By Je; Sipes
Initial lean e;orts at most manufacturers tend to focus on operations, especially the shop floor: a kaizen event here, some 5S there. Except for paying the bills for incremental services or miscellaneous tools and supplies to support spot projects,
accounting and finance people, including the chief
financial o;icer, aren’t really involved. Over the
long term, though, they can help everyone focus
on the improvements that matter most: those that
cut costs, add revenue, or do both.
Over the past several months we have focused on
people in operations positions at a fictional shop
called Typical Fabricating Co. (TFC). This month we
focus on the leaders in accounting and finance. Let’s
consider the role of Matt, the CFO.
TFC fabricates steel products. The business is a
mix of repetitive parts (sold to a Tier 1 that then sells
to the OEM) and low-volume, high-mix work (
structural materials used in construction and major refurbish projects). It has typical issues many small
and midsized fabricators experience, including capacity constraints, unpredictable demand, and lots
of scheduling and priority changes. And sometimes
resistance to change makes implementing seemingly obvious improvements an uphill battle.
The CFO View Before
the Lean Journey
What is the CFO’s involvement before and during
the early stages of the lean journey? If the person
is involved at all, the CFO probably focuses on costs
and cost reduction. If the finance department uses
a standard cost-accounting system, the CFO may
provide information that helps focus improvement
e;orts. If a shop has no formal costing system, then
costing at a product, process, or customer level can
be very di;icult.
As a result, the CFO may have scant cost information to go on for making informed decisions. If the
CFO directs people to cut costs, and the accounting
and financial information is only marginally accurate, then operations may go in the wrong direction.
Instead of being taken at face value, costing information should be challenged for accuracy and
relevance to ensure it represents what is really happening. Costs need to be associated with the correct
actions. Incorrect account assignments can create a
disconnect between the action that causes specific
costs. This makes cost reporting inaccurate.
Also, is overhead spread on a rational basis? Factory overhead should include costs that cannot be
directly applied to a product, like facility maintenance, heating, and cooling. Spreading overhead
based on irrelevant drivers can lead to serious problems, like undercosting one product and overcost-ing another.
Is too much data being collected from the shop
floor? Data is necessary to understand how a process is performing, but sometimes we go overboard.
We spend so much time collecting so much data in
so many places, we end up creating confusion rather
All this just scratches the surface, but you get the
idea: The CFO can and should have a significant impact on information that drives improvement.
How the CFO Can Be an Enabler
If the CFO and the rest of the accounting and finance
folks understand lean methods and practices, they
can help identify where it makes the most sense to
invest in improvement. For instance, they can define a portfolio of financial measures that go along
with the nonfinancial measures. A;er all, the CFO
and his team are in the best position to know what
information is available and how it can be used.
They also can assist improvement teams with financial analysis, which will require digging to find
appropriate measures and root causes. This is a
logical place for operations and finance personnel
to work shoulder-to-shoulder.
Those in finance and accounting can train operations personnel in cost management and control.
Most people in operations are good at managing
flow, busting constraints, and keeping material
moving, but cost management is o;en not a skill
set that comes naturally to them. Operations people with at least a general grasp of costing and cost
management will be better problem-solvers and
Accounting and finance employees can develop
a deep understanding of the pros and cons behind
standard costing and lean accounting. Standard
costing relies on standards to be measured against.
Variances against the standards provide data to
assess whether an operation is performing well or
poorly. This tends to be a rather static approach to
Lean accounting is a more robust and dynamic
approach to measuring and assessing performance.
Who better than the CFO to train the rest of the
company in these accounting and measuring approaches?
The CFO should play a key role in the leadership
team that generates and deploys lean strategies. He
or she can make sure systems are used in the most
e;ective manner possible to support strategy development.
Ultimately, the CFO can educate others about a
central tenet of accounting: Costs are the result of
work. The question should be, Is this work value-added or non-value-added? If it is non-value-added, the costs are unnecessary and should be candidates for reduction or elimination. Sustainable cost
reduction comes from changing the way work is
done—because, again, work drives costs.
How a CFO Develops a Lean Strategy
TFC has progressed in its lean journey. Employees
look at lean as a way to run the business, not just as
a way to run projects. Knowing this, they realize that
improvements will a;ect everyone in the company.
TFC’s CFO is now actively engaged with his senior
management colleagues in creating a lean strategy.
Matt’s expertise and focus help managers pay at-
tention to the way improvements are recognized.
Improvements that reduce costs or increase revenue
are communicated in dollars and shared broadly, so
all TFC employees understand their work’s impact.
Read more from Jeff Sipes at www.thefabricator.com/author/jeff-sipes
A lean transformation’s impact
on accounting and finance
Improvement through the eyes of the CFO