Education & Workforce Development and Manufacturing & Technology

Lean manufacturers take stock of accounting innovation: Fishers company optimistic movement will gain favor

August 28, 2006

The leanest aspect of lean manufacturing is moving from the shop floor to the accounting office, where a new recordkeeping system is gaining a following.

Proponents of so-called lean accounting say it's better than traditional accounting at measuring the cost savings and efficiencies of lean manufacturing, a business-improvement strategy that shortens the time between customer order and shipment.

Instead of simply looking at inventory levels and sales numbers as traditional accounting does, lean accounting measures things such as worker productivity and a manufacturer's capacity.

One area company, Fishers-based Flexware Innovation Inc., is so optimistic about the promise of the new accounting method that it has spun off a consulting and education company focused solely on the practice.

The education unit, Fishers-based Lean Accounting Summit LLC, will hold its second national conference Sept. 21-22 in Orlando, Fla. LAS officials expect to double the number of attendees at the first summit in Dearborn, Mich., last year.

"We expect about 650 to 700 CFOs, vice presidents of finance and other financial executives from manufacturers worldwide," said Jim Huntzinger, LAS president. "Officials from companies such as LaZBoy, Cessna Aircraft, Boeing and others have already committed."

LAS officials are considering expanding to more than one annual U.S. summit and are also looking at European markets.

Lean accounting is a replacement for traditional cost accounting, said Brian Maskell, a New Jersey-based manufacturing consultant and author of several books on lean accounting.

"Serious lean has to change the culture of the company, from the shop floor to the front office," Maskell said.

Some accountants said lean accounting can make required filings for public companies more challenging, but Maskell, who is also a certified public accountant, disagrees.

"With lean accounting, we're dealing with actual, real-time costs," Maskell said. "That makes public filing easier."

The practice of lean manufacturing has grown tremendously in the last decade. State and Purdue University manufacturing experts said the number of central Indiana manufacturers practicing some form of lean manufacturing has grown from fewer than 50 in 2001 to about 2,500 of the 5,000 manufacturers in the region. But lean accounting is in its infancy.

While awareness is growing, few are using it, said Huntzinger, who has a master's degree in engineering management and has worked in several manufacturing companies practicing lean manufacturing.

"Manufacturers are still trying to get their arms around what this means," Huntzinger said. "Lean accounting is completely different from what is being taught in business schools and MBA programs, so we have to educate people."

Lean manufacturing bases production on customer demand rather than sales forecasts. Some say the concept was developed inside Toyota Motor Corp. Others contend Henry Ford invented the process while making Model T's, but abandoned it for mass production when consumers demanded too many variations.

Toyota officials are credited with perfecting and popularizing the technique, which is now rolling through the United States like a widget through an assembly line. And many Japanese companies have been able to do something with lean manufacturing Ford never could-make it work with varying product lines.

Manufacturing experts said lean manufacturing can lead to a 25-percent reduction in expenses and can cut production time in half. But it also reduces inventory, which can cause problems.

"A line of credit can often be based on a manufacturer's percentage of inventory and percentage of receivables," said Scott Brown, partner in the manufacturing and distribution practice in the local office of accounting firm Katz Sapper & Miller. "So you can see where there would be a disconnect.

"Traditional standard cost financial statements were designed to support the process of mass production. As a result, the use of traditional accounting often conflicts with the concepts and goals of lean manufacturing."
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