Management Accounting 2

Lecture 6

‘Lean’ Accounting

Lecture Outline

• The ‘Lean ‘concept’• Lean Techniques • Lean accounting

The Lean Concept

• Lean concept is a combination of various Japanese techniques and approaches

• Developed widely in US and UK from its Japanese origins

• The term ‘Lean’ came into use in early 1990s, particularly in relation to supply chain – then more widely

The Lean Concept per Womack and Jones – see Maskell, 1999

Four Key Elements:

1. Value and the value stream

2. Flow

3. Pull

4. Perfection

Value

• Value concerns what is provided to/for the customer• “Lean thinking must start with a conscious attempt to

precisely define value in terms of specific products and specific capabilities offered at specific prices through a dialogue with specific customers”, Womack and Jones

• Note the VA v NVA used in ABM• “Value is a feature a customer is prepared to pay for”• Value not defined here in terms of assets, products,

engineering or sales skills, although all these may be important and may contribute to value creation

Value stream

• “The value stream is the set of all the specific actions required to bring a specific product (good or service or both) through the three critical management tasks of any business:– The problem solving task – concept design – launch– The information management task– The physical transformation task

• The entire value stream for a single product may be surprisingly long

• Typically the value stream contains large amounts of ‘waste’ (muda = Japanese for waste)

Value stream for Coke production

Waste in the Cola value stream(production of cola and purchase through Tesco)

Flow

• This concept is that any item of production should flow through the various processes with little or no interruption – it should be made in ‘one go’

• Often implemented as ‘flow lines’ or manufacturing cells

• This contrasts with traditional ‘batch and queue’ systems

• Originates with Toyota Production System• Anything that interrupts the flow of production is waste• Simplest form is within factory• Most radical form is through the whole value stream –

see Cola example

Old Bicycle Production Plant

Traditional Bicycle Production Plant

• Arranged by functional operations• Batches of work determined by ‘efficiency’

considerations• This led to long lead times and often months of items in

stock• Various storage areas• Large number of part movements

Flow Production Bicycle Plant

PULL

• “Pull in simplest terms means that no-one upstream should produce a good or service until the customer downstream asks for it”

• JIT is the most common pull system• The opposite is ‘push’ where a planning system

determines what is produced in line with expected demand and then alterations are made when expectations are not met. MRP and MRPII are the most common push systems

• Pull systems still have long run capacity planning, but actual production does not commence until a demand trigger occurs

Example of spare parts for Toyota

• In previous system dealers held common items of stock, non-common items were ordered with weekly deliveries

• Result, large amount of stock, many customers had to wait as the part needed was not held in stock.

• Aim: Toyota would supply any part next day (overnight)• New system of regional distribution centres, advanced

‘picking and packing’ system for small volumes• Service level improved and costs fell – see table

Toyota (US) Spare Parts Service

USA – 1994 USA – 1996

parts days parts days

Parts Distn Centre 50,000 120 65,000 30

Dealer 4,000 90 6,000 21

Stock level index 100 33

Service rate 98% in 7 days 98% in 1 day

One dealer was able to cut the value of stock held in half while holding 25% more stock items; turn half the store area into money-earning service bays and give –same-day’ service to a substantailly larger pnumber of customers

Perfection

• This is the pursuit and attainment of excellence• Perfection through a series of endless steps• Perfection is often found the practice not design• Various well-known techniques are used to achieve

this:– Kaizen – continuous improvement– Breakthrough improvement– Best practice and benchmarking

Lean Techniques

• Elimination of Waste• Continuous Improvement – Kaizen• JIT and zero-defects• Pull instead of Push• Multifunctional teams• Decentralised responsibilities with integrated functions• Horizontal and vertical information systems• Supportive supplier relations - partnerships

Lean Accounting Issues

Critique of traditional management accounting

• Leads to wrong production decisions, such as large batch sizes, and high utilisation (produce for stock)

• Hides waste by lumping most costs in overheads – note the Stream Int experience of many small activities combining

