LEAN THINKING

A FINANCE & MANAGEMENT SPECIAL REPORT

SR38 | SEPTEMBER 2012

BUSINESS WITH CONFIDENCE icaew.com/fmfac

LEAN THINKING FOREWORD
A special report published by:
Finance and Management Faculty
Chartered Accountants’ Hall A LEAN VISION – DOING MORE
Moorgate Place
London EC2R 6EA
T +44 (0)20 7920 8508
WITH LESS
F +44 (0)20 7920 8784
E [email protected] With the ever-changing demands on business leaders to identify competitive
icaew.com/fmfac opportunities, many organisations have been using a wide range of
methodologies to improve their business processes. Over the past couple of
Emma Riddell
Acting head of faculty decades, one prevalent method has been the adoption of a lean philosophy.
T +44 (0)20 7920 8749 Lean principles originated after the second world war from the innovative
E [email protected] manufacturing methods of Japanese automobile maker, Toyota. Taiichi
Ohno had developed Toyota’s production system (TPS) to focus on
Jennifer Chong
Technical manager achieving a totally waste-free environment while maximising customer
T +44 (0)20 7920 8661 value. The TPS principles became popular in the west when the term ‘lean’
E [email protected] was first coined in 1988 in an article ‘Triumph of the Lean Production
Rick Payne System’ by John Krafcik, a quality engineer in the Toyota-General Motors
Finance direction programme New United Motor Manufacturing Inc joint venture. In 1990, following
T +44 (0)20 7920 8451 Krafcik’s article, the term was introduced internationally in the book The
E [email protected] Machine that Changed the World, co-authored by James Womack, Daniel
Caroline Wigham Jones and Daniel Roos.
Services manager The primary aim of this report is to outline the major concepts and
T +44 (0)20 7920 8508 thought processes behind the lean philosophy. Daniel Jones provides an
E [email protected]
overview of the origins of lean thinking and addresses some critical issues to
consider before commencing a lean journey. John Bicheno sets out a
This special report is one of a series
produced for faculty members. In each framework for lean and introduces the core TPS principles by outlining the
report we give a review of a topical theme key Japanese concepts to identify what your customers value. Bicheno also
within finance and management, offering provides an essential toolbox to support the transformation process and
both analysis of the relevant theory and a emphasises the crucial role of leadership and management. Kevin Dilton-Hill
review of the practical application of
appropriate management techniques.
describes practical applications of lean concepts in service organisations,
where success is dependent on identifying customer demands, while John
If you have any comments or suggestions,
please send them to Jennifer Chong. Seddon provides a critique of the use of Ohno’s TPS principles within the
The information contained in this and service industry. In addition, there are articles on accounting in a lean
previous issues of this publication is environment, which is predominantly based on common sense, and also on
available (to faculty members only) on the lean applications in the finance function.
faculty website at icaew.com/fmfac Before adopting a lean transformation process, there are some points to
F&M SPECIAL REPORTS
note:
... are produced on behalf of the faculty by • lean is a mindset which requires a departure from traditional thinking and
Silverdart Publishing involves not only managing the visible wastes but more importantly the
www.silverdart.co.uk invisible factors;
Contact: Alex Murray
• transformation is a long continuous journey and a lean organisation will
[email protected]
not be achieved by just applying the tools and techniques alone; and
© ICAEW 2012. All rights reserved. The • sustainable on-going change requires management commitment and
views expressed in this publication are engagement of the right people from top to bottom, with clear
those of the contributors; ICAEW does not
communication and training to all staff to establish a lean culture.
necessarily share their views. ICAEW and
the author(s) will not be liable for any
reliance you place on information in this If the lean approach is properly applied, your business should be in a robust
publication. If you want to reproduce or position to focus on a continuous progression of improvement.
redistribute any of the material in this As you embark on your lean journey, we hope this report helps to provide
publication, you should first get ICAEW’s
permission in writing.
you with an insight into the underlying methodology and key issues
involved. Please let me know if you have any comments.
ISBN 978-0-85760-638-9

Jennifer Chong

Jennifer Chong is technical manager of the

Finance and Management Faculty.
[email protected]

icaew.com/fmfac
LEAN THINKING

CONTENTS
02 INTRODUCTION 12 LEAN IN ACCOUNTING
FOUR KEY QUESTIONS TO START THE CHANGE TO WHY – AND HOW – LEAN ACCOUNTING WORKS
LEAN THINKING The application of accounting when your organisation
Developing lean thinking in your business means adopting a adopts lean presents some challenges, but Frances Kennedy
new evidence-based approach. Daniel Jones discusses the suggests ways in which this could add value.
background of lean and outlines how to start this process.
16 ACCOUNTING IN A LEAN ENVIRONMENT –
04 THE LEAN FRAMEWORK A PRACTICAL EXAMPLE
THE APPLICATION OF LEAN IN BUSINESS AND Jean Cunningham describes the process adopted by one
INDUSTRY organisation which found that lean thinking contributed to
The basic concepts of lean thinking were developed in its success.
industry during the 20th century. John Bicheno sets out the
framework on which this idea has been built. 17 LEAN IN FINANCE
DEFINING THE BENEFITS FOR THE FINANCE FUNCTION
06 LEAN IN SERVICES The adoption of lean thinking by finance professionals is not
ADAPTING LEAN INDUSTRY SKILLS FOR USE IN widespread – but Peter Coote and Stathis Gould outline the
SERVICES reasons for considering a new approach to lean.
Manufacturing was the origin of lean thinking, but the
practice has spread into services. Kevin Dilton-Hill explains 20 APPENDIX 1 – FURTHER READING
the implications and looks at the benefits. BOOKS, JOURNAL ARTICLES AND MORE...

10 BUT IS THIS THE RIGHT APPROACH? 21 APPENDIX 2 – GLOSSARY

John Seddon takes a sceptical look at lean in services, A GLOSSARY OF SELECTED LEAN TERMS
suggesting that broad-based solutions do not adapt well to
individual organisations.

FINANCE & MANAGEMENT SPECIAL REPORT September 2012 01

 INTRODUCTION

FOUR KEY QUESTIONS TO START THE

CHANGE TO LEAN THINKING
Daniel Jones discusses the background to lean, the benefits of adopting a lean
approach and the key issues which should guide the transformation to lean thinking.

Twenty five years ago our global research team at the Toyota’s lasting contribution to the practice of
Massachusetts Institute of Technology documented a big management is that it created a unique synthesis of three
gap in quality, productivity and time-to-market between fundamental approaches to improvement:
Toyota and other Japanese car makers and their • the analysis of quality and the use of the scientific
competitors in Europe and the US. approach learnt from Edwards Deming, the American
We labelled this superior production system ‘lean’ and statistician and consultant;
described the competitive threat this posed in The • process thinking about organising the flow of work
Machine that Changed the World. This book quickly inspired by the early Henry Ford and honed through
became a best seller and triggered a huge change in Taiichi Ohno’s own experiments at Toyota; and
practice in the auto industry. Five years later, in Lean • people learning by doing, drawn from the ‘Training
Thinking, Jim Womack and I described the underlying within industry’ programme developed by the US
principles and the steps early pioneers had followed to government during World War II.
build their own functional equivalent lean systems to
close their performance gaps. A further eight years later, Many organisations have experienced the power of
Jeff Liker filled in the details of Toyota’s management engaging employees in using lean tools to eliminate
practices in The Toyota Way. waste in their workplaces. Others have gone on to use
We then embarked on a long march to explore how the lean principles to streamline the flow of work. But in
these practices could similarly transform other industries, fact these form only part of a very different way of
from aerospace to retailing to construction and managing and leading change. A good way of seeing this
healthcare. In each case the pioneers achieved step is by asking four fundamental questions.
changes in performance that forced their competitors to
follow their example. While the problems and types of 1. How can you focus everyone on the vital few
work required very different starting points, the improvements that will make the biggest difference
management system needed to manage organisations to the organisation?
focused on improving the flow of work for customers is The lean answer to this is to use a scientific approach to
common. understand the choices and to dig down to the
Lean thinking and practices also spread from physical underlying root causes. Addressing these root causes is
activities on the shop floor or the hospital ward to much more effective than grabbing at solutions and
administrative and service delivery activities in financial launching hundreds of projects, in the hope that some of
services, utilities and the public sector. These processes them succeed.
turned out to be even more broken than manufacturing, It is no accident that the first things given to a new
generating a lot of what Toyota calls unnecessary ‘created manager by a superior on joining Toyota are a problem
demand’ as a result of broken process. Addressing the and an A3 form. The A3 form frames the dialogue
root causes and separating out the routine from the between the manager and the superior, and ensures that
complicated work flows are the initial steps in redesigning no step is missed in finding a solution to the problem.
these processes. Once they are capable of completing This begins by defining the problem and moves through
each step right first time and doing today’s work today gathering facts (rather than just relying on past data),
this opens up new opportunities for creating additional establishing a target condition or the gap to be closed,
value for customers. understanding the root causes of a problem, proposing a
As a result of these streamlined back-office processes, series of countermeasures (not just one), checking
retail banking for example stands on the threshold of whether these worked and reflecting on the lessons
being able to offer customised and optimised bundles of learnt. Throughout this process the superior is asking
products and services to many customers. The real value questions rather than telling the subordinate the answers.
of lean is that doing more with less effort opens up new The significant point of using this scientific approach to
business models to serve increasingly demanding and focus on the vital few improvements is that everyone
empowered customers in the web era. learns to think in the right way about the right things.

