and marketing is a key part Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 11. Business901 Podcast TranscriptionImplementing Lean Marketing Systemsof value stream improvement and lean accounting. We reallywant to be able link as close to the customer as possible in termsof the measures that we put in place and also to the supply chainas well.Joe: How can you use accounting to be predictive, how do yougo about doing that? When I say the words its nice to say it, butis it truly possible?Ross: It is possible, but like a prediction, like all forecasts, thereare sources of error in there. As Im sure you know, there areforecasting methods and techniques that we can use to improveour forecasts as we move forward. Essentially in lean accountingthe way to be predictive is to accumulate data over time. Itsabout trend analysis. One of the reasons why we advocate weeklyreporting of lean accounting data into the value stream is so thatwe can get, in a short period of time, a large sect of data,compared to the performance measures of the value stream. Wecan start to predict how improving flow for example will impacton costs, how reducing waste or reducing inventory will impact oncost and cash flow. We start to predict by using data over aperiod of time, like most forecasting approaches.Joe: We do this year-end statement and then we do this budgetout there for the year. There is so much uncertainty in having ayear budget. Is that really sensible in todays world? Whats yourview on something like that?Ross: Well, lean accounting essentially says we should moveaway from the annual budgeting circus, which can become a verypolitical process. Its about departments conflicting with eachother and trying to make ground against each other. We shouldmove towards a much more rolling budget process. We advocatea monthly forecasting rolling process, which is typically predictingahead one year or two years depending on the marketcircumstances. Because we are doing it frequently and because Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 12. Business901 Podcast TranscriptionImplementing Lean Marketing Systemswe are constantly taking account of changing environments, weare able to forecast, hopefully, more accurately.At the end of the year or whenever, this has to be rolled up intosome sort of budget for shareholders or for marketers, etc. Buthaving an ongoing monthly process allows continuousimprovement to be applied to that process, so that we areconstantly keeping a link to market conditions.Joe: So if I was sitting there looking at a dashboard, I wouldkind of have my monthly budget maybe across the top of itlooking like a slow ticker tape.Ross: Sure.Joe: Is really what you are saying there, is that its changingand its moving. If it moves out of what parameters I put inthere, lets say that its even numbers such as we do in thesupply chain where we have red, yellow, green...Ross: Yeah, absolutely.Joe: You could be sitting there looking at it and seeing ifnumbers are fluctuating too much, too much variants anddifferent things like that, correct?Ross: Entirely correct, and that is very common in organizationsthat we work with. Ill also say that the budget, or lets say therolling forecast, should be linked to our improvement plans aswell. So well have Kaizens plan for the value stream, well haveimprovement activity planned, and that means we can plan whatthe financials would look like once those improvements aresuccessful. We can do lets say 90-day forecasts for the next90-day improvement plan and longer term forecasts as well. Soits closely linked into other lean activity.Joe: You know the old saying that if youre not working on yourconstraint, youre not doing anything well at all. I think one of the Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 13. Business901 Podcast TranscriptionImplementing Lean Marketing Systemsproblems that we have in a lot of organizations, they will come inand theyll start making rapid improvement. But all improvementis not necessary, does lean accounting follow some of the thingsthat were really going to look at TOC or that bottleneck or thatconstraint, before we start making too many improvements?Ross: Yes. In line with lean improvement philosophy generally,we would say the bottleneck constrains the flow of the velocity ofthe whole value stream. Weve already mentioned performancemeasures and weve mentioned aligning those with the financialdata. We would also say we should align the capacity of the valuestream in there and in particular the capacity of the bottleneckprocess or activity. If were talking about a scoreboard that youmentioned, we might have lets say six or eight performancemeasures, key performance measures of flow and quality,customer service. We would have the key financial measures andwe would also have the capacity at the bottleneck, the productivecapacity which is the time spent doing work right the first time, ofcourse.The non-productive capacity, which is the time that we lose towaste, setups, changeovers, down time, scrap, etc. and theavailable capacity which of course is free to do more work. This isgoing to be most constrained