Lean management: the term is usually applied to the production line, but the finance function would benefit from getting a bit leaner, too.
James Womack, Daniel Jones and Daniel Roos first used the term in their 1990 book The Machine That Changed The World, describing the fundamentals of the Toyota production system as "lean production". Womack and Jones went on to broaden its application in their 1996 book Lean Thinking and last year's Lean Solutions. Like many other cliched management techniques, it has come to mean different things to different people. Some associate it with efficiency and low costs, but this is a narrow view. Yes, being lean is about efficiency, but it's also about effectiveness--the effectiveness of an enterprise in delivering value to its customers. "Delivering customer value without waste" is our definition of leanness. Let's dissect this phrase to see how it might help you to improve both the effectiveness and the efficiency of your organisation.
The Toyota production system is all about delivering a particular product: a car. As lean thinking extends its scope, the products and services to which it applies expand--eg, buildings, healthcare, supermarket stock-keeping units etc. The finance function has a range of products. Our future rests on what these are, how we deliver them and which channels we develop and adopt. Typically, they will include three core groups--transaction processing, risk management and decision support--with a range of products in each.
Without the customer there is only cost. For most physical products the customer is the person who parts with their earnings to acquire ownership of that product. Finance's customers vary depending on the product, but with some significant ambiguities:
* Transaction processing. The customer is usually the department that owns the physical transaction that finance is evaluating and processing. For example, the sales team is typically the customer for invoicing. As we move increasingly to shared-service organisations, the customer will be the business unit that contracts and pays for these services. Where these are provided by internal resources and process ownership might be less clear, the customer and their relationship with the supplier can become more ambiguous.
* Risk management. For audit services our customer is typically the board, which allocates resources accordingly. For inspection and corrective action recommendation this generally works well. But, for the increasing range of preventive work that we're required to do, things can become less clear. For example, is operational management a customer or supplier?
* Decision support. At local level it can be clear who the customer is. The plant manager is the customer of a particular piece of cost analysis developed by the plant controller to help the plant management team make decisions, for instance. But it quickly becomes more complex. For example, the customers of the financial forecast of a typical multinational, multi-operational company are the board, the corporate management team and the operational management team.
In Lean Solutions, Womack and Jones set out six simple principles of lean consumption that provide a definition of value for today's consumer:
* Solve my problem completely.
* Don't waste my time.
* Provide exactly what I want.
* Deliver value where I want it.
* Deliver value when I want it.
* Reduce the number of decisions I must make to solve my problems.
Since we're all customers of a wide variety of products and services, we can probably all relate to these and have our own views of how different suppliers meet these expectations. They provide a useful structure by which to gauge how well a business delivers value. They can also be used to assess how well its finance function delivers value.
Consider the example of a medium-sized manufacturing firm whose MD we will call Jim. He's the customer and he has decided to allocate a certain portion of his operating expense budget to the finance department to provide transactional and financial accounting services. His needs are as follows:
* Solve my problem completely. Jim expects the transactional accounting just to happen, tightly coupled with the associated physical processes. He doesn't understand how orders and invoices can become disconnected.
* Don't waste my time. Jim wants to focus all of his efforts on driving the business and satisfying its customers. He resents any failure in the accounting services that distracts him or the rest of his team from this.
* Provide exactly what I want. While he can understand financial statements, Jim likes to see the figures in a particular format with the related physical information, so that he can understand their relationship better.
* Deliver value where I want it. Jim is IT-literate. The other directors are not. He wants the latest information on his laptop PC and handheld device. They want the paper reports they've always had.
* Deliver value when I want it. Jim does not understand why he has to wait until after the end of the month to see the financial effects of action taken in that month. He wants to see them as they occur.
* Reduce the number of decisions I must make to solve my problems. Jim isn't an accountant and doesn't expect to be asked specialist questions to solve his operational problems.
Does this sound familiar? This is only a simple example, but it shows how we in finance must understand our customers' needs and how well we meet them.
In Lean Thinking, Womack and Jones describe waste as any human activity that absorbs resources but creates no value. They quote the late Toyota executive Taiichi Ohno, who categorised waste (muda) in the following groups:
* Defects (in products).
* Overproduction of goods not needed.
* Inventories of goods awaiting further processing or consumption.
* Unnecessary processing.
* Unnecessary movement of people.
* Unnecessary transport of goods.
* Waiting (by employees for process equipment to finish its work or an upstream activity to be completed).
