The No. 1 enemy of good management in American manufacturing is the widespread assumption that management accounting systems are needed to control and evaluate operations on the shop floor.
In fact, the current wave of interest in “lean” manufacturing has attracted a large following of accountants who are promoting what is called “lean accounting.” Not all of what they advocate is bad, but much of it resurrects old ideas about management accounting that, if carried too far, will impair sound operations.
There are a number of ways to identify and judge a truly lean operation. Lean is about viewing operations in the present moment, not with delay, and in a specific, concrete place, not in an abstract context removed from the site of the actual work.
In contrast to this, American managers customarily “see” operations after the fact, through abstract financial or quantitative data in computer reports and quantitative analyses. This propensity may go a long way toward explaining why American businesses have had so little success in adopting and implementing lean practices. They deal with the world in abstract terms rather than in the more concrete terms required to conduct lean operations.
Average unit cost, for example, is an abstraction, far removed from the reality of the operation. American organizations will drive operations managers to pursue average unit costs by evaluating departments with standard cost variances.
Producing more and more output to reduce average unit costs is a time-honored pathway to excess, delay and abnormal variation – prime drivers of higher total cost.
To focus on costs and on the concrete reality at hand, you must look at total cost, not unit cost. This is one of the most distinct differences between a Toyota plant and plants run by American companies.
The difference is that chasing average unit costs invites employees to focus on output, whereas pursuing low total cost, as Toyota does, invites attention to consumption of resources.
Toyota’s approach to managing total cost focuses on the unit of output in each workstation at every moment, whereas the American companies’ focus on average unit cost shifts attention to an abstraction far above the local workstation or cell level where the resources that cause cost are consumed.
Viewing total cost as including resources consumed in each and every moment, in each and every step, as Toyota's system does – one order at a time – leads to lower total costs, higher quality, lower lead times and greater flexibility.
On a traditional batch-and-queue shop floor, external systems for production control and management accounting control are standard fare. Managers are using standard-cost budget variances to motivate behavior they hope will achieve financial targets.
Such external control systems disappear when a company conducts customer-pull, continuous-flow operations as seen in a Toyota plant. In the continuous-flow setting, controls are inherent in the work itself.
For production control, the customer pull sets the schedule in the Toyota plant, and standardized connections and pathways among workers and machines provide all the necessary routing information.
Cost control is maintained by adhering to standardized work and immediately reporting and rectifying abnormalities whenever and wherever they occur. Deviations from expected cost will be visible to people on the Toyota floor long before accounting evidence can signal such a development.
However, American managers seem to feel a need for external cost and financial controls more strongly than they feel the need for production controls.
This difference in attitude between production and financial control systems is perhaps understandable, because the production controls American accountants see in a Toyota plant, achieved by customer-pull scheduling and kanban replenishment, are concrete, immediate and visible. They understand and accept that a Toyota plant operates without an MRP system to release work to the floor and route it through the relevant processes. They readily see how internal features of the work process itself replace any need for external computer scheduling.
But, they find it much more difficult to see the internal features of the work that enable a Toyota plant to control cost without any need for external financial controls. Toyota achieves that cost control, of course, by the way they design work processes, so every employee at every moment sees exactly what must be done to complete just one order at a time.
In the traditional American setting, managers strive to achieve the best overall results by running all parts of the system efficiently, without regard to the connections between one part of the system and another. This means the American plant will stress or sacrifice parts of the whole to achieve financial targets.
The lean plant strives to operate every part as a balanced and integrated whole. This holistic approach is the difference between seeing the whole as a mechanistic sum of parts and seeing the whole as an emergent feature of relationships among a living system of parts.
These two approaches to conducting operations differ greatly in how they manage abnormalities, errors or defects. In traditional operations, an error is the fault of an individual person or machine, which is detected by inspecting work after it is done, and away from where and when it was done.
In lean operations, by contrast, an abnormality is immediately visible as soon as it occurs and where it occurs. Having people see and remedy abnormality promptly is an expected part of work in the lean setting. Moreover, an abnormality is not seen as an individual’s fault. Rather, it occurs because of a breakdown in the pattern of relationships inherent in the work. The problem lies in the system, not with the person.
This list of ways to see lean, and know you are seeing it, is not exhaustive, but it shows that a person can identify and judge operations to be truly lean without using quantitative metrics. The attributes of a manufacturing organization’s operations identified here provide a more powerful lens than any available table of metrics to see whether they follow the principles of the Toyota system.
About the author:
H. Thomas Johnson is a professor of Business Administration at Portland State University in Portland, Ore.