2. How can you close the performance gaps which are

critical for the organisation?
Daniel Jones is chairman of Lean The lean answer to this is to remove the obstacles to the
Enterprise Academy (www.leanuk.org) flow of work that creates the value for which customers
and author of The Machine that Changed are paying, which lean thinkers call a ‘value stream’. This
the World, Lean Thinking and Lean involves combining activities which were once separately
Solutions. managed into an integrated value stream, eliminating the
[email protected] sources of unnecessary variation, optimising the whole
rather than the parts, removing queues, bottlenecks and

02 icaew.com/fmfac
 ‘ A lean transformation begins with a series of
controlled experiments in key activities to
build an experience base as quickly as
possible ’

handoffs as they cross from one department to another, them resolve the most important hindrances to doing so.
and aligning the flow of work with the rate of demand. In Making everything visual is vitally important in learning to
most organisations, no one sees or is responsible for these work together to optimise the whole system.
horizontal, end-to-end value streams. There is now a
wealth of experience in using the right lean principles and 4. How can you sustain the gains?
tools in the right sequence to redesign value streams. The lean answer is to build new knowledge through
By taking a value stream perspective one is learning to learning by doing. In a complicated social environment
see the whole and understand where to act to close the where causality is not always clear, real learning comes
critical performance gaps. from doing a number of controlled experiments to see
what works and what does not. Very often problems do
3. How can you change behaviour to work together not occur where people think they do and the root
more effectively along these value streams? causes are also not always obvious. Establishing a
The lean answer is to plan not only what should happen common language for all kinds of problem-solving makes
to every product or patient as they progress through the it possible to capture and share not only what works but
value stream but exactly when this should happen – and also how problems can be solved.
to make any progress and/or deviations from this plan as Learning by doing is also the basis for a very different
visible as possible. Reviewing progress on an hourly or approach to lean transformation. Instead of spending a
daily basis enables teams to respond quickly to get back lot of time planning and then deploying a centrally
on plan and ensures that recurrent problems are tracked designed training programme, that is quickly forgotten
to their root causes. when the experts move on, a lean transformation begins
Making progress and problems visible in a no-blame with a series of controlled experiments in key activities to
environment is much more productive than hiding them build an experience base as quickly as possible.
from view or in a computer system. Anyone who has This then forms the basis of further experiments and for
been part of a value stream mapping exercise will have building communities of practice to share results and
witnessed the dramatic change in behaviour as experiences. These may also be consolidated on an
participants stand in front of the map and see for the first intranet accessible to everyone in the organisation and
time how to fix their broken process rather than blaming reinforced by competitions and recognition ceremonies
each other. for the winning projects. This experimental, evidence-
Managers also begin to recognise that their role is to based approach ensures that everyone learns how to
support frontline staff in doing their work and to help learn by doing and reflecting.

FINANCE & MANAGEMENT SPECIAL REPORT September 2012 03

 THE LEAN FRAMEWORK

THE APPLICATION OF LEAN IN

BUSINESS AND INDUSTRY
From its start in industrial management in the last century, the ‘lean’ concept has gone
global. Here John Bicheno looks at lean in business and offers practical tips.

‘Lean’ is perhaps an unfortunate word for a family of consultant Joseph Juran, who wrote extensively about
methodologies that has become mainstream in the world ‘total quality management’. Defect reduction is central,
of operations over the past two or three decades. with variation reduction a key concept. Today it is
The word ‘lean’ was coined by a researcher at the common to find organisations referring to their
Massachusetts Institute of Technology coming out of a programme as ‘lean sigma’ or some close variant – for
worldwide study of the car industry that also resulted in instance the US group GE;
the book The Machine that Changed the World by • systems thinking – from the rich field of systems
Womack, Jones and Roos published in 1990. thinkers including W Edwards Deming and Russell
The word was considered appropriate when it was Ackoff. Certainly, a ‘systems approach’ is now widely
found that leading Japanese companies were producing a regarded as essential. This would also include end-to-
car in half the time, with half the people, with half the end process thinking, although some systems purists
work in process inventory, in half the space, and with far might quibble with definitions;
less than half the defects of average US car companies. • total productive maintenance (TPM) – for some capital-
intensive organisations, this may be the way into lean.
The framework But TPM itself has expanded in scope to be concerned
The first thing to say is that lean is not a set of tools that not just with the effective use of machines but also of
are implemented on a one-off basis. Rather, lean is an professional people – for instance how much time does
ongoing improvement philosophy aiming at higher levels a doctor spend ‘doctoring’; and
of value. Forever. A simple definition of value is benefit • the theory of constraints and factory physics – aimed at
divided by cost, and good lean should aim at both bottleneck utilisation, and the non-linear relationships
continual improvements in benefit (to customers, between lead time, utilisation and variation.
employees and society) and in reduction of cost. Too
often, lean has been seen as just concerned with cost – Each of these areas contains numerous tools, some of
but that would be to miss an important aspect of value. which have been in use for well over a century. But
Although lean has been strongly associated with knowledge of the tools does not mean knowledge of
Toyota, today lean, for many, is an amalgamation of a lean. Appropriate tools must be chosen to deliver value.
range of approaches and concepts. Thus waste reduction
and lead-time reduction – central concepts in the Toyota Lean in manufacturing
system – have been joined by other approaches that have Here, we can draw on two concepts – ‘muda, muri,
widened the scope both horizontally and vertically. mura’ and ‘training within industry’.
Horizontally, lean has found application not only in all
types of manufacturing operations, but also, increasingly, Muda, mura, muri
in services, transport, health, government, construction, Toyota talks about understanding and reduction of
defence, and mining. (Examples from each of these ‘muda, mura, muri’. ‘Muda’ is waste, in all its forms –
include, respectively, RBS, British Airways, the National activities that don’t add value. But waste needs first to be
Health Service, the UK court service, most large civil uncovered. This is not a simple checklist procedure for the
contractors, the Royal Air Force and DeBeers). ‘experts’ to do, but something to which everyone needs
Vertically, lean has expanded into design, logistics, to be attuned – to create a questioning culture.
accounting, IT, and human resources – all of which have ‘Mura’ is variation or amplification. But there are two
been the focus of books with titles beginning with the types of variation – process variation and demand
word ‘lean’. variation. Can they be reduced? How much demand
These other approaches that have joined the lean variation is self induced – for example by the ‘bullwhip’
family include: effect or end-of-month sales targets? But note also that
• six sigma – itself a newer manifestation of quality actions aimed at variation reduction can sometimes be
management going back to the 20th century massively self-defeating – resulting in failure demand –
having to do something over again by not getting it right
first time. Failure demand imposes extra load, causing
muri.
‘Muri’ is overload – of people and processes. People
who are overloaded will not have time to improve or to
John Bicheno teaches at the University of recognise opportunity. Processes that are overloaded will,
Buckingham and is the co-author of The because of variation, result in long queues. Note that
Lean Toolbox. overload begins at less than 100% capacity – next time
[email protected] you are circling to land at Heathrow consider that runway
www.picsie.co.uk utilisation is in the high 90%s. Queues can only be
decreased by reducing variation in demand or process, or

04 icaew.com/fmfac
 ‘ All of this lean change will not be successful
unless the bottom line results show up; so
accountants need to be involved ’

by freeing up capacity through waste reduction, decrease repetition. The US management writer Mike Rother calls
in what John Seddon terms ‘failure demand’ (see this ‘kata’ after the routines that even multi-dan karate
Glossary, page 21) or by greater resource flexibility. practitioners continue to do. The lean consultant David
Mann talks about not breaking habits but extinguishing
Training within industry (TWI) them, like raking over a campfire several times. So leaders
TWI was a set of skills aimed at front-line managers which need standards also.
was developed in the US during World War II and Leader standard work (LSW ) is the idea that leaders at
became a foundation of the Toyota system. The ‘three all levels must do regular activities. This is combined with
legged stool’ of TWI comprises: visual management, where results, problems and
• job instruction (JI) – how to teach a person to do a job opportunities are shown on a board at the gemba.
correctly; So, perhaps, team leaders check once per hour. Area
• job methods (JM) – how to improve a job; and managers meet with the team once per day; general
• job relations (JR) – how to work with your people. managers perhaps once per week; and directors once per
month. But there are also escalation meetings. There
Today, 70 years later, JI remains the most effective, proven would be set agendas, items to check on and questions
way of teaching a job (interesting, as modern brain to ask. The particular version of LSW of course needs to
research backs up these methods). JM has morphed into be determined. For example, speaking at a recent
‘kaizen’ (continuous improvement) and A3 problem conference, George Koenigsaecker, a C-level manager at
solving (using an A3-size template but also, vitally, famous lean group Danaher Corporation, told of how he
incorporating mentoring), while JR is embedded in many insisted that director-level managers participate in four
good teamworking practices. TWI is now undergoing a week-long kaizen events per year in order to be
much overdue renaissance. All three skills include the considered for the bonus scheme. This was not because
Deming ‘plan, do, study, act’ (PDSA) cycle. their improvement ideas were needed, but for the culture
change that it encouraged.
Attention to people
Of course, to get all of these concepts to work in Practical tips
harmony requires a huge amount of attention to human However, all of this lean change will not be successful
and managerial aspects. So it is appropriate that in the unless the bottom line results show up – so the finance
last decade there has been much attention to people, function needs to be involved. But there may be counter-
culture and leadership issues within lean. intuitive ideas and concepts to be faced (see box below).
So, is lean a panacea? Of course not! Do we even call it
The ‘gemba’ concept lean? Very likely, and increasingly, not. But do we need to
Gemba is the place of actual ‘value add’, the place where get going with the principles? Well, this is no longer a
workers come into contact with the product or the question!
customer. Managers at all levels need to spend time at
the gemba. Direct observation is key. Go to the call Box 1 PRACTICAL TIPS
centre and listen. Go to the supermarket and observe,
speak to customers and to staff – as Sir Terry Leahy,
former chief executive of Tesco, used to insist upon. • Is inventory an asset? In the balance sheet inventory is an asset. So
But gemba is not just ‘industrial tourism’. It is a skill building more inventory may be seen as something good. But for a
that needs developing in order to see waste and lean practitioner, inventory is something that needs to be reduced. It
opportunity. Don’t just walk – stop, observe, discuss. It is affects lead-time, quality, space and visibility. Reducing inventory may
taking an active, genuine interest in front-line staff – their look bad in the financials, even though cash flow may improve.
concerns and their ideas. Of course, one might argue that Reconciliation is required.
this is a follow-through of the famous Hawthorne effect • Is keeping machines busy the aim? Some accountants may see an idle
(during experiments on factory workers in the 1920s, machine as undesirable. But a lean practitioner would not be
productivity was improved not so much by changing the concerned, except if it was a bottleneck. Even then, planning around
level of lighting in the factory but by the interest being 100% utilisation is poor practice because of the variation affects on
taken in the work by the researchers). lead-time.
Moreover, walk the whole value stream, end-to-end. • Batch sizing – big batches are good, an accountant may think, so use
Even better, if possible, walk the whole supply chain. Get the economic order quantity. Not so, thinks the lean practitioner. Big
a systems perspective. batches are bad for the same reasons that inventory is bad.
• Are standard costs appropriate or do they need adjustment? How are
Implementing lean overheads to be allocated? Using direct labour hours or machine hours
What we now know about lean implementation is that may discourage the use of smaller, more simple machines or cells.
one-off does not work. Embedding is required by

FINANCE & MANAGEMENT SPECIAL REPORT September 2012 05

 LEAN IN SERVICES - 1

ADAPTING LEAN INDUSTRY SKILLS FOR

USE IN SERVICES
Kevin Dilton-Hill explains what lean in services means and how the manufacturing
concept of identifying ‘the seven wastes’ can be used to manage services more efficiently.