To these seven they add another the design of goods and services that do not meet the needs of the customer--and go on to summarise lean thinking in five principles:
* Precisely specify value by each particular product.
* Identify the "value stream" for each. Make value flow without interruption.
* Let the customer pull value from the producer.
* Pursue perfection.
Let's apply this model to a typical product of the finance function: the monthly financial forecast for a multinational, multi-operational firm. To keep it simple, assume that the customer for this is the CEO, who has a clear idea of what he values in the forecast: "I want it to be directionally right, including the impact of our latest decisions, so that it helps us understand what other actions we need to take."
You might need to translate his wishes into more quantitative terms le: he wants a directionally correct "50:50" forecast, based on the latest results and most recent physical assumptions, that gives him enough understanding of change to allow any required management action to be triggered.
Next, let's identify the value stream that generates that product (see panel). Those who have done any forecasting will recognise this as a simplification. The likely occurrences of waste are already starting to appear. A reworking of the forecast for inconsistent or inaccurate assumptions is a typical example. Eliminating this waste and getting that value to flow without interruption can typically be done in stages. First, organise to manage the whole value stream for the forecast rather than managing and optimising each process in isolation. Next, make process improvements to allow instructions to flow upstream--the better the guidance given to the participants, the less likely the need to rework. Then, make process improvements to allow the product to flow downstream. Typically a big improvement is opening access to data for review before finalisation, although in many firms this will be a big cultural shift. Lastly, progressively eliminate activities that do not add value.
In many cases, some of the bigger improvements will involve operational colleagues. For example, when Ford Europe re-engineered its financial forecast process in the mid-nineties, it identified that the greatest source of waste was inconsistent assumptions of product definitions and product volumes. By establishing a single master source of both and making it available automatically to all participants at the start of the forecast process, the finance team increased the accuracy and timeliness of the monthly forecast, while reducing the amount of resources it took. The average time for the revenue forecasting process in each market was reduced from two days to 30 minutes.
The next stage--letting the customer pull the value from the producer--is probably still ahead of us for the customers of the financial forecast. Typically, a management team likes to look ahead when it's considering a decision or is concerned about an issue. These triggers for a forecast do not follow a neat monthly schedule. Anyone who has presented a forecast containing outdated assumptions will recognise the customer's need to make progress on this and the supplier's difficulties in doing so.
For those of you already working to improve the ability of your finance function to "deliver customer value without waste", we suggest that you:
* Manage the scope--ie, focus on products where benchmarking shows high costs for relatively little value.
* Understand who the customers of these products are, talk to them and establish their definition of value.
* Assign clear process ownership for the value stream that produces this product. Where it crosses functional boundaries, ensure that this owner has the right sponsorship to make the required changes.
* Establish the clear and frequent measurement of the process's effectiveness and efficiency. The more that this can integrated into the normal functioning of the process, the easier it will be maintain.
* Build a culture of continuous improvement--ie, aim for small, regular and highly visible gains that involve many colleagues and are appreciated by the management.
* Use this as a foundation for more transformational change. The stronger the foundation is, the more likely the change will deliver the required results.
Those of you who have experienced the Six Sigma technique will notice the close relationship of this approach to define-measure-analyse-improve-control. This should be no surprise, as Six Sigma, lean manufacturing and various other process improvement initiatives have much in common, with clear process ownership and measurement being shared prerequisites.
Setting the foundations of process ownership and measurement can be a challenge, since it requires a shift away from the "management by results" approach, which many of us are used to, and towards "management by means"--ie, identifying and managing the critical business drivers. The latter is at the heart of Toyota and similarly successful firms. In our second article on leanness, which will appear in FM later this year, we will show how this change can be made using examples of establishing a continuous improvement capability, achieving transformational change and working with customers to match their needs more closely with finance's capabilities.
This approach can help you to handle the challenges that your finance function faces. Manufacturers in the late seventies and early eighties thought that high quality and low cost were alternatives. They tried hard to inspect quality into their products. They now realise that high quality can be achieved at low cost. If they do it right first time, they avoid costly inspection and reworking. Our finance functions can realise some of the same opportunities if we are willing to challenge some received wisdoms.
Peter Coote is a principal at the Wexner management consultancy. He was previously a change programme director at Ford. Stathis Gould, a former technical specialist at CIMA, is a technical manager at the International Federation of Accountants.
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|Title Annotation:||TECHNICAL MATTERS|
|Author:||Coote, Peter; Gould, Stathis|
|Publication:||Financial Management (UK)|
|Date:||Mar 1, 2006|
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