Health Care -- Lean Philosophy on Cost

Health Care -- Lean Philosophy on Cost Reduction and Quality Improvement

Lean Philosophy is initially traced back to Henry Ford's innovative assembly line, revolutionizing manufacturing while failing to provide true variety. Building on Ford's concepts Toyota management established a Lean Philosophy in the 1930's and 1940's that focused on production flow and waste elimination, resulting in rapid, low cost and high quality processes, along with simpler and more accurate management. These concepts were further elucidated by authors including James Womack, who established the Lean Enterprise Institute in 1997.

The essential elements of Lean Philosophy are 5 principles including: defining the value sought by the customer; specifying the value stream of the product satisfying that value while challenging wasted steps; making a continuous flow of product through refined steps; creating "pull" (essentially meaning "customer demand/expectation") from step-to-step for continuous flow wherever possible; continually improve and refine the process to cut the steps, time and information required in the production process. Based on these principles, proponents of Lean Philosophy established a Lean Action Plan consisting of initiation; reorganization; installation; and completion of transformation. This philosophy ideally creates a customer-oriented human system that defines value from a customer's perspective, reducing effort, cost, time and space while improving customer service.

Companies using the Lean Philosophy often found that traditional accounting concepts were anti-lean. Consequently, a Lean Accounting method was developed, also stressing customer-oriented, value-centric processes. Defined by the Lean Accounting Summit in 2005, Lean Accounting has a vision dedicated to quality improvement and cost reduction. Accordingly, Lean Accounting employs the 5 principles of: lean and simple business accounting; accounting processes supporting lean transformation; clear and timely communication; planning from a Lean perspective; and strengthening internal accounting control.

Due to the notable success of Lean Philosophy and Lean Accounting, they have spread globally to non-manufacturing industries, such as the health care industry. While the health care industry has many complex processes that benefit from Lean Philosophy and Lean Accounting, one example of muda (source of waste) that is readily responsive to Lean Accounting is the medical supplies area. Applying lean and simple business accounting, accounting processes supporting lean transformation, clear and timely communication, planning from a lean perspective and strengthening internal accounting control, Lean Accounting is able to streamline supplies processes, significantly reducing costs and improving quality.

Outline

Introduction

Analysis

Lean Philosophy

Background of Lean Philosophy

Essential Elements of Lean Philosophy

Lean Action Plan

Initiation

Reorganization

Installation

Completion of Transformation

Benefits of Lean Philosophy

Lean Accounting

Background of Lean Accounting

Vision of Lean Accounting

Principles, Practices and Tools of Lean Accounting

Lean and Simple Business Accounting

Accounting Processes Supporting Lean Transformation

Clear and Timely Communication

Planning from a Lean Perspective

Strengthen Internal Accounting Control

Application of Lean Accounting to Health Care: Supplies Areas

Lean and Simple Business Accounting

Accounting Processes Supporting Lean Transformation

Clear and Timely Communication

Planning from a Lean Perspective

Strengthen Internal Accounting Control

Conclusion

Introduction

Lean Philosophy, established and refined in the 20th Century, revolutionized manufacturing. Focused on customer-oriented value, Lean Philosophy proactively defines and eliminates waste in order to continually provide higher quality while lower costs. Though Lean Philosophy was initially attempted with traditional accounting methods, Lean proponents found that traditional accounting is bloated and anti-lean. Consequently, Lean Accounting was developed to enhance the Lean Philosophy. Due to the success of Lean Philosophy and Lean Accounting in manufacturing, these concepts have spread globally to government and service industries, including the health care industry.

Analysis

Lean Philosophy

Background of Lean Philosophy

Historians trace the Lean Philosophy's origins back to Henry Ford's innovative assembly line, invented in 1913 (Lean Enterprise Institute, 2009). Integrating the entire production process with his "flow production," consisting of interchangeable parts, standard work and moving conveyances, Ford revolutionized manufacturing. Nevertheless, Ford's flow production had a major drawback in that it did not provide true variety (Lean Enterprise Institute, 2009). Refining Ford's flow production from the 1930's through the 1940's, Toyota's Japanese management identified 7 mudas (sources of waste) in manufacturing: conveyance, motion, waiting, overprocessing, inventory, defects, and overproduction (Jimmerson, 2010, p. 3). Concentrating on eliminating waste, Toyota management placed even greater stress on the concept of flow through tailoring machines for needed volume, using self-monitoring machines, arranging machines in order of process, originating rapid set-ups to enable machines to make several parts in low volumes as necessary, and authorizing each step to notify the prior step of needed materials (Lean Enterprise Institute, 2009). These innovations resulted in rapid, low cost and high quality processes, along with simpler and more accurate management (Lean Enterprise Institute, 2009). Those concepts, which proved highly successful for Toyota, were applauded and further refined in The machine that changed the world: The story of lean production (Womack, Jones, Roos, & Carpenter, 1990), and then reduced by Lean thinking: Banish waste and create wealth in your corporation (Womack & Jones, 1996) into fundamental elements. Finally, James Womack, a co-author of both books, established the Lean Enterprise Institute in 1997. Since that time, the Lean Enterprise Institute has flourished as a non-profit organization dedicated to education, publishing and research in order to advance and deepen understanding of Lean Philosophy (Lean Enterprise Institute, 2009).