By ‘lean in services’ we mean lean off the factory floor. • safety – unsafe work areas create lost work hours and
This encompasses the service aspect of manufacturing expenses, for example poor ergonomics, eye strain and
businesses and all the processes in service businesses, in poor air-conditioning; and
other words, the people-dominated areas. • information – enterprise resource planning (ERP)
The mantra for lean is ‘quicker, better, cheaper’. This systems requiring current/correct master data details –
can be applied to the processes in human resources, too many account codes/cost centres.
finance, sales, marketing, customer service, legal and
even research and development. Lean can be applied to These could all be classified under over-processing.
the operations areas of service businesses – to how your In our experience, people working in services implicitly
business actually delivers its services to customers. It can understand waste – it’s the ‘painful’ things that they have
also be applied to processes that cross organisational to do, the things that don’t make sense or could be done
boundaries, so one should also look to apply lean to the far more easily; and sorting out others’ mistakes.
interface between suppliers and customers.
Two high-level types of demand in services
What is lean in services? The key principle in lean is to ‘specify value in the eyes of
Lean was developed for manufacturing environments the customer’. What do your customers want; what are
where the main operations are performed by machines. they prepared to pay for? Customer demand can be split
In service environments the main operations are into two types – ‘value demand’ and ‘failure demand’.
performed by people. This people involvement means Value demand relates to what customers are trying to
that the principles of lean have to be implemented obtain from us.
differently in service environments. Failure demand is totally different. When something
For example, a classic method in lean is ‘going to goes wrong or doesn’t happen the way you expected,
gemba’ – which means visiting the place where the work what do you do? You contact the business. This is failure
is done and the value is added – to find out what is demand – the demand that consumes resources to make
happening in the process in action. By standing on the things happen the way they should have in the first place.
factory floor, evidence of the ‘seven wastes’ (see below Understanding failure demand is invaluable; it shows
and opposite page) can be identified easily by the trained clearly what customers don’t want. Eliminating failure
practitioner. But if you walk into an office, it is not so easy demand improves customer service and cuts costs.
to identify waste. Simplistically, it is easy to see when a Software is available to analyse voice and text
machine is not producing. How often do you see people communications with customers to identify why they are
leaning back in their chairs staring at the ceiling with contacting the business. One can identify product and
arms crossed waiting for work or for help? But, finding service defects, process breakdowns and improvement
out what is actually going on in services is just as vital; opportunities.
going to gemba is done using enquiry and analysis rather
than observation. Implementation of lean
Lean can be used as the key methodology in
Outline of principles – the seven wastes improvement projects or in ongoing continuous
In Box 1 (opposite) we take the commonly accepted improvement programmes. Either way must have
elements of waste in the Toyota production system and appropriate management commitment and governance.
illustrate how they apply in manufacturing and services. Lean is used the same way in projects and continuous
These seven wastes – transportation, inventory, motion, improvement, just the scope and scale is different.
waiting, over-production, over-processing and defects – A lean review of a process involves the following steps:
are easily remembered using the acronym TIMWOOD. • define the scope of the process under review;
From time to time people propose additional wastes, • identify what the process’s customers want from the
for example: process;
• skills – using higher skills to perform the task than • identify how the process is performed – the ‘as is’;
necessary, which is particularly relevant in professional • identify waste in the process;
environments such as finance, legal and HR; • define how the process could be done to remove the
waste and better serve customers – the ‘to be’. Ensure
that the suggestions are feasible by checking with other
Kevin Dilton-Hill is a finance
parts of the business, simulation, etc; and
transformation expert. He is founder and
director of JSK Solutions and works as an • develop a plan to move from the ‘as is’ to the ‘to be’
associate director for one of the Big Four including appropriate risk management.
accounting firms.
[email protected] Then one moves into the usual change implementation
process. A key challenge is to find the time to do this

06 icaew.com/fmfac
 ‘ The pitfalls in any change initiative are well
known and using lean is no different ’

Box 1 THE SEVEN WASTES – ‘TIMWOOD’

WASTE ACRONYM WASTE IN MANUFACTURING WASTE IN SERVICES
ELEMENT

Transportation T Moving products farther than is minimally Evidenced by people walking corridors to collect
required. or deliver stuff; the actual or virtual chasing of
information.

Inventory I Having more inventory than is minimally Work in progress because further information is
required - Excess Inventory is the deadliest required from customers or other parts of the
type of waste. organisation; people on hold, queues.

Motion M People moving or walking more than Needless effort - switching between programmes,
minimally required. too many keystrokes, re-analysing accounts.

Waiting W Products waiting on the next production Any delay between the end of one activity or
step, or people waiting for work to do. step and the start of the next one - most likely to
occur at hand-off points; physical or virtual in-
trays.

Over-production O Making more than is needed, or making it Rarer in service environments. Preparing answers
earlier than needed. for questions no longer being asked; ‘keeping
busy’.

Over-processing O More work is done than what is required by If you don’t know what your customers want you
the customer; also includes using tools that could add more ‘value’ than they are prepared to
are more precise, complex, or expensive than pay for, eg, too many features causing
absolutely required. complexity; excessive checks and authorisations,
that is, more than essential to control identified
key risks.

Defects D The effort involved in inspecting for and Any aspect of the service that does not conform
fixing defects. to customer needs. Anything ranging from
missing or incorrect information to missed
deadlines.

work and to conduct business as usual. As one finance • it focuses on one area that is relevant to all participants;
director put it, ‘we’re too busy to find out why we’re • the improvement suggestions are owned and promoted
too busy!’ by the team;
The way to handle this is to define the scope of the • improvements can start to be implemented the next
process very carefully. The scope should be set to ensure week; and
that the bullet points above can be handled in 10 to 15 • it leaves time for the staff to carry out business as usual
hours of workshops – identifying what customers want for part of each day.
and the ‘as is’ process should be done in advance of the
workshops. The participants in the workshop should include subject
We have found that a one-week ‘kaizen’ approach of matter experts and someone who really understands lean.
continual improvement is the most effective way to In addition to identifying waste – which is done in
implement lean. The team meets in workshop sessions probably every lean project – many tools and techniques
that last two to three hours every day for a week. The have been developed to help analyse the ‘as is’ and to
workshop focuses on one process or as much of one develop the ‘to be’. A good source of these is The Lean
process as can be addressed in that time. The reasons Six Sigma Pocket Toolbook (George et al, McGraw-Hill,
why this approach works well are: New York, 2005). It includes tools such as:
• it is fast-paced and builds momentum and enthusiasm; • ‘suppliers, inputs, process, outputs, and customers’
• it avoids the ‘put-down and pick-up’ time and energy (SIPOC), a tool which summarises the inputs and
loss from spreading it over a longer period; outputs of one or more processes in table form;

FINANCE & MANAGEMENT SPECIAL REPORT September 2012 07

‘ The lean review identified four major
changes that delivered a headcount
reduction of almost 50% ’

