Rolling into the last week before the Lean Accounting Summit it seems appropriate to visit CFO.com to see what the financial folks are thinking about these days and as usual the answer is … not much. The gulf between the solid, growing minority of financial leaders who really get lean and the majority who spend their careers polishing that which they learned at accounting school and have had nary a trace of an original thought since is as vast as ever.
Most of the failings of the accounting profession when it comes to the pursuit of excellence are of the omission sort, rather than commission. That is to say, they simply do not get involved, don’t understand (or put much effort into trying to understand); they sit on the sidelines and idle away at meaningless trivia like the rising cost of audit fees, and how the regulators are tweaking cash flow statement rules.
The big problem with accounting, however, is the underlying assumption of perfection – they got it right, accounting as it has always been done is correct and accurate, no room for even the remotest possibility that their methods and beliefs are wrong. This pervasive view of accounting leads to management by tradeoffs.
In a nutshell, traditional accounting presents management with tradeoffs: Which will it be? A or B? You can have high cost or poor quality; you can have lots of inventory or long customer lead times; pay people well or have high profits … pick one or the other but you can’t have both.
Lean thinking is really just a rejection of accounting trade off thinking. We want both – and we know how to have both.
CFO dot com publishes articles such as The Perfect Storm for Supply Chain Costs with such insight as “Service levels, for product availability and order-cycle time, are typically mandated to supply chain management by marketing and sales. As a consequence, service targets are often set at too high a level of aggregation. Such ill-conceived service targets inherently lead to over-serving segments of the market, with more inventory and higher freight costs.” Lean thinking rejects the basic premise, but it takes lean accounting to understand the basis for the rejection.
“Many companies do not even realize (1) what the total cost truly is for their service levels and thus set an arbitrarily high number for all customers, and as importantly, (2) their customers may not value the level of service they are receiving if they have to pay the real cost. The lesson learned is: know your true costs for various service-level performance and segment and communicate with your customer what increased service levels will cost.” Nonsense!
There is no tradeoff between customer service levels and cost. Customer service levels are not cost drivers any more than excellent quality is a cost driver. Waste is the big cost driver, but accounting systems that are completely wrapped up in allocations, centered around classifications as to fixed and variable or direct and indirect, drawing distinctions between SG&A and operating overheads rather than value adding and non-value adding will never lead management to that conclusion.
Lean thinking picks C – None of the Above when presented with the typical accounting tradeoffs. Lean companies routinely achieve short customer lead times with a lot less inventory than they carried in their former, non-lean days. They pay people much better than their competitors – and make more money than the competition. They achieve excellent quality at lower costs. In short, they understand that long lead times drive inventory, rather than require it; that lousy quality increases costs, rather than saves money; that well paid, engaged employees are the source of greater profits, rather than detractors from it.
The only trade-off is that between comfort and excellence. Accounting can (A) stay in its comfortable silo perpetuating its comfortably irrelevant role, and live with the loss of growth and profitability they drive; or (B) accounting can get very, very uncomfortable and lead the company to new heights. Most opt for A. The best choose B.