Essential Elements of Lean Philosophy

Lean thinking: Banish waste and create wealth in your corporation (Womack & Jones, Lean thinking: Banish waste and create wealth in your corporation, 1996) clarified Lean Philosophy into five basic principles: defining the value sought by the customer; specifying the value stream of the product satisfying that value while challenging wasted steps; making a continuous flow of product through refined steps; creating "pull" (essentially meaning "customer demand/expectation") from step-to-step for continuous flow wherever possible; continually improve and refine the process to cut the steps, time and information required in the production process (Lean Enterprise Institute, 2009). In sum, focusing only on steps creating products that satisfy a value sought by customers, this philosophy separates the useful from the wasteful and eliminates the wasteful, wringing the most productivity out of its workforce's time and resources.

Lean Action Plan

According to the Lean Enterprise Institute, conversion from a bloated philosophy to an effective lean philosophy requires significant changes in an organization's culture through four multifaceted, well-defined steps: initiation; reorganization; installation; and completion of transformation.

Initiation

Management must find a leader to take personal responsibility for the organization's conversion to Lean Philosophy. Then, with the assistance of this "change agent," the organization should use a consultant who can teach the system of Lean techniques and implementation. Armed with this knowledge, management must use or create a crisis faced by the organization and/or focus on a lean competitor, customer or supplier that is demanding significantly improved performance from the organization. Leaving aside a grand strategy, the organization must map its "value streams," tracing the current processes for information and material, then redrawing its value streams in a desired, leaner state and setting a timetable for implementation of those new value streams. The organization should then begin following the new value streams with a visibly important organizational activity, demanding immediate results from the new practice. Finally, the organization should use the momentum gathered from these new processes to spread and link the processes, extending beyond the "shop floor" to office processes (Lean Enterprise Institute, 2009). One of the Lean Philosophy tools used to accomplish initiation is the "Lean Event" or "Kaizen Event," a process-improvement workshop used by company cross-functioning teams to create, redesign and further refine processes. Though this tool is logically related to this step, it is obviously valuable at all further steps in the process. Kaizen, which is a system of control and improvement, may also involve a "5S Program," which focuses on visual order, cleanliness, organization, and standardization through the 5 S's of: "Sort," the initial step in cleaning up and organizing; "Set in Order," which entails organizing, identifying and arranging everything in the work area; "Shine," entailing regular maintenance and cleaning; "Standardize," involving standardization and simplification in order to make maintenance easier; "Sustain," involving maintaining the first 4 accomplishments (Lean Enterprise Institute, 2009).

Reorganization

After initiation, the organization must be restructured according to product grouping and the new value streams established during initiation. The reorganization focuses on constructing a new strategy for growth and eliminating: any step that does not comply with the new value streams; every employee whose job has been rendered unnecessary by the new value streams; every employee whose job performance tends to slow the process. In addition, management should focus on continual improvement of the system, settling for nothing less than improvement. Finally, management should assure remaining employees that their jobs will not be jeopardized by Lean techniques (Lean Enterprise Institute, 2009).

Installation

At the point of installation, management should create a Lean culture throughout the organization. This is accomplished by adjusting company policy according to Lean Philosophy, teaching the philosophy and skills to everyone within the organization, making performance measures clear to everyone, compensating employees according to the organization's performance, altering tools, machinery and information systems to their appropriate size for optimum usage, and establishing a lean accounting system (Lean Enterprise Institute, 2009).

Completion of Transformation

The transformation from bloated to lean is completed by disbursing the Lean Philosophy throughout the organization's management and beyond. This is accomplished by changing the organization's leadership from top-down structure to leadership rooted in questioning, teaching and coaching. In addition, management must adopt the scientific method of planning a step, either performing or having employees perform that planned step, checking the performance, then acting on the information gained. Finally, the organization must spread the Lean Philosophy beyond its parameters by creating a global strategy and convincing suppliers/customers to adopt the Lean philosophy, as well (Lean Enterprise Institute, 2009).

Benefits of Lean Philosophy

The Lean Philosophy ideally creates a customer-oriented human system. This system defines "value" from the perspective of customers, reducing effort, cost, time and space while improving customer service. These focused activities make the organization more readily responsive and adaptive to customers and other external elements. In addition, the necessarily increased employee involvement creates an organizational culture in which the employee is accountable and empowered, employee-management relations are improved, and processes are continually refined for increasingly effective productivity and innovation (Berk & Associates, 2011). The benefits of Lean Philosophy have made it so successful in manufacturing that it has spread globally to other fields, such as government, professional services and health care.