• ‘voice of the customer’ (VoC) a method of interpreting improvement. Yet those who have come from a
what customers say they want into process manufacturing background generally start lean in the
requirements and measures; office with 5S. In our view this discredits lean and it has a
• tools for collecting and analysing data about the ‘as is’ long way back to regain its rightful reputation.
process including root cause analysis; Another challenge is how long it takes before changes
• models that could be used for the solution such as start to happen. If a large number of processes are broken
‘kanban’ (see the case study below); and in a department it can take several months of analysis to
• tools for selecting the best solutions. gain an understanding of all the processes, to gather the
relevant performance data and to prioritise where lean
However the book does not include the technique that should be implemented. And then a pilot is performed to
we find most useful for service processes. There is a prove applicability of lean. So one can easily be three
tendency when we design processes to ensure that they months down the road before any benefits are delivered.
cover every eventuality. So processes start off being Our recommended approach is very different – the one-
relatively simple but as the exceptions come along the week kaizen approach starts to deliver benefits before a
steps to cater for them get added to the process and month is out.
suddenly one has a really complex time-consuming
process. In manufacturing plants, a lean method called How leading companies are using lean six sigma to
‘runners, repeaters and strangers’ was developed to drive results
simplify production planning. It is probably the most It is rare to come across a large service business that has
powerful simplification method around. not used ‘lean six sigma’ (a strategy to improve the
Runners are those simple transactions that make up the quality of process outputs) to a greater or lesser extent.
volume on an 80/20 basis in every process. The repeaters After the initial use of consultants to provide the required
are those things that happen pretty often but probably skills and prove that it works, many companies have hired
not daily. The strangers are those things that are probably their own teams.
one-offs, with there being quite a few but each one a bit Lean is not a project but a journey, for two reasons:
different from the others. Processes should be designed to first, in time and with experience, one’s definition of
handle runners. Repeaters should be redesigned to waste changes; and second, entropy or degradation over
become runners but if they can’t they should be handled time also applies to processes – increasing process
as strangers. Strangers should be handled outside the complexity is a good example of this.
runner process and inserted into it just before the end Lean six sigma is used extensively in the repetitive
when all the difficult stuff has been done manually. processing areas where there are large volumes of similar
This approach has significant benefits: items to be handled, be they transactions or customer
• runners are not burdened with the needless overhead of interactions. So areas such as document processing, call
complex tasks. These could be as simple as eliminating handling and simpler customer interactions like check-in
checklist steps but could be needless calculations; and and till check-out are well covered.
• strangers get the focused attention of people skilled But the more that one moves away from simple
enough to deal with them correctly first time. interactions into more complex ones that involve
professional judgement as the major value-adding activity,
Potential implementation pitfalls of lean the less one sees lean six sigma. This is not because it
The pitfalls in any change initiative are well known and doesn’t work, but because the way that one applies these
using lean is no different. In addition to these pitfalls, lean tools and methods has to be radically changed to suit the
does have a few challenges of its own. circumstances, and few people have the skills so to do.
The most important challenge is that lean’s cost
reduction credentials are well known. It is imperative that CASE STUDY – the insurer
the impact on staff is clearly set out from the beginning; The application of lean practices and techniques
are headcount reductions part of the deliverables or not? Rather than using a straight forward processing process as
Lean is a mindset as well as a whole lot of methods. If an illustration we have decided to use something more
the right methods are not used in the right place they complex to illustrate the use of lean. Complaints handling
easily fail and discredit lean. One such method is ‘5S’, is messy; there is a lot of pick-up and put-down as
which basically means ‘a place for everything and further information is obtained and there is a lot of
everything in its place’. While on the factory floor this is a variability in the individual cases. Complaints are where
key first step in implementing lean, in the office failure demand lands up if customers’ issues are not
environment it is less applicable. People really can’t see resolved speedily to their satisfaction.
the relevance of having a specially marked place for their The UK arm of a large multinational insurer focusing
stapler on their desks, particularly when there are broken on motor and home insurance had a customer
processes all over the place that are urgently in need of complaints team (CCT) that was designed to handle

08 icaew.com/fmfac
 ‘ They also gain confidence in the new
process because they see the steps that will
be taken to eliminate the non value-adding
work so that it no longer has to be done ’

Level 3 complaints and those that came in via company Box 2 SAVING 50% HEADCOUNT
executives or the Ombudsman. In reality 50% of their
15,000 cases per annum were Level 1 or Level 2 • Change work allocation to a ‘kanban’ pull system to provide greater
complaints. visibly and ease of management of workload and greater efficiency
CCT was viewed as effective at resolving complaints – 6 FTE (Full-time equivalent) saving. Kanban is a lean method for
within FSA timescales, but less effective at work allocation and scheduling.
understanding the root causes of complaints and at • Hand back non-complaint work, for example the work undertaken
converting this intelligence into business improvement to settle the complaint once agreement was reached with the
initiatives. In addition its capacity planning and customer, to the business because the skill set for this activity is not
individual performance target setting was poor. held within the CCT – 5 FTE saving. This was a real saving because
The objective was to reduce both the volume of the business agreed to take back the work without a reallocation of
complaints and the time to resolve complaints by 50%. headcount.
A lean review of the CCT’s processes identified four • Streamline the processes by eliminating non value adding work
major changes that delivered a headcount reduction of such as letter checking and duplication of system input – 3 FTE
almost 50% (16 FTE or ‘full time equivalent’ ) – see Box saving.
2, right. Other changes were identified by a lean • Treat directly received complaints that were Level 1s and Level 2s as
‘waste’ analysis that challenges each step in the process being these levels rather than as Level 3s. (It was previously
– does it add value to the customer; should it be done identified that all complaints were being treated as though they
that way or at all; should it be done by us? were Level 3s.) This eliminates the overhead associated with Level 3s
The way this complaints team worked is similar to such as keeping records for FSA – 2 FTE saving.
the way most administrative functions are organised.
The transaction comes to a supervisor who reviews it
and then allocates it to a member of staff. This is
known as ‘demand push’, the exact opposite of pile and the person draws another complaint from the
another key lean principle, ‘demand pull’. What then kanban.
happens is the files pile up on each person’s desk; some In this case implementing a kanban was the biggest
awaiting initial processing, others awaiting further single method to increase capacity and achieved a
information to complete. Then failure demand phone headcount saving of almost 20%.
calls start when customers have not heard further The lean ‘waste’ analysis is always used in a lean project
within the timeframe that they expected. It is also to identify:
extremely difficult for supervisors to know how each • steps that can be eliminated because they add no value
case is progressing and how to allocate resources. All in from the customers’ perspective (referred to as ‘non
all a recipe for backlogs. value-adding’);
Kanbans are used by factories to achieve the key lean • steps where one should minimise the resource
principle of ‘demand pull’; make value flow at the pull consumed because it is an administrative or control step
of the customer. Although customers are the ones (‘necessary non value-adding’); and
complaining, the customers of the complaints process • steps where one should consider increasing the
are actually the staff. To overcome the problems resources or find a better way of doing them because
mentioned in the previous paragraph, staff need to pull they add value to the customer (‘value-adding’).
the transaction rather than have it pushed onto them.
Complaints, new and in progress, are held in one place This is a powerful consensus-building approach that
until people are ready to process their next transaction delivers staff commitment to the proposed changes
when they are then pulled out. because they understand why change has to happen and
With this kanban approach a staff member only ever have been part of developing the new process. They also
has one complaint on their desk at a time. This makes it gain confidence in the new process because they see the
easy for the supervisor to see if it is taking too long and steps that are going to be taken to eliminate the non
then to offer support. The number of cases awaiting value-adding work so that it no longer has to be done.
processing are also easy to see as they are all in one A classic example of a non value-adding step is a
place; backlogs are immediately obvious. Rules can be check that was done in the past to catch an error but is
set-up to determine which complaint a person should no longer necessary after the process was changed so
draw next when the one on their desk is complete or that those errors no longer occur. Or a ‘we’ve always
has been processed as far as it can at that time. Rules done it that way’ step that is no longer appropriate or
can ensure that when additional information is received necessary because of changes in the business. Or a
the person responsible for that complaint draws it first. control where no one has done a proper risk analysis to
Or, if a person draws a complaint that is outside their identify what could go wrong and how this could be
skills range it can be placed on the complex complaint picked up.

FINANCE & MANAGEMENT SPECIAL REPORT September 2012 09

 LEAN IN SERVICES - 2

BUT IS THIS THE RIGHT

APPROACH?
John Seddon critiques the application of lean in service organisations and looks back to
the originator of the Toyota production system to argue for a better approach.

Eager to achieve Toyota-style levels of performance focusing on relationships, financial results would
differentiation, service organisations have flocked to follow. To focus on financial results is to do it the
embrace ‘lean’. Unfortunately, many are becoming wrong way round – they are the by-product of
disillusioned by results that fail to come up to identifying and resolving the problems in the system.
expectations.
I am increasingly asked for advice by leaders of Service organisations as systems
service organisations who are anxious about their Studying service organisations as systems reveals
lean programmes. Their most frequent concern is some counter-intuitive truths. To treat all demand as
that the ‘improvements’ detailed in copious project though it is work to be done is to miss the truth that
reports are not reflected in the bottom line. Claimed much of it is what I call ‘failure demand’ (demand
savings adding up to a sizeable fraction of total costs caused by a failure to do something or do something
1
simply refuse to appear as real cost savings. We need right for the customer [Seddon 2003] ). Much failure
to understand why. demand is predictable, and if it is predictable it is
preventable. It cannot be removed without
Lean in service organisations understanding its causes, however. And studying
Lean arrived in service organisations that were service organisations as systems reveals that two of
already highly industrialised – for instance, call the major causes are – wait for it – standardisation of
centres and back offices managed as mass-production work and activity management. When we switch off
systems. Managers of these organisations think of preconceptions and really study service organisations
their job as continually juggling the following as systems, we discover that they have very different
equation: problems to solve from car manufacturers. By far the
• how much work is coming in; most important is designing a system that can absorb
• how many people do I have; and the variety of customer demand. If we can achieve
• how long do people take to do things? that, costs will fall as service improves. It is the
essence of the ‘Toyota solution’ for service
Central to this production-driven view is that activity organisations – and has nothing to do with what is
equals cost; hence, the argument goes, the more we promulgated as lean.
reduce activity times the more we cut costs. It is a By believing the pitch that the Toyota tools are
fallacious argument, to which we will return. universal (again contradicting the advice of Ohno,
Mass-production managers are constantly looking who insisted that codifying method would have
for new ways to do three things: standardise work, exactly this damaging result), managers have failed
reduce activity times and drive out waste. For them, to realise they have missed the first and vital step and
lean seemed like an answer from heaven. They were thus the whole point of the Toyota approach. A focus
encouraged by the consultants and academics who on reducing activity times to cut costs not only leads
promulgated lean, and who shared a similar world them to ignore a much more powerful lever for
view: lean was a new solution to management’s improvement – understanding demand – but also
known problems. lulls them into the belief, understandable but
Yet that very assumption – that we already know erroneous, that they must automatically be improving
what our real problems are – runs directly counter to end-to-end performance, the complete flow of
the teachings of the originator of lean (a label he service from first contact to final solution, as well. As
would have rejected), Taiichi Ohno, the man who careful analysis shows, focusing on activity as cost
developed the Toyota production system. Ohno usually damages end-to-end performance from the
taught managers that their first and primary task is to customers’ point of view, with inevitable upward
study their systems, to identify and understand what impact on costs.
their real problems are. He taught that through
acting on the system – the way the work works – and Absorbing variety
Understanding demand leads to the recognition that
service organisations need to use people to absorb
variety. This is a direct and fundamental challenge to
factory designs that instead use IT to standardise it
John Seddon is a visiting professor at away – ‘dumbing down’ rather than ‘smartening up’
Derby and Hull Universities. He is also the – and which have become the norm. It is true that as
chief executive of Vanguard consulting. a result transaction costs may rise in customer-
[email protected] contact areas – but the total costs of service fall. The
www.systemsthinking.co.uk
lesson is that costs are in flow, not activity;
something that is also true in manufacturing. These