• Provides little useful information for improvement• Organised by Departments not value streams• Creates waste through too many transactions and too

many unused accounting reports

Recommendations for Lean Accounting

Per Maskell – note he is a consultant in this area

• 70% of accounting staff located in operations• 50% of accounting staff time devoted to improvement• High level budgets only – no detailed budgets• Control processes through activity outputs• No need to record detailed labour hours• All information widely and easily available• Set targets using benchmarking and ‘lean perfection’• Identify non-financial performance measures

ABT and Lean Accounting

• Initially there appears to be a conflict• ABC usually shows that large batches yield much

cheaper unit costs – thus this may be a motivation away from lean ideas

• Cooper in 1996 JCM paper argues this is not the case• He argues that the batch costs need to be taken into

consideration in deciding how small batches should be• Also the correct managerial response to higher batch

costs is not necessarily larger batch sizes, but action to reduce batch costs

Lean Accounting and Target Costing

• Japanese practice, developed from 1960s - considerable development through that period

• Contingent factors include: increased automation, shorter product lives, intense domestic competition, objective of increased world market share

• Belief that scope for cost reduction after production started is relatively small

What is the Target Cost (TC)?

• Target cost = Target price - Target Profit (including target volume)

• Target cost = maximum manufactured cost of product

• Target cost = cost planning tool; costs must be reduced to TC

• Target cost = integrative mechanism (see TC processes later)

Target costing v Traditional costing

Target Costing Traditional costing

Production Specification

Product Specification

Target Price and Volumes

Product Design

Target Profit

Estimated Cost

Target Cost

Target Profit

Product design Target Price

Implementing Target Costing

4 Key stages

• Product Planning• Product Design• Preproduction• Production

Examples from Matsushita and Toyota

Matsushita Toyota

General audio products Cars

Highly automated720 employees, 1650 robots

Production line

Typical product life 1 year Typical product life 4 years

New product planning 10 months New product planning 33 months

Stage 1 - Product planning - 1

• Committee headed by chief engineer establish product specification and target price, using: market info, competitor info, present price etc.

• Functional analysis - degree to which functionality of feature meets customer requirements (cost of function not cost of item)

• Toyota: Target price = Current price + value of improvements

• Target profit based on 3 year medium term profit plans and seen over life of product

• Target Cost calculated as residual after volumes estimated

2

• Estimated cost = Current production cost + cost of new features

• Cost tables enable new features (new products) to be costed

• Estimated cost - target cost = required cost reduction

Product Planning Implementation Issues

• Target cost, estimated costs etc. calculated for total and each component and each production process

• Requires target cost to be allocated across all components!!

• Cost reductions calculated for each component and process

Stage 2 - Product Design

• Most cost reduction obtained at this stage• Value Engineering is process of design and redesign

that produces target cost• Value engineering highlights design simplicity, common

parts and processes, evaluation of alternatives, innovative solutions

• Extensive use of prototypes to test cost reduction• Iterative process until target cost is reached• Toyota has 2 year prototype phase involving many

cross-functional teams• Toyota 'Does value added by new feature justify its

cost?'

Stage 3 - Preproduction

• Configuring production lines and trial runs• Target cost still being recalculated up until point of

production• Toyota runs 2 experimental production lines

Stage 4 - Production Stage

• Cost maintenance is primary objective• Standard costs based on target costs• Some forms of TC require annual reduction in standard

costs• Kaizen Costing

Benefits of Target Costing

• Pricing is market oriented• Profit margins are maintained• Close cross- functional co-operation• Integral to other Japanese methods (JIT, continuous

improvement)• Congruent with overall objectives of growth in market

share (1970s and 80s)

Problems and Difficulties of Target Costing

• Benefits of TC decrease when accuracy of variable costs diminishes - uncertainty, volume estimates, totally new products

• Emphasises manufacturing costs when other areas may be more important - e.g. procurement, quality

• Knowledge of customer requirements• Allocating TC to components and processes• Longer development times (e.g. Matsushita shaver!)• Employee burnout through stress of deadlines• Organisational conflict - sales v manufacturing• Market confusion - does the market know what it

wants?

Concluding Comments

• The Lean concepts and techniques are widespread and moving into service industries

• Analysis of whole supply chain (value chain) is now common

• Many firms use some of the ideas and techniques without espousing the Lean ideology

• Lean is an umbrella for many ideas not a tightly defined approach

• Lean is extremely important in many industries, notably automotive and aerospace