Lean Accounting

Background of Lean Accounting

As mentioned above, installation of the Lean Philosophy within an organization necessarily involves establishing a new accounting system. After the establishment of the Lean Philosophy, companies attempting to mesh that Philosophy with traditional accounting practices found those practices to be "anti-lean" (Maskell & Baggaley, 2006, p. 35). In comparison to the deliberately customer-oriented, value-centric Lean Philosophy, traditional accounting proved to be bloated, encouraging large batch production and high inventory, incapable of accurately measuring improvements created by Lean Philosophy, producing reports that many employees cannot understand, and leading organization to make poor business decisions (Maskell & Baggaley, 2006, p. 35). As a result, the Association for Manufacturing Excellence (AME) sponsored a Lean Accounting Summit in 2005 to define and document Lean Accounting, its principles, techniques and tools (Maskell & Baggaley, 2006, p. 35). Throughout their presentation, it is clear that Lean Accounting proactively finds methods to quality improvement and cost reduction.

Vision of Lean Accounting

In keeping with Lean Philosophy's intent to create value-centric, customer-oriented company processes that are continually refined to increase value while reducing costs, Lean Accounting's vision statement asserts that it will:

"1. Provide accurate, timely, and understandable information to motivate the lean transformation throughout the organization, and for decision-making leading to increased customer value, growth, profitability, and cash flow.

2. Use lean tools to eliminate waste from the accounting processes while maintaining thorough financial control.

3. Fully comply with generally accepted accounting principles (GAAP), external reporting regulations, and internal reporting requirements.

4. Support the lean culture by motivating investment in people, providing information that is relevant and actionable, and empowering continuous improvement at every level of the organization" (Maskell & Baggaley, 2006, p. 36).

Principles, Practices and Tools of Lean Accounting

In their summary of the 2005 Lean Accounting Summit meeting, Maskell and Baggaley assembled a table illustrating the relationships among the principles, practices and tools of Lean Accounting, and shown below:

(Maskell & Baggaley, 2006, p. 37).

Lean and Simple Business Accounting

This principle focuses the Lean Philosophy on the accounting process itself by continuously streamlining accounting processes, reports and methods through value stream mapping both the current and desired accounting processes, dedicating itself to continuous improvement and the Plan-Do-Check-Act problem-solving method described above. Acknowledging and distinguishing between "muda (source of waste) type 1," which is waste that cannot be immediately elimination, from "muda (source of waste) type 2," which is waste that can be immediately eliminated, the streamlining waste reduction process can be accomplished relatively rapidly. The rapidity with which streamlining can be accomplished, along with the realization that some improved processes will eventually be eliminated, frees up accounting personnel to also focus on applying these leaner principles to other company processes (Maskell & Baggaley, 2006, p. 36).

Accounting Processes Supporting Lean Transformation

The organization's transformation from bloated to lean processes entails three practices: management control & continuous improvement; cost management; customer & supplier value and cost management. Management control and continuous improvement is accomplished by the tools of: constant improvement; target costs; linkage of metrics, value streams and plant/corporate reporting to the lean business strategy; projects for continuous improvement and breakthroughs, charted by value stream performance boards, typically updated on a weekly basis; value stream performance illustrated by box scores (Maskell & Baggaley, 2006, p. 36). An example of a box score for performance is illustrated below. As the box score illustrates, this tool enables the reviewer to examine the weekly financial, capacity and operational processes at a glance.

(Maskell & Baggaley, 2006, p. 39).

The practice of Cost Management is achieved through the accounting tools of value stream costing and value stream income statements. The practice focusing on Customer & Supplier Value and Cost Management is achieved through the accounting tool of target costing, typically collected weekly. Through these tools, lean accounting is able to assist in the organization's lean transformation by effectively focus on value made for customers, thereby continually improving customer relationships, design, pricing and continual process improvement (Maskell & Baggaley, 2006, pp. 36-37).

Clear and Timely Communication

The principle of Clear and Timely Communication is achieved by the practices of: financial reporting; visual reporting of performance measures; decision-making. The practice of financial reporting is aided by the accounting tools of "plain English" financial statement, simple and chiefly cash-based accounting and primary reporting using visual performance boards of corporate functions such as sales and marketing, design, production and administration. The practice of Decision-making is achieved through analysis of profitability and incremental cost via value stream costing and box scores (Maskell & Baggaley, 2006, p. 38).

Planning from a Lean Perspective

The principle of Planning from a Lean Perspective is achieved through the practices of: planning and budgeting; impact of lean improvement; capital planning and investing in people. The practice of planning and budgeting employs the lean accounting tools of Hoshin policy deployment and sales, operations and financial planning. Unlike traditional accounting tools, the Hoshin policy deployment employs a 1-year plan with desired break