10 icaew.com/fmfac
 ‘ Understanding demand leads to the
recognition that service organisations need
to use people to absorb variety ’

designs put people in control of the work and change lean’s use, or rather abuse, as another device to sweat
radically the role of management, which is labour, about as far from Ohno’s philosophy as it is
henceforth to work on the system rather than possible to get.
manage the people. Toyota itself is not immune from falling short. Tom
To cite just one example: Owen Buckwell, the Johnson (2009)4 explained the company’s plunge into
leader of Portsmouth City Council’s housing repairs its first-ever losses after 50 years of outstanding
service, learned through studying his service as a financial results as a consequence of losing sight of
system, that focusing on the activity of their the fundamentals, a diagnosis confirmed by president
tradesmen actually drove costs up, a counterintuitive Akio Toyoda’s mea culpa to a US congressional
realisation. Moreover, working to standard times hearing. In our service organisations we have only
failed to reflect the variety in the work being done begun to learn about the fundamentals, the shift
(not all tap repairs, for example, are the same) and from management by the numbers to management
setting targets for jobs-per-man-per-day led to by means, as Johnson expresses it.
meeting the target, but not ensuring jobs were But just as Ohno learned in manufacturing, and
completed. Using knowledge gained by studying Buckwell learned in housing, a focus on relationships
demand – the type and frequency of repairs required (the system) in service organisations delivers levels of
by the properties – Owen and his team designed a performance improvement that most people
repairs service that now delivers repairs on the day wouldn’t dare dream of – something far beyond the
and at the time tenants want, and this revolutionary capacity of any toolkit to deliver, especially one that
design operates at half the original cost – a result on calls itself lean.
a par with Toyota’s original innovation. Ohno would
have been impressed; the management expert Gary
Hamel recognised Portsmouth’s innovation with an REFERENCES
award for establishing a true economic benchmark
(Hamel and LaBarre, 2010)2. 1 Seddon, J, 2003, ‘Freedom from Command and
Control: the Toyota System for service
Industrialisation organisations’. Vanguard Press, Productivity Press
Instead of changing it, lean unfortunately reinforces (2008).
management in its current paradigm. As such, it 2 Hamel G and LaBarre, P, 2010, ‘Dispatches From
represents the further industrialisation of service, with The Front Lines Of Innovation Management’
effects that can only be deleterious. Aside from the McKinsey Quarterly, November 2010.
costs of inefficient service delivery and unhappy 3 Stewart, P et al, 2009, ‘We sell our time no more:
customers, lean (like all mass-production Workers’ Struggles Against Lean Production in the
management) demoralises workers. Four years into its British Car Industry’. Pluto Press.
lean programme, and still experiencing serious 4 Johnson, T, ‘The Unnatural Environment’, Quality
performance problems, HMRC reports chronic low World, November 2009.
morale; while Stewart et al (2009)3 tell the sad tale of

FINANCE & MANAGEMENT SPECIAL REPORT September 2012 11

 LEAN ACCOUNTING

WHY – AND HOW – LEAN ACCOUNTING

WORKS
Accounting when your organisation adopts lean involves providing simple,
transparent, and meaningful information, as Frances Kennedy explains.

Organisations across industries and with varying

business models are adopting and implementing
customer-focused lean strategies. This type of strategy
transforms an organisation by pushing decisions
down within the business, standardising processes to ‘ The primary focus of a lean
build in efficiencies and quality, embracing a focus on
continuous improvement, and empowering the system is not on reducing the
employees. But such a change in delivery system
necessitates changes in support areas, such as cost per unit, but on creating
purchasing – and even accounting! and managing smooth, high
Why must accounting information change? quality and efficient processes ’
The goal of management accounting information is to
provide the necessary data and information for
decision-making. There are three key reasons why this
information must change in a lean environment.

1. The goals of the system have changed

The goal of a traditional system is increased efficiency
and lower cost per unit. Consequently, manufacturing 2. The organisational structure has changed
in larger batches is encouraged because this means Traditionally managed organisations are vertically
fewer changeovers and lower prices on material, structured with department managers responsible for
leading to lower costs. Yet batch processing does not decision-making and budget accountability.
consider the hidden costs of inventory movement, Accounting reports comparing actual spending with
storage, obsolescence and damage. Even service and pre-designed budgets have therefore been targeted
support areas process batches of reports, invoices, towards these managers. Lean organisations are more
etc. The real cost, however, is the lack of flexibility horizontal. Cross-functional value stream teams are
and the increased working capital that processing in now responsible for most operational decisions. A
large batches requires. value stream encompasses all resources and people
The primary focus of a lean system is not on involved in a process from beginning to end. One
reducing the cost per unit, but on creating and example of a value stream team would be an order
managing smooth, high quality, and efficient fulfilling value stream whose process is to produce
processes. The goal is to produce and deliver 100% and deliver current products to customers. This value
quality products and services, in a smooth flow and stream includes not only machine operators, but also
on time. This is done by focusing on constantly forklift drivers, setup personnel, purchasing agent,
improving processes and shortening lead times so and even an accountant. In other words, anyone and
that flexibility and capacity increase without large any resource directly involved in the planning,
capital investments. Working capital requirements production and movement of product. Another
decrease as the order to invoice time reduces. The example could be a new product development value
overall effect is improved cost efficiency. stream. In this case, team members would probably
include marketing, designers, computer-aided design
(CAD) engineers, process and mechanical engineers
and an accountant. It makes sense that accounting
information targets the value stream teams rather
than functional departments and managers that are
no longer relevant.

3. The timing of information needs has changed

Accounting is a transactional control system designed
Frances Kennedy is associate professor of
accounting at Clemson University, South to provide summaries of activities to managers so that
Carolina. She received the 2006 they can assess whether or not their areas were (over
International Federation of Accountants the given period) ‘in control’. In other words, variance
(IFAC) Award of Merit for her reporting in the form of departmental expense reports
distinguished contribution to the field of and profit and loss reports indicates whether their
finance and management. area met expectations as defined by the annual
[email protected] budget.

12 icaew.com/fmfac
 ‘ The lean accounting statement differs from
the traditional statement in content as well
as format ’

Reporting is reliant on accounting cycles and is, • who is going to use these statements (eg, value
therefore, monthly. By this time, the magnitude of the stream team, production and plant managers)?;
problem is usually large because it was not caught • what actions and decisions do these users make (eg,
and communicated right away. capacity usage, new products, improvements to
In a lean system, value stream teams need to know flow)?; and
right away when the process is ‘out of control’. Visual • what is the key information that informs those
management is a critical element of any lean system actions and decisions (eg, space and machine
because it alerts all users immediately to the status usage, value stream cost per unit, on-time delivery)?
and needs of the process – crucially, in time to make
corrections before more problems occur. Visual Answering these questions will help reveal the gaps in
management may take the form of lights signalling information you currently provide and identify
when a machine is down, a metric board where cell information currently reported that statement users
team members track the days’ production, on-time- do not find useful.
delivery and quality results, or even a well-placed Traditional accounting practices usually involve
computer monitor that allows employees to easily complex cost allocations that attempt to assign
track progress. (share) costs among products. The intent, of course, is
Visual management reduces time wasted looking for to estimate the amount of resources consumed during
information and the potential danger of not knowing the production of a product or completion of a
when a change needs to occur. service. This estimate becomes the basis of unit costs
For these three reasons – organisational structure, and cost summaries on periodic accounting reports.
decision authority, and timing – in order to become The problem with this method is that with each level
lean it is critical to address the accounting of aggregation – and each allocation – the cost
information currently provided in our organisations to actually becomes less accurate as these layers of
determine its relevancy. allocations mask actual costs and make it very difficult
to manage.
What is the essence of lean accounting? A related problem is that as decisions are pushed
The key to successful lean accounting is providing down to lower levels, there is less understanding of
simple, transparent and meaningful information for accounting information. People do not use
given recipients’ needs. information that they do not understand. Instead,
Financial accounting reports are prepared for they find other data sources that they do understand
external parties in accordance with regulations and and that they trust. It is essential that all users
their emphasis is on the past performance of the understand the information and, most importantly,
company as a whole. On the other hand, managerial know what drives that information.
and cost accounting information is designed to meet
the needs of internal users and, in a lean What does lean accounting look like?
environment, provides information by value stream as Once you have identified the users’ information
both a feedback mechanism and a planning tool for needs, the challenge is to design a report that
value stream teams. provides the data in a user-friendly manner. Figure 1
So the first step in designing meaningful and (on page 14) contains an example taken from a
relevant information is to focus on three questions: manufacturing company we will call ABT. The figure
compares a traditional profit and loss statement for a
manufacturing company with one that has been
restated in common language that is easy for
employees at many levels to understand. The lean
accounting statement is presented in a
‘ Visual management is a critical straightforward manner and uses ’plain English’ in
describing various costs.
element of any lean system The lean accounting statement differs from the
traditional statement in content as well as format. The
because it alerts all users key differences are as follows:
immediately to the status and • inventory changes are highlighted – when a
manufacturing company first implements lean
needs of the process ’ practices, efforts are made to reduce inventory
levels by tightening the reins on production and
selling out of finished goods inventory. As inventory
is depleted, product costs held as an asset until sold

