Understanding lean thinking

- [Joshua] There's a real buzz in the world of managerial accounting about the benefits that lean accounting can deliver to enterprises. When used effectively, lean accounting can achieve astronomical results whilst also giving the accounting department a stronger purpose. But before we get too excited about the accounting aspects of lean, let's take the time to firstly understand exactly what lean thinking is all about. The basic premise of lean is to remove waste from the production process by directing resources to the things that add value to the customer. Now, this might sound revolutionary, but did you know that lean first emerged in the manufacturing sector back in the '80s? And whilst many of the measuring techniques and performance indicators have evolved over time, this still very much centered around designing a business model that frees up capacity and directing resources to improve the customer experience or value. The centerpiece of all this are measurable KPIs. That is, key performance indicators for each value stream. The value stream describes the flow of something, usually a product or service, from order receipt to customer fulfillment. Now it isn't feasible to describe specific KPIs here, as they tend to be unique to the business. However, they usually include a combination of internal and customer-oriented performance measures. An example of an internal KPI might be, say, staff utilization rate. A good customer-oriented one might be, say, delivery time. The design, measurement, and ongoing tracking of these KPIs can be rather complex, and this is where the accounting comes in. You might be thinking this doesn't sound like accounting to me, and certainly in a traditional sense, that's true. What lean accounting does is challenge legacy accounting processes that are often retrospective, labor intensive, and narrowly focused. So the role for accountants when it comes to the lean thinking enterprise is to arm managers and decision makers with the information or KPIs that are aligned with the business' strategies and goals. And as we just discovered, these performance measures are much broader than just the financials. In fact, lean focuses on improving measures that add value to the customer. So in a sense, the financial outcomes become a byproduct of this exercise. Now, this might seem like a leap of faith for the accounting department, but this reinvention from traditional to goal-oriented accounting builds stronger relationships with management and the business whilst also elevating the profile of the finance team.