at the bottleneck and therefore thisis focusing our improvement activity on the bottleneck process.Joe: This isnt the typical accountant. Weve kind of touchedupon this earlier, but when you become a lean accountant, itsounds like youre becoming more of a coach and more of aconsulting party in these groups, rather than the guy sitting theresaying, "The numbers arent right here"?Ross: I totally agree with you. Lean accountants are not justguys by the way, theres plenty of girls out there too. And yes, ofcourse you start wearing flowery T-shirts and sun specs when you Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 14. Business901 Podcast TranscriptionImplementing Lean Marketing Systemsbecome a lean accountant, you become much more groovy as aperson.But yes, youre a business partner; you become part of the valuestream team. You work, you help, perhaps coach, facilitateimprovement, facilitate the understanding of what the datameans in linkage to the performance measures. Its being anintegral part of the improvement team, neither higher nor lowerin status than the supply chain expert or the engineering people,or even the operational people.Joe: You really look at a corporation then through the processes,not necessarily by departments. Is that true?Ross: That is entirely true. One of the objectives of the valuestream organization is that we should get people who haveperhaps traditionally worked in departments, as close to the flowas possible. And this means having real engineers working in thevalue stream, real maintenance people working in the valuestream, a real lean accountant working in the value stream.Joe: If someone wants to learn more about lean accounting, youparticipate in the Lean Accounting Super Group?Ross: The Lean Accounting Super Group is on the Internet. Imsure if you type in Lean Accounting Super Group to a searchengine, youll find us. Weve just passed the 1000th memberstage, which is rather impressive. If you just want to find outabout lean accounting, there are videos and there are articlesthere. Theres plenty of blogs and other information available. Ifyoure a more experienced lean accounting practitioner, thenspecific questions can be raised, discussions between differentmembers and so on. So its a very rich source of information forpeople interested in accounting and also implementing leanaccounting.Joe: Now, can anybody join that site? Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 15. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsRoss: Oh, absolutely! Its free to join, anybody can join. As I saytheres lots of information there even for the curious just wantingto find out a little bit more about lean accounting.Joe: Just describe a lean accounting process to me a little bit, ifwe can visually do that at all. When Im looking at it, I picture itas Im looking at value streams and I determine my cost pervalue stream. Im not really looking at lets say a balance sheetor a P&L statement of that value stream, am I?Ross: Well yes, you are actually after a short period of time. Iwould typically say that the first step to a company or anorganization that wants to move forward with lean accountingwould be the actual "Define the value stream" stage. I mean, youslightly glossed over it there, but its important for a company toget its value streams right at the outset. We dont want to havetoo many value streams because then the teams will be too smalland there will be too many sets of accounts to put together. Ortoo few value streams, and then it will start to be meaninglessand we wont be able to support decision making andimprovement. The value stream definition stage is prettyimportant and is worth senior management time to look at thealternatives and see what the options might be.When weve got to that stage we can then start to look at thestructure of the accounts process, how our cost centersstructured, start to align those with value streams. After that weshould be able to start to get a value stream profit and lossstatement, as I mentioned, on a weekly basis, but also perhapsconsolidating that on a monthly basis.Now this is the direct costs though of the value stream, so werenot attempting to allocate or apportion any corporate overheadsto the value stream. These are the costs that the value streamteam can control and manage, and are therefore responsible for.So, the value stream profit is more or less, as some people Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 16. Business901 Podcast TranscriptionImplementing Lean Marketing Systemsdescribe it, as a contribution. Its that value streams contributionto corporate profit and also to corporate overheads.So its the profit that they can manage within the value stream.Joe: So is it just not contribution margin said differently?Ross: Effectively its the same as contribution margin by valuestream. Yes, I would agree.Joe: OK. Im not an accountant, but an accountant wouldcertainly recognize that and be familiar with what youre doing?Ross: The accountant would certainly recognize that and wouldbe familiar with the term "contribution margin". It depends,actually. In Europe the