FINANCE & MANAGEMENT SPECIAL REPORT September 2012 13

‘ The lean accounting statement is presented
in a straightforward manner and uses “plain
English” in describing various costs ’

are recognised on the profit and loss statement, Figure 2 (opposite) takes this simple reporting one
reducing operating income. In traditional reporting, step further and assigns costs directly to the value
a user cannot tell how much of the operating stream that consumes the resources. The ‘sustaining
income is due to inventory changes and how much costs’ column highlights resources within the facility
is due to current operations because the change is that do not directly support the flow of goods
hidden within the cost of goods sold (COGS) through a value stream. This column may include
section. Lean accounting highlights these changes unused equipment, certain staff or managers that do
and clearly separates the impact from operational not work on a specific value stream, and the cost to
performance; maintain space capacity.
• corporate allocations are separated – there are Separating these items triggers discussion on how
usually costs over which a local entity has no to use these resources more productively. Provided on
control, such as a corporate allocation. Such costs a weekly basis, the key benefit is that value stream
are typically allocated to product costs – again teams can see more quickly the impact of last week’s
masked in the COGS section. The lean accounting decisions and learn from them. (For guidance on
statements separate these costs so that a more getting started see the box right.)
accurate appraisal of operations can be attained;
• very few allocations are used – in this company, the Conclusion – a better use of the finance
only allocation used is for occupancy costs (eg, lease function
costs, utilities, taxes). Assignment of costs at the The primary change for the finance function is that
value stream level is based on actual usage; and many of the routine transactions are no longer
• no manufacturing variances are reported. A key lean needed. For example, if managers are not using
principle is to produce to customer orders rather labour variances, then there is no need to calculate
than produce to budget forecast and hold as those and provide detailed reports. Once consumed
inventory. When managers are held accountable for with routine transactions and reporting, many
manufacturing variances, the tendency is to accountants will now be able to provide more value-
produce inventory to reduce variances. This non- added analytical support. As reporting changes, so
lean behaviour is detrimental to proper inventory will the processes within the department. Some of the
management. changes in our example company, ABT, include 60%

Figure 1 COMPARISON OF TRADITIONAL AND LEAN ACCOUNTING P&L STATEMENTS FOR ABT

TRADITIONAL PROFIT AND LOSS STATEMENT LEAN ACCOUNTING STATEMENT

Sales $ 5,563,374 100% Sales $ 5,563,374 100%
Cost of goods sold at
standard 3,711,884 66.7% Material costs 1,731,189 31.1%
Gross profit 1,851,490 33.3% Employee costs 1,095,413 19.7%
Equipment-related costs 496,780 8.9%
Material variances 24,485 0.4% Occupancy costs 391,376 7.0%
Labour variances 31,380 0.6% Other value stream costs 411,403 7.4%
Overhead variances 64,527 1.2% Total operating costs 4,126,161 74.2%
Scrap 34,392 0.6%
Total variances 154,784 2.8% Profit from operations 1,437,213 25.8%

Gross operating margin 1,696,706 30.5% Inventory reduction (or

increase) 181,436 3.3%
Operating expenses Profit after inventory change 1,255,777 22.6%
Sales, general and
administration 96,006 1.7% Corporate allocation 84,874 1.5%
Distribution costs 429,797 7.7%
Total operating costs 525,803 9.5% Net operating income 1,170,903 21%

Net operating income 1,170,903 21%

14 icaew.com/fmfac
 ‘ Once consumed with routine transactions
and reporting, many accountants will now
be able to provide more value-added
analytical support ’

reduction in monthly closing times, elimination of TOP TIPS FOR LEAN ACCOUNTING
annual physical inventory and extensive labour
reporting.
But it isn’t just about what is eliminated or 1. Ask the statement users what decisions they
reduced. Time previously spent on the eliminated make, and what information they need for
tasks, in our ABT example, enabled the business to those decisions. How much detail do they
develop better support operations by reassigning need? Do they need supporting schedules?
finance people to each value stream. This not only 2. Design a user-friendly format. Keep it simple!
enabled the value stream teams to have better Remember that the core of lean accounting is
analytics for their decisions and drive improvement, providing the right information to the right
but it also increased job satisfaction for the finance users at the right time – in a transparent and
personnel themselves. easy to understand manner. Make sure all terms
are easy to understand.
This article was first published in Finance & 3. Select the frequency of reporting with the
Management, issue 188, May 2011. decision in mind. As a rule of thumb, the closer
the user is to operations, the more frequent the
decisions and the need for information (daily?
weekly?). Monthly reporting is more
appropriate for strategic decisions.
4. Choose a communication device appropriate
for the user and decision. Should it be on a
metric board for frequent checking by many
users? Or should it be in a report or
presentation for the staff meetings?
5. Ask the user again! Go back to the users and
see what is working and what needs
adjustment. Sometimes a small change can
make all the difference.

Figure 2 ABT’S LEAN ACCOUNTING STATEMENT BY VALUE STREAM

VALUE VALUE SUSTAINING TOTAL PLANT

STREAM 1 STREAM 2 COSTS

Sales $2,708,333 $2,855,041 $5,563,374

Material costs 1,040,000 691,189 1,731,189

Employee costs 190,667 393,575 $358,963 1,095,413
Equipment-related costs 156,000 357,682 496,780
Occupancy costs 120,022 234,826 36,528 391,376
Other value stream costs 296,942 114,461 411,403
Value stream profit 904,702 1,063,308 (395,491) 1,437,213
33% 46% 28%
Inventory reduction
(or increase) 181,436
Profit 1,255,777

Corporate allocation 84,874

Net operating income 1,170,903
Return on sales 21%

FINANCE & MANAGEMENT SPECIAL REPORT September 2012 15

 LEAN IN ACCOUNTING - 2

ACCOUNTING IN A LEAN ENVIRONMENT –

A PRACTICAL EXAMPLE
What does lean accounting look like? Jean Cunningham provides an insight into the
application of lean practices and techniques in one organisation.

If you know of lean accounting at all, you probably know layout has a section for each of these value streams. The
that it is very important for a manufacturing company’s consulting section consists of the revenue by type, and
successful lean transformation. Companies that create the associated variable costs related to travel and
inventory must have the right metrics and information to commissions. The non-variable salaries, benefits, and
support the lean transformation. With lean thinking, travel associated with consulting are also separately listed
inventory reduction is a natural outcome of reducing for this value stream. These are the money-making
batch size and using pull instead of push. Standard cost components of the business. Targets for revenue and
accounting obscures the lean benefits of inventory profit are now specific to this value stream.
reduction creating the catalyst for lean accounting. But Next, there is a section for marketing. The costs here
what if you do not produce inventory? What if you are a include the direct, specific spending categories
service company, a medical office, a personnel firm, a associated with generating new revenue. These include
clothing store, a consulting firm, etc? Does lean salaries, publication costs, websites, etc. This area also
accounting have any value to you? has a target that is related to ‘expected next year
The reason for switching to lean accounting is to be revenue’ so that they can continue to invest at an
able to provide the most needed, highest value appropriate affordable level for the future.
information in the shortest time about the activities of A similar section exists for administration as well as a
the firm to all functions. The core characteristics are that private section for ownership.
the information:
• is easy to understand; Benefits
• is in words that non-accountants understand; With these changes, the financial statements are now a
• separates variable costs and fixed costs; and useful tool to communicate the decision processes within
• is readily available. the company, and all company members know how
their piece fits within the total. Trade-offs are made as
CASE STUDY – the consultancy needed.
Let’s look at an example of a service company that If you are a student of lean thinking, you will see lean
provides a consulting service to a wide variety of clients. characteristics throughout this example. Respect for
It has a single location. In addition to the owners, the people was demonstrated by changing the language of
resources include employees who are paid a base salary the statements to make them easier to be understood by
and a commission based on individually generated the employees and owners, who are the customers of
revenue, and salaried employees who provide the statement. Reduction of time and waste was
administrative support. achieved in the production process of the statement, and
Traditionally this company used a standard financial also by reducing the time required for the reader to
statement that listed revenue and then the expenses by understand the statement. Batch size reduction was
type of expense. Expenses included salaries, overtime, instilled by separating the various value streams, which
benefits, rent, commissions, auto expenses, etc. The only required less time to evaluate the impact of business
targets were revenue growth and profit increase. Because changes on the various elements of the process.
the owners’ expenses were included in the company Most importantly, during the up and down business
expenses (appropriately), the owners were not cycles, the organisation can now recognise in advance
comfortable sharing financial information with the where resources need to be increased (or reduced), and
employees. the continuous improvement efforts to create capacity
and minimise waste can be recognised in the numbers
Reconfigured statements for each value stream.
After learning about lean accounting, the business This company has since doubled revenues and
reconfigured the statements to better align with the profitability has more than quadrupled. Additionally, it
value streams, which were consulting, marketing, has been possible to value the company appropriately,
administration and ownership. The new financial report allowing for new employee stockholders to invest and
create ownership expansion and continuity.

Conclusion
Jean Cunningham is principal of Jean
In summary, while it is never a good idea to run a
Cunningham Consulting. She is widely
company on the numbers alone, the numbers are an
recognised for her work in lean
accounting, IT, HR and other non- essential source of feedback about the success or barriers
production functions. experienced as a company continually works to enhance
[email protected] performance. And by deploying lean accounting, the
www.jeancunninghamconsulting.com value of the numbers is finally available to be effectively
utilised in decision making throughout the business.

16 icaew.com/fmfac
LEAN IN FINANCE

DEFINING THE BENEFITS FOR THE

FINANCE FUNCTION
Peter Coote and Stathis Gould discuss the usage of lean within finance including
planning tips, managing end-to-end processes and applying lean techniques.

