If you use a shop floor management system, you are familiar with the frustration of trying to use job tracking reports to improve the bottom line. These reports are retrospective in nature, meaning that they give a snapshot of costing data after the deeds are done, usually in less than user-friendly language. They imply that you can manage manufacturing processes by analyzing job cost accounting numbers and reviewing the results.
 
So, you show the numbers to supervisors hoping for improvement to be gained from insights gleaned from the reports, but that improvement is often elusive. Trends seem inconsistent from one period to the next with no real improvement in profitability. Global competitive pressures keep a tight lid on the extent to which price increases can help, so you probably find yourself asking "what can I do on the shop floor to protect and improve profitability?"
 
Well, the answer is simple and direct - Confront Reality. What do I mean by reality? The reality is that managing by results does not work in a lean organization and never has. To effectively manage profitability in a lean company, you should reconsider this management practice now-before it is too late-and consider implementing lean accounting practices that reflect the working reality of your shop floor. For managers who have experienced the transformative power of lean improvements, it should come as no surprise that it takes lean thinking to profitably manage a lean enterprise.
 
Leveraging the Lean Advantage
Why does managing by results not work in lean organizations? It's simple; most supervisors, let alone operators and other shop personnel don't understand what the numbers on tracking reports signify. To satisfy Generally Accepted Accounting Principles (GAAP), your company is likely using some sort of allocation processes or variances to make the numbers comprehensive. This is done to ensure that the cost data are representative of the complete or total cost of operations. But for shop personnel (let alone cost accounting professionals), the reports wind up distorting what has happened in the manufacturing process to the extent that it is not recognizable to them in a meaningful way. In short, it does not reflect the reality they observe and work in every day, making it virtually impossible for your shop people to react with corrective measures that will drive better results. OK, point made, you say, "but what can I do?"
 
What you can do is introduce Lean Accounting Methodology throughout your company. To understand what lean accounting can do for your business, let's first take a look at what accounting in general is all about.
 
Accounting is nothing more than tracking inflow to outflow as a measure of profitability, which is governed by GAAP. Essentially, GAAP-driven accounting methods provide the "10,000-foot view" of the financial operations of a company. As these methods proliferate across the company and throughout the manufacturing process with sophisticated allocation and job-costing practices, complexity increases and everyday decipherability usually decreases. Lean Accounting Methodology simplifies and streamlines the accounting process without upsetting GAAP by replacing distorting, confusing and time-wasting parts of the process with metrics and analysis that is grounded in the language of the lean manufacturing processes-the "value stream flow process"-that you and your people have already successfully implemented. The image below gives a visual representation of Lean Accounting Methodology.

The Simple Logic of Lean Accounting
As the implementation of lean processes expands throughout the organization, the principles of traditional accounting theory become ineffective as a management tool. This is because the traditional approach is retrospective in nature (management by results) and tries to "steer from the back end of the process." This is wholly contradictory to the prospective, forward-looking nature of lean methodology. In the lean organization, value stream processes require a new take on management cost accounting, driving a new concept of "Management by Means" or "Management at the Point of Action." In the transition to lean accounting practices, traditional accounting practices GO AWAY: they are removed from operations or value stream flows.
 
In traditional financial accounting, data about labor, equipment, material, etc. enters the operational value streams (Inflow) and finished products exit the other side of those streams. These two data points can be sent through the 10,000 foot view of the financial accounting system to generate income statements and otherwise satisfy GAAP requirements. BUT this financial information NEVER enters the operation/value streams. The question on every business executive's or owner's mind is HOW do we measure what happens in value streams and operations?
 
The Logical Answer:

1. Admit that traditional cost accounting methods do not and can not accurately and appropriately measure operational activity in lean organizations based on the value stream concept.
2. The underlying principles that guide lean implementation and the creation of value streams are flow, self-improvement and problem resolution. These principles must also be the foundation for properly designed, well executed and continually improving lean accounting systems.
3. Focus on what is happening from moment to moment inside value stream operations using metrics that reflect lean practices and values in plain language and understandable analytics.

Value Stream Costing simplifies the accounting process to give everyone real information in a basic, understandable format. By isolating all fixed costs along with direct labor, manufacturing resources can be easily applied to value streams as a commonly understood value; for example, per square footage utilized by a particular workstation. Such a factoring methodology-when broadly applied-can provide a truer picture of workstation cost consumption relative to value-added throughput for each value stream company-wide.
 
What we are talking about here is a transition process that is completely dependent on a focused corporate vision; moving from Management by Results to Management by Means or at the Point-of-Action. The goal is a simplification of management accounting practices that focuses on what is actually happening at any given moment in the operations within value streams in a lean company. This means designing metrics that reflect and measure manufacturing activity according to the lean values at the foundation of the company.
 
In today's lean world, one company stands out-Toyota. At Toyota, the guiding management vision is expressed through their "True North" metrics, which include growing the skills of the workforce, enhancing the quality of products, reducing the cycle time of production, and building profitability through productivity and cost management. These four key areas of Toyota's True North metrics drive comprehensive, company-wide lean improvement efforts while still hitting all of the crucial figures on corporate financials. It is an example to be emulated and followed.