companies tend to prefer the term"contribution" because its not a profit in the sort of financialdefinition of the word profit, because we havent got overheads inthere.Joe: We talk about defining that value stream, and that is a verydifficult process. Do you keep that internal to the company, thatvalue stream?Ross: It depends what you mean, and it also depends how welladvanced the company is with lean. Usually, initially the valuestream will be internal to the company and it will be equivalent tolets say a product family, a family of products with a similarprocess flow. However, as companies get better at lean and theytherefore progress with their lean accounting, value streams veryquickly become aligned with customers and/or with markets aswell. So there should be a linkage with the market, and as wementioned earlier, we should be trying to build in performancemeasures of customer value for example.Joe: When you first apply lean accounting, do you kind of get agroup together, built around that value stream and have a Kaizenevent to implement it? Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 17. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsRoss: Certainly, yes. We would be looking for a cross-functionalgroup, so not just the finance people. As we perhaps mentionedearlier, supply chain people, purchasing people, sales andmarketing people, because we want to get as broad a view aspossible as what the data should look like, what the performancemeasures really are of flow and quality, etc. So yes, a Kaizenevent or a number of Kaizen events over six, nine months willtypically be required to implement lean accounting stage bystage.Joe: What has been your biggest drawback for being able toimplement lean accounting?Ross: I think funnily enough the biggest drawback or thebiggest difficulty is company culture. I mean, often leanaccounting and lean generally will be done on sort of a pilot basis.There will perhaps be a pilot value stream. And thats fine, butthe people who work in that value stream also have to work inthe sort of traditionally organized business, as well. And there canbe conflicts of behavior, conflicts of incentive sometimes even,company incentives based on profit which might not be the sameas improving flow.So moving the company mindset away from a traditionalorganization structure to a lean focus, a value stream focus isprobably the biggest difficulty.Joe: What type of organization would not fit in trying to attemptlean?Ross: Well, I think that an organization that was verytraditionally based, that was strongly wedded to a culture ofproduct cost accounting, for example, very much wedded toperhaps outsourcing product rather than building value streamswithin an organization. It would be difficult to implement lean andlean accounting in that type of organization, perhaps in thedefense industry, as well. Defense projects are often done on sort Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 18. Business901 Podcast TranscriptionImplementing Lean Marketing Systemsof an allowable profit basis, a cost plus basis, and that meanstheres not necessarily an incentive to improve the flow andimprove the value stream basis.But in all industries there are companies doing lean, and leanaccounting can be applied, therefore, in all industries. Its amatter of mindset rather than any physical attributes.Joe: When you look at the different other disciplines ofaccounting is there a certain type of accounting that is moreapplicable of changing to a lean accounting system?Ross: No, I dont think so. I think accountants are skilledpeople. It takes a number of years to qualify as an accountant.Therefore accountants working in any industry and in anyparticular type of costing environment can move towards leanaccounting. Weve never had any particular areas of difficulty.Some accountants are more strongly wedded to traditionalmethods of costing than others and therefore their mindset maybe perhaps more difficult to change. But again, thats anindividual mindset issue rather than a structural issue.Joe: Tell me a little bit about BMA. Are they worldwide?Ross: Yes, BMA is a fairly small consultancy headed by BrianMaskell. Hence BMA, Brian Maskell Associates. It started inAmerica, started in the U.S., five or six consultants working inAmerica. At the moment Im the only member of BMA who isbased outside of the United States. I work in Europe and live inScotland. We work with clients across Europe.So, lean accounting is still in its fairly early days. You mentionedthe Lean Accounting Summit earlier, which is next week in LasVegas, and thats perhaps in its sixth or its seventh year. So it isstill in its infancy, still in its growth stages I would say. Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 19. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsJoe: Why do you think traditional metrics, or are traditionalmetrics still effective in todays work? Do you think theyre stillpertinent to todays market?Ross: Some of them are pertinent and some of them are notpertinent. As human beings we like our comfort blankets.Traditional metrics were sort of born before the Second WorldWar, perhaps in the 1920s when industries were focused on massproduction. So, those metrics were entirely pertinent in a massproduction environment. Nowadays, we have much more productvariety. We have virtually every different customer wanting adifferent product or a different type of product, differentdemands. Therefore, the old metrics which are focused on massproduction begin to fall apart.For example metrics about overhead absorption encourage us touse our resources, our equipment and our people as much aspossible. Lean says we need to be flexible, we need to changeover between different product varieties, etc., etc. So, suchmetrics dont encourage lean improvement. Metrics are oftenbased on stock levels and, again, absorbing overheads intoinventory.In lean we dont want inventory. We want to get as close to thecustomer as possible and we want to get as fast a flow aspossible. So, those sorts of measures become redundant as well.However, there are still good measures which have been aroundfor a long time, measures of quality, measures of customerservice and delivery, measures of lead time, which are entirelyapplicable. We just need to be more flexible and more aware ofthe impact on the customer of our measures.Joe: When you bring the supply chain in and you bringmarketing in and customers, because I look at marketing todayand I look at products today, that theyre really done in much,you know, they just about have to be changed on the fly. We live Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 20. Business901 Podcast TranscriptionImplementing Lean Marketing Systemsin a demand world, OK, where people can pretty much determinetheir own price and their own terms on buying somethingbecause we have an overabundance of suppliers.Ross: Yes, indeed, yes.Joe: The only differentiation you really have is value. And itsnot the value you perceive, but what the customer perceives.Ross: Indeed.Joe: When I look at that, I look at the fact that you have to beable to build a flexible structure to be able to supply that justabout on an as needed basis. So, you really cant affordinventory?Ross: Indeed, you cant. But also, lean accounting gives us atremendous opportunity to respond to the different customerperceptions of value. By using the voice of the customer andother analysis tools we can start to see what are the features,what are the characteristics of our products and of our serviceswhich a particular customer values. We can map those back intothe value stream and focus on improving those activities whichadd value, and alternatively stop doing those activities whichdont add value. Because lean accounting gives us very rapidfeedback, weekly feedback of cost information, we can start torespond and see the impacts of that response very, very quicklyindeed.Lean accounting is focused on that flexibility and on the need toconstantly change and constantly be looking at differentparameters.Joe: When Im looking at this input of data to get this weeklyfeedback and things, is there software applicable to this? I mean,this is a fairly quick turnaround you did. Do I have a leanTurboTax out there or anything, or..? Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 21. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsRoss: BMA is not a software house and we dont particularlyadvocate any particular packages or anything in terms ofsoftware. Many companies, process companies, have short flowdata collection through the equipment that they use. So, that canallow data to be ready, well on an hourly basis, let alone a weeklybasis. However, we do encourage the team to collect their owndata, so to have cell boards and value stream boards where datais manually written on. And that includes finance data. Ive seenclients where the finance person on a Monday morning, will gointo the work area onto the value stream board, and with amarker pen markup that weeks financial data by hand just tomake the contact more personal, if you like, for the data, tomake people handle the data and understand the data muchmore. So on the whole, we would advocate personal involvementwith the data.Now clearly, in a highly technical process where there aremeasurements to nanometers and things, then some systemsinvolvement is also necessary.Joe: Have companies become sensitive? Do you share too muchdata, too much financial data to get this accomplished?Ross: Well, thats a good question, actually, because clearly Imtalking about putting financial data into the value stream and theteam working together with that data. That means that thecompany has to be open enough to be willing to share weeklydata with the team, with the people that work for the company.Now, I personally have never seen that as a problem in thecompanies that we work with, but perhaps it is an issue in somecompanies, perhaps privately owned companies. But part of leanphilosophy is openness and working together. So if a company iscommitted to the lean philosophy, they should be committed tothe sharing of data. Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 22. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsHowever, I will tell you that in some cases clients will visit valuestreams, and the value stream team and the company are not sokeen for the client to see what their actual performance data is.In which case, they will take down the sheet with the finance dataon it for the duration of the visit, for example.Joe: When you talk about the improvement cycle or how you doit, youve mentioned it several times about the standard work.So, the first thing you really have to do from... Whats the firststep, do you standardize or do you create a value stream?Ross: The first step is to create the value stream, to understandthe value stream and to get the value stream together, the valuestream team together to start to develop what the leanaccounting will look like, what the performance measures will be,what the finance data will be. Once youve understood what thedata will be you then need to develop standard procedures,standard work to be able to bring that together in a timely basis.If were talking about reporting weekly into the value stream, youreally want to be able to collect that data together within one ortwo hours. You dont want a huge additional workload, trying tocollect the data to report it weekly. You need to simplified andstandardized procedures for collecting and reporting the data.Joe: The other thing weve mentioned and we really didntexpand on a lot was the linkage between lets say the financialbenefit and performance improvement and the people. Is thatsomething that is particular to lean accounting or is that one ofthe mainstays that you try to utilize?Ross: Yeah, I would say that was a key benefit of leanaccounting actually because there is a time-lag between processimprovement and between realizing the financial benefits. Thepurpose of lean improvement is to remove waste, as wediscussed right at the beginning of this conversation, and thatcreates available capacity within the value stream. It may also Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 23. Business901 Podcast TranscriptionImplementing Lean Marketing Systemsreduce your costs through reducing scrap, reducing the need forovertime and so on. But the main lean benefit is to improve thecapacity of the value stream. The financial benefit will only comewhen you can sell that additional capacity and therefore we needto be able to use the lean accounting data that we accumulate tobe able to plan ahead and say, "In three months or six months’time, were going to have an extra 20 percent capacity in thisvalue stream. We need to be planning now for the new products,the new customers, the new product varieties that we can putinto the value stream to realize the financial benefits of that."I would say that ability to forecast the financial impact of leanimprovements is a vital part of the planning process linking in tosales and marketing to begin to realize the actual profitabilitypotential of lean improvement.Joe: I may play Devils advocate here a little bit. But what if Isay, "Im over capacity now, what I need is demand. I needsomebody to want my product." How can lean accounting helpme? Whats the sense of getting rid of waste if Im already notutilizing everything I have?Ross: Well, there are two issues there. Number one, getting ridof waste will save you money because it will help you improvequality and therefore reduce scrap and losses through scrap. Leanimprovement will help you reduce your inventory, which will giveyou a cash flow boost, and all companies can do with cash flowboosts in the economic environments we have just now. So, thereis incentive from that point of view. But lean accounting also,through the target costing approach gives us the opportunity tofocus on those issues which add customer value. Once we canfocus on those activities, those characteristics which addcustomer value and improve those, then were going to improveour position in the marketplace. Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 24. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsI can give you an example of a client in Germany, makingstainless steel components. They were currently able to deliver tothe market in just over seven days. They realized that if theycould improve their flow to deliver to the market within threedays of a customer order, they would be the fastest, most flexibleprovider in the market and therefore they would be able todominate the markets and increase their market share.They achieved that, partly through improving finance processes,credit checking and that sort of aspect. The lean accounting canhelp us focus on improving our customer value in a difficultmarket and therefore expanding demand for our product.Because were improving the value stream, we deliver thatdemand with the current resources that we have and thereforeincrease profitability.Joe: So, what youre saying is in this particular instance thatsomeone sat there and was able to reduce the inventory level oftheir customers by shortening that lead time...Ross: Absolutely.Joe: ...which added profitability to that customer. It was kind ofa no-brainer for that customer to use them as a source.Ross: Yes, exactly, win-win for everyone. Much more flexibility,much more responsive to the market, makes you a much moreattractive supplier than your competitors and therefore you canincrease the demand for your products and services even in adifficult market, perhaps particularly in a difficult market as a bigincentive to move towards that.Joe: I think thats where, and this is going to be a shamelessplug Ive got to throw it in here. But thats why we alwaysconcentrate on when were looking at customer identification toidentify the CTQs that are important to their product marketgroups. Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 25. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsRoss: Yes.Joe: And weight the value of them. So that if we know that ashort delivery time such as that is important, thats what weconcentrate on, to deliver that value point or that valueproposition even more, because thats what will separate us fromor differentiate us from the competition.Ross: Yeah, I totally agree with you, Joe. For that reason Ibelieve that there should be strong links between the leanaccounting team and the sales and marketing team because thelean accounting people can deliver the information, the costinformation, the financial impact of improvement, which you canuse in pricing and in demand analysis and all these aspects. So,there should be a strong linkage between the marketing peopleand the lean accounting people.Joe: Thats one of the things that I have seen is when you lookat data driven marketing, when you look at the different numbersand manipulating the numbers in marketing, people shy awayfrom numbers. But it needs to be done. We have so manynumbers nowadays; we dont really utilize the data we have.Accountants that have taken a liking to what I would say thevalue streams, theyre the most readily people that seem to beembracing what I called lean marketing.Ross: Yeah, its about making the data visible andunderstandable and accessible to people. That means making thelink between the customer value and the marketing side and thedelivery side. Because were only going to improve as a businessand as a value stream by making that link direct to the customerand providing what the customer wants.Joe: Is there anything Ive left out of this conversation that youwould like to add? Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 26. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsRoss: I think youve been pretty comprehensive, Joe. Youvecertainly given me a sore throat. Weve mentioned the planningpiece, weve mentioned the customer value piece, I think wevecovered everything. I hope you can edit my long arm out there!Joe: Ross, if someone is interested in learning more about LeanAccounting, you mentioned the Lean Accounting Super Group.But how can they get a hold of you or BMA?Ross: Well, you can visit our websites, which, M-A-S-K-E-L-L. Or if youre based in Europeyou can visit Alternatively, type "LeanAccounting" into Wikipedia and theres some interestinginformation there. Or type in "Lean Accounting Super Group" toyour search engine, youll find the Super Group, youll find meand the rest of the BMA team, and many other people registeredthere. Yu can email us directly, obviously chocolates and flowershelp, but were pretty friendly people on the whole.Joe: Well, I want to thank you very much, Ross. I reallyappreciate it. This will be available on the Business 901 websiteand also the Business 901 iTunes store. So again, thank you.Ross: It was my pleasure to speak to you, Joe. Rapid Decision Making enabled thru Lean Accounting Copyright Business901
  • 27. Business901 Podcast TranscriptionImplementing Lean Marketing Systems Joseph T. Dager Lean Six Sigma Black Belt Ph: 260-438-0411 Fax: 260-818-2022 Email: Web/Blog: Twitter: @business901 What others say: In the past 20 years, Joe and Ihave collaborated on many difficult issues. Joes ability to combine hisexpertise with "out of the box" thinking is unsurpassed. He has alwaysdelivered quickly, cost effectively and with ingenuity. A brilliant mind that isalways a pleasure to work with." James R.Joe Dager is President of Business901, a progressive company providingdirection in areas such as Lean Marketing, Product Marketing, ProductLaunches and Re-Launches. As a Lean Six Sigma Black Belt,Business901 provides and implements marketing, project and performanceplanning methodologies in small businesses. The simplicity of a singleflexible model will create clarity for your staff and as a result betterexecution. My goal is to allow you spend your time on the need versus theplan.An example of how we may work: Business901 could start with aconsulting style utilizing an individual from your organization or a virtualassistance that is well versed in our principles. We have capabilities toplug virtually any marketing function into your process immediately. Asproficiencies develop, Business901 moves into a coach’s role supporting theprocess as needed. The goal of implementing a system is that the processeswill become a habit and not an event. Business901 Podcast Opportunity Expert Status Rapid Decision Making enabled thru Lean Accounting Copyright Business901