‘How does lean thinking apply to finance?’ That was the 2. Who are the customers of this product or service?
question that we asked ourselves six years ago when Again, generally a lot easier to define for manufactured
preparing two previous articles1,2. Now, despite the goods. The customer is the person who buys that Ford
substantial potential benefits to both operational Focus or Sony television and they have a choice of
effectiveness and efficiency, we observe that the competing products. But for services it may be less
understanding of lean thinking, and its potential apparent and there may be multiple types of customer,
application to service-based industries, seems to be sometimes with a split between who pays and who
limited. consumes. Similarly for the finance function. For example,
Similarly, its adoption by finance professionals to monthly management accounts are typically consumed
improve the effectiveness and efficiency of finance by other finance colleagues, operational management,
processes does not appear to be widespread. We now ask corporate management, with the cost of their production
ourselves why that should be. often lost within the overall corporate cost of the finance
Here we suggest some answers and provide some function.
updated guidance on how you might apply lean thinking
within the financial management processes of the 3. What do these customers value in this product or
organisations within which you work. It is these individual service?
processes that you will need to focus on, rather than your For most manufactured products, as a result of market
finance function as a whole. research and other such tools, the manufacturers are very
clear on what aspects their customers value, and focus on
Lean thinking these and, in particular, the elements that influence them
Let’s start by looking into lean thinking to remind throughout the manufacturing process. For services in
ourselves of its fundamental concept – delivering general, and for finance in particular, the same degree of
customer value without waste – and some of the rigour has often not been developed, and is potentially
challenges that it initially requires us to overcome. There aggravated by multiple customers valuing different things
are three key questions to consider. within the same product or service. As the finance
function is traditionally supplier-led rather than demand-
1. What are you delivering? led with internal customers not having a choice of taking
This is generally easy and clear for manufactured goods – their business elsewhere, it may be that your finance
a Ford Focus, a Sony television, etc. But this can be less function has never regularly asked its customers what
clear for services, for example, what does a hospital they value.
deliver? Is it operations? Is it remedial care? Or all of these
and more? And what does finance deliver? ‘Too much’ If you wish to benefit from the application of lean
you may answer! Any application of lean thinking has to thinking to at least some of the products or services
start by being clear on the products or services that you within your finance function, the three questions above
are delivering, and those on which you will focus for will need to be answered first. Once you have selected a
improvement. We suggest you might start with a product product or service, you know who are its customers, you
or service that consumes a relatively high level of resource have engaged with them and know what they
to produce and is critical to your customers. An example individually and collectively value, then you are ready to
of this might be your management accounts. focus on ‘without waste’. For this you will need to
understand the stream of activities that produce this
product or service – the value stream.

The value stream

Peter Coote is a former change The stream of activities that combine to produce a
programme director at Ford Motor manufactured good can be relatively easy to see and
Company and is now a partner at follow in a ‘gemba’ or ‘value-stream’ walk. In addition to
management consultants Crawford Joyce the production line of the recognised manufacturer, for
Consulting. example at Ford’s Saarlouis plant producing the Ford
[email protected] Focus, this stream will include the activities completed at
component suppliers and may also include activities
within the distribution network. The mapping and
Stathis Gould works at the International
Federation of Accountants, managing its understanding of these activities, the resources they
technical program supporting professional consume and how they interact with each other, is the
accountants in business. foundation of any lean improvement programme.
[email protected] Which of these activities create value for the customer,
and which consume resources without creating value?

FINANCE & MANAGEMENT SPECIAL REPORT September 2012 17

‘ For finance there is the challenge of
defining the value stream of a product or
service so that they fully encompass the
activities that influence it ’

Success in manufacturing industries has been based on the value stream(s) of one or more product or service,
helping the participants in the value stream know the you should expect to be faced with some challenges to
answer to these questions and helping them do the values and beliefs in the organisation. In their book
something about it. that gave birth to lean, The Machine that Changed the
In one of his periodic e-letters, Jim Womack, one of the World, Womack, Jones and Roos wrote the following:
architects of lean thinking wrote: ‘Recently I’ve been ‘When we visited the high quality but low productivity
spending most of my gemba time walking through value- European plant that we just mentioned, we didn’t have to
creating processes in organisations far away from go far to find the basic problem: a widespread conviction
manufacturing. And the further away I get – for example, among managers and workers that they were craftsmen.
all the way to healthcare – the more I find myself asking, At the end of the assembly line was an enormous rework
“Who designed this wasteful, incapable, unavailable, and rectification area where armies of technicians in white
inadequate, inflexible, uneven, and disconnected value laboratory jackets laboured to bring the finished vehicles
stream in the first place? And who is responsible for its up to the company’s fabled quality standard. We found
performance now?” The answer in most cases is that that a third of the total effort involved in assembly
usual suspect, no one.’ occurred in this area. In other words, the German plant
Womack goes on to argue that a key part of the was expending more effort to fix the problems it had just
solution to this muddle is the creation of a role that he created than the Japanese plant required to make a nearly
calls the ‘value stream architect’ responsible for perfect car the first time. We politely enquired of these
fundamentally re-thinking an existing value stream to white-smocked workers exactly what they were doing.
create a lean value-creating process. In our experience, “We’re the craftsmen, proof of our company’s dedication
the creation and staffing of this role, initially to map and to quality,” they replied.’
understand the current muddle and then to guide this re- In our view, the above paragraph encapsulates the
thinking, is essential. difference in beliefs between the employees in a
However, as many organisations have discovered, on its manufacturer using a mixture of mass and craft
own, it is insufficient. It needs to be accompanied by a production, and one focused on lean production.
greater level of process awareness, process thinking, and Overcoming it has been one of the major challenges in
process ownership across the participating activities and implementing lean in manufacturing. As you look around
their leadership. your own finance function, ask yourself ‘Where are our
Just as value stream management in manufacturing has workers with white jackets?’ and ‘How do we need to
extended out of the assembly plant to include the change to eliminate the need for them?’ You can expect
upstream and downstream activities, for finance there is this to challenge values and beliefs in your organisation,
the challenge of defining the value stream of a product or as people come to realise that activities that they have
service so that they fully encompass the activities that worked so hard on over the years are not necessarily
influence it. For example, a management accounting those that add value for the customer, and can be
team might initially think the value stream of the monthly eliminated by changing the underlying processing of the
management accounts starts with the postings into the value stream.
general ledger. The number of roles that finance is expected to
However, they may come to realise that this is too perform, the number of tasks in each of these roles, and
narrowly defined and excludes activities and colleagues the number of different customers requesting these
that critically influence these postings, for example not seems to be increasing inexorably. Wrestling between
only the codification and processing of transactions in apparently conflicting and overwhelming priorities has
operating subsidiaries but also the operational drivers of become a key challenge for any FD and their leadership
these transactions. They would find greater improvement team.
opportunities and challenges in a value stream of Any lean improvement programme will add to this list
‘transact to management reporting’, engaging and of priorities. It will require you to actively engage with
involving all of those who contribute toward the creation your customers, to better understand their needs, what
of customer value derived from that reporting, whether in adds value for them and what does not, what you can
finance or operations. stop, and what you need to focus on. It is definitely not a
Frances Kennedy’s article earlier in this report ‘Why – ‘programme of the month’. It is a lifestyle change that,
and how – lean accounting works (page 12) provides done well, will yield progressive benefits over a number of
some good examples of this value stream approach in years of continuous improvement, freeing up resources
practice. from wasteful activities to either be re-invested in more
valued activities or saved. It will require building the levels
Values and beliefs of trust across your whole team to help make activities
Once you have completed these initial steps in transparent and to encourage improvement without fear.
establishing a ‘lean improvement programme’ focused on You will need to invest in the development of additional

18 icaew.com/fmfac
 ‘ Outsourcing may become part of your
improvement plans, but only after you
understand the value streams and how to
make ongoing improvements to them ’

capabilities in your team such as change and project organisations increase, expectations of the finance team
management, value stream/process mapping. are increasing’;
Outsourcing may become part of your improvement • ‘you need to improve the information, advice and
plans, but only after you understand the value streams guidance provided to us to enable us to plan and
and how to make ongoing improvements to them. manage our business’; and
Similarly, the implementation of new IT systems might be • ‘we need to make a quantum change in our efficiency
part of your improvements, but only when driven from a across the centre, groups and partner organisations’.
full understanding of how they can add incremental value
and eliminate waste. Recognising that this would require substantial change
across finance in both BIS and its partner organisations,
CASE STUDY – BIS they formed a ‘finance executive’ (FE) to drive their
It is upon just such a journey that the Department for vision of ‘One Finance Family’. Based on their
Business, Innovation and Skills (BIS) has recently customers’ needs, they established a shared set of goals
embarked. to guide them, focussing on both the key value streams
BIS is a major government department focused on of the department and finance’s internal capabilities to
delivering growth for the UK, working with 42 diverse service these. Each goal is being championed by a
partner organisations (subsidiaries), such as the Student member of the FE, with blueprints established showing
Loans Company and the Insolvency Service, to achieve the key characteristics, key achievements and where
its objectives. Faced with the need to improve next.
substantially the service provided by finance across These together form an integrated programme of
both BIS and its partner organisations, at the same time work consisting of a series of existing and planned
as achieving a 25% reduction in programme costs, BIS’s projects involving staff across BIS and its partner
FD David Allen initiated their ‘Finance for the Future’ organisations. An example of one of these is the ‘clear
programme. line of sight’ programme. Initially instigated by the
In common with many finance functions in both the Treasury to improve statutory reporting across
private and public sectors, the mindset of the finance government departments, this has been embraced and
colleagues in both BIS and its partner organisations extended by BIS to align and improve both planning
tended to focus more on the activities they performed, and management reporting across BIS and its partner
rather than their customers and the value they provided organisations, to provide senior leaders with clear and
to them. Allen and his fellow FDs in some of the key consistent objectives and a shared and consistent set of
partner organisations therefore started by considering the performance information.
services that they provided focusing particularly on: This has required the detailed mapping, analysis, and
• business planning; progressive improvement of the planning and reporting
• advice, guidance and decision support; value stream. It is enabling transformational change in a
• governance and control; and way that Allen describes as a ‘sticky arrow’, providing
• accounting and reporting. both specific benefits while creating a unifying force and
momentum for change.
They actively engaged with a cross-section of their key
customers across all organisations to understand what
they valued about these services, and the areas of greatest
opportunity for improvement from their customers’ REFERENCES
perspective. They received some strong messages from
their customers including: 1 Coote, P and Gould S, ‘Lean Management’, Financial
• ‘we feel too reliant on a few key team members and are Management, March 2006. pp31,32 & 34.
looking for finance to up-skill and expand your creative 2 Coote, P and Gould S, ‘Lean Management’, Financial
capabilities’; Management, September 2006. pp25 & 26.
• ‘as spending controls tighten and demands for These articles are available in the ICAEW Library – see page 20
transparency across our network of partner

FINANCE & MANAGEMENT SPECIAL REPORT September 2012 19

 APPENDIX 1 – FURTHER READING

BOOKS, JOURNAL ARTICLES AND

MORE...
The ICAEW Library and Information Service offers further resources on lean thinking
and related subjects. The selection below is available to ICAEW members – for further
information, see icaew.com/library.

