Book Review: Practical Lean Accounting

Mike Negami – my Lean Six Sigma friend – tweeted on the phone conversation that Toyota’s Kaizen can be applied to accounting system. His mutter made me remember a bad memory in past. The bad memory came from “Lean Accounting” class I taught in a training, and I referred to this book in the class. The feedback from students were no so good. I didn’t talked about my bad memory to Mike, but instead, I am going to write it in this book review.

I was a member of core team for creating Lean Silver Certification Program in a company, and we were discussing the curriculum in the training course.

When we created Lean Bronze Certification Program, we focused on the Lean tools and techniques. But for the Lean Silver Certification Program, we were going to focus on the Lean principles for achieving organization goals. Because of it, I argued that a Lean Silver certified person must have the knowledge of accounting system, and the Lean Silver curriculum must have Lean Accounting class.

It is no surprise that many Lean and Six Sigma practitioners are untrained in accounting. Their knowledge in accounting system is very limited. The core team members were also the same, and just allowed me to add the Lean Accounting class in the training course. And I used this book as a primary reference to my Lean Accounting class and the teaching material.

Summary of book from back cover

Practical Lean Accounting:
A Proven System for Measuring and Managing the Lean Enterprise

  • By Brian Maskell, Bruce Baggaley, Larry Grasso
  • ISBN-13: 978-1439817162
  • ISBN-10: 9781439817162
Practical Lean Accounting

“This book makes a huge contribution toward understanding how to measure and manage a Lean enterprise. The addition of many new case studies and examples after each chapter, and more tools and practical information on the accompanying CD….”

My individualistic book review

This book was really useful, and I was able to understand that how Lean Kaizen activities improve Cash-flow and inventory turnover rate through calculations in the accounting system. The book also made me understand why many Lean Kaizen activities got terminated because of lack of understanding the Lean accounting.

I created the teaching material based on this book, and started my class with the following statements:

  • The Lean Kaizen activities do not reduce the total manufacturing cost
  • Because of that, the Lean Kaizen activities easily get terminated
  • Instead, many companies the reduce labor costs to reduce the total manufacturing cost
  • Reducing the labor cost is not the purpose of the Lean Kaizen activities
  • Increasing the Cash-flow is the purpose of the Lean Kaizen activities

But, before I emphasized that “the ultimate goal of the Lean Kaizen activities is the investments for future growth with strengthening the financial standings”, the students in my class strongly complained that “it doesn’t make sense the Lean Kaizen activates don’t reduce the total manufacturing cost”.

Because of the complaint, I tried to explain the mechanism of the accounting system with the following slide.

Traditional Accounting

This calculation is using GAAP (Generally Accepted Accounting Principles) and may be different from a calculation in your country. But the main point in the calculation is that the total manufacturing cost is the remainder of subtracting the total remained cost from the total incurred cost.

The students seemed to understand the slide. But a big complaint came in the next slide.

Traditional Accounting and Lean Kaizen Event

A plant manager for an example heard that the Lean Kaizen is pretty good. So he executed a big Kaizen Event in his plant (in the first quarter). Then all employees improved the manufacturing processes by reducing batch sizes, in-process inventories, and material losses. As the result:

  • The used total raw materials was reduced
  • The ending raw material inventory was reduced

But the total manufacturing costs increased because the calculation in accounting system was unchanged.

The cash-flow was increased by the Lean Kaizen event, however, the plant manager didn’t care much about the cash-flow because his goal was to reduce the total manufacturing costs.

When the plant manager got the result of the first quarter from the accounting department, and came to know that the total manufacturing costs was actually increased, he could rage at the result, and asked “What did they do in the Kaizen events?”

Not only the plant manager, but the students in my class also raged and said that it doesn’t make sense that the Lean Kaizen increases the total manufacturing cost. So I explained again and again that this is the calculation what the accounting system does for the total manufacturing cost. It is different from the cash-flow calculation. But they didn’t understand.

The next slide made their rage even worse.

Traditional Accounting and Continuous Improvement

The employees calmed the plant manger’s anger, and kept the Lean Kaizen activities (from the second quarter to the fourth quarter). They implemented Just-in-Time, Kanban Pull System, and One-Piece-Flow. Then they reduced all raw material inventories (i.e., beginning, In-process, and Ending). The cash-flow increased even more. The financial standings became stronger. And the CEO of the company became happier too.

The plant manage raged again because the total manufacturing costs was actually increased more and more. He didn’t care about the cash-flow, but the total manufacturing costs. The raged plant manager finally quit the Lean Kaizen activities.

The only way to reduce the total manufacturing costs is to reduce the labor costs (both indirect and overhead). So the raged plant manager laid off the Lean Kaizen team members as well as other employees.

This is not a fiction, but a real story.

The students in my class were the same. They raged and said that why they needed to get laid off after the Lean Kaizen efforts.

I explained again and again the way of accounting system, and we could not change the accounting system because of the governed guidelines by laws.

I emphasized that the Lean Company must understand the accounting system, increasing cash-flow, and investment the cash for future growth. Then I encouraged them to understand the accounting system because they become the leader in Lean. But they didn’t understand how the Lean Kaizen makes a positive and a negative effects on accounting.

My “Lean Accounting” class had a bad reputation and quit. Then it became my bad memory.

The Lean and Six Sigma practitioners tend to focus on tools and techniques. But the practitioners must understand the ultimate goal in Lean and Six Sigma. Otherwise they would become like the plant manager. This is what I learned from the book.