Articles in the library collection • Lean solutions: how companies and customers can create
• ‘The lean vs standard cost accounting conundrum’ value and wealth together
by J Cunningham, Finance and Management, No. 200. by J Womack, Simon & Schuster, 2005, 355pp
June 2012. pp.14-17. ISBN: 0743275950
• ‘Unleashing lean's potential one behavior at a time’ by • What is lean six sigma?
D Searcy, Strategic Finance, Vol. 93 No.7, January 2012. by M George, McGraw-Hill, 2004, 92pp
pp.40-45. ISBN: 9780071426688
• ‘Productivity improvement’ by B Plowman, Financial • Performance management- finding the missing pieces (to
Management, October 2010. pp.29-30. close the intelligence gap)
• ‘Why, and how, lean accounting works’ by F Kennedy, by G Cokins, Wiley, 2004, 284pp
Finance and Management, No.188. May 2011. pp.6-9. ISBN: 0471576905
• ‘Understanding lean six sigma’ by P Chan, Finance and • Lean thinking: banish waste and create wealth in your
Management, No.177. May 2010. pp.20-21. corporation
• ‘Developing a lean performance score’ by D Searcy, by J Womack, Free Press, 2003, 396pp
Strategic Finance, Vol.91 No.3, September 2009. pp.34- ISBN: 0743249275
39.
• ‘Elegantly wasted’ by Z Roberts, People Management, eBooks
Vol.14. No.13. 7 August 2008. pp.28-29. The library provides full text access to a selection of key
• ‘Lean thinking in healthcare’ by D Westcott, Accounting business and reference eBooks from leading publishers.
and Business, Vol.10. No.6. June 2007. pp.31-33. • Leading corporate turnaround: how leaders fix troubled
• ‘Lean times’ by I Lawrence, Taxation, Vol.159. companies
No.4089. 4 January 2007. pp.8-10. by S Slater, Wiley, 2006
• ‘Fix the process, not the people’ by R Cveykus,
Strategic Finance, Vol.88. No.1. July 2006. pp.27-33. Selection of online reports and articles
• ‘Trim figures’ by J Morris, Financial Management, The library provides access to a huge range of articles in
November 2004. pp.34-36 full text from leading finance and management journals.
• ‘Tesco's revolutionary new "lean" regime’ by A • ‘Lean knowledge work’ by B Staats, Harvard Business
Mitchell, Finance and Management, No.90. August Review, Vol.89. No.10. October 2011. pp.100-110.
2002. p.9. • ‘Proper lean accounting: eliminating waste isn't enough;
• ‘Slim pickings’ by J Darlington, Financial Management, you have to reduce inputs to save money’ by R Yu-Lee,
June 2002. pp.26-27. Industrial Engineer (IE) Oct 2011, Vol. 43 Issue 10, pp.
39-43
Books in the library collection • ‘People driven productivity lean for small businesses’ by
• The Toyota way to continuous improvement: linking H Van Landeghem, Management Services, Spring 2011,
strategy and operational excellence to achieve superior Vol. 55, Issue 1, pp.13-18
performance • Lean and fit: improving frontline service in an age of
by J Liker, McGraw-Hill Professional, 2011, 448pp austerity, Deloitte, 2010, 16pp
ISBN: 9780071477468 Available electronically at: www.deloitte.com/view/
• IT audit control and security en_GB/uk/index.htm (search for Lean and fit)
ICAEW members
by R Moeller, Wiley, 2010, 667pp • ‘Get results: improve your accounting firm processes
can obtain all these
ISBN: 9780471406761 (contains sections on Six Sigma using Lean Six Sigma’ by D Hostetler, Journal of
books and articles
from the Library & and lean technologies) Accountancy, Jan 2010, Vol. 209 Issue 1, pp. 38-42
Information • Lean accounting: best practices for sustainable integration • ‘Unleash the power of lean accounting’ by J Brosnahan,
Service. Books can by J Stenzel, Wiley, 2007, 309pp Journal of Accountancy Jul 2008, Vol. 206 Issue 1, pp.
be posted out free ISBN: 9780470087282 60-66
of charge. eBooks • Achieving transformational change: reform, efficiency and ‘• Lean accounting’ by R Maynard, Financial Management,
and certain journal lean thinking in the NHS: a comprehensive guide to Mar 2008, pp.44-46
articles can be success CIPFA, 2007, 178pp • ‘Why do we need lean accounting and how does it
viewed online. ISBN: 9781845081317 work?’ by B Maskell, Journal of Corporate Accounting &
Journal articles can
• Six Sigma for financial services: how leading companies are Finance, Mar/Apr 2007, Vol. 18 Issue 3, pp.59-73
be supplied for a
driving results using Lean, Six Sigma and Process • ‘The lowdown on lean accounting’ by A van der
small charge when
not available to Management Merwe, Strategic Finance, Feb 2007, Vol. 88 Issue 8, pp.
members online. by McGraw-Hill, 2006, 248pp 26-33
Contact the Library ISBN: 9780071470377 • ‘Lean what’s it all about? Accounting’ by F Kennedy,
on +44 (0)20 7920 • Operations management for MBAs Strategic Finance; Nov 2005, Vol. 87 Issue 5, pp.26-34
8620 or by J Meredith, Wiley, 2006, 445pp • ‘Cost accounting undercuts lean’ by G Taninecz,
[email protected] ISBN: 0471351423 Industry Week, Oct 2002, Vol. 251 Issue 9, p73

20 icaew.com/fmfac
APPENDIX 2 – GLOSSARY

A GLOSSARY OF SELECTED
LEAN TERMS
The following definitions apply to concepts referred to in this special report – all based
on lean thinking, whether derived from Japanese management terms or from Western
business practice. We also show the page numbers where these terms are discussed.

5S (seiri, seiton, seiso, seiketsu, shitsuke) – Muda – any activity that consumes resources without
A workplace organisation method that uses a list of five creating value for the customer. There are type one
Japanese words meaning ‘sort, straighten, shine, muda, consisting of activities that cannot be eliminated
standardise, sustain’. The list describes how to organise a immediately, and type two muda, consisting of
work space for efficiency and effectiveness by identifying activities that can be eliminated quickly through kaizen.
and storing the items used, maintaining the area and – Mura – unevenness in an operation; for example, a
items, and sustaining the new order. gyrating schedule not caused by end-consumer
See page 8 demand but rather by the production system.
– Muri – overburdening equipment or operators by
A3 problem solving requiring them to run at a higher or harder pace with
A structured problem-solving and continuous more force and effort for longer than equipment
improvement approach using an A3 size template. This designs and appropriate workforce management allow.
frames the dialogue between the manager and the See page 4
superior, and ensures that no step is missed.
See page 2, 5 Six sigma
A quality standard of just 3.4 defects per one million
Failure demand opportunities; 99.9996% perfect. Six sigma
Demand caused by a failure to do something or do methodologies emphasise mathematical and statistical
something right for the customer. tools to improve the quality of processes that are already
See pages 4, 6, 8, 10 under control. Application follows a five-step process of
define, measure, analyse, improve, and control.
Gemba See pages 4, 7, 8
The ‘actual place’, often used for the shop floor or any
place where value-creating work actually occurs. Suppliers, inputs, process, outputs, and customers
See pages 5, 6, 17, 18 (SIPOC)
A tool which summarises the inputs and outputs of one
Kaizen or more processes in table form.
Continuous improvement of an entire value stream or an See page 7
individual process to create more value with less waste.
See pages 5, 7, 8 Toyota production system (TPS)
The production system developed by Toyota Motor
Kanban Corporation to provide best quality, lowest cost, and
'Sign' or 'signboard'. A signaling device that gives shortest lead time through the elimination of waste. TPS
authorisation and instructions for the production or is comprised of two pillars, just-in-time and jidoka
withdrawal (conveyance) of items in a pull system. (providing machines and operators with the ability to
Kanban cards are the best-known and most common detect when an abnormal condition has occurred).
example of these signals. They are often slips of card See pages 6, 10
stock, sometimes protected in clear vinyl envelopes,
stating information such as part name, part number, Training within industry (TWI)
external supplier etc. A set of skills aimed at front-line managers which was
See page 9 developed in the US during World War II and became a
foundation of the Toyota system.
Kata See pages 2, 5
The embedding of what is required by repetition.
See page 5 Value demand
What customers are trying to obtain from the business. The definitions
Leader standard work (LSW) See page 6 shown here are
The idea that leaders at all levels must do regular principally derived
activities. This is combined with visual management, Value stream from Lean Lexicon,
where results, problems and opportunities are shown on The flow of work that creates the value for which published by the
a board at the gemba. customers are paying. Lean Enterprise
Institute ($15.00,
See page 5 See pages 2, 5, 12, 16, 17
available from
www.lean.org).
Muda, mura, muri Voice of the customer (VoC) Other definitions
Three terms often used together in the Toyota production A method of interpreting what customers say they want are supplied by
system (and called ‘the three Ms’) that collectively into process requirements and measures. authors or other
describe wasteful practices to be eliminated. See page 8 sources.

FINANCE & MANAGEMENT SPECIAL REPORT September 2012 21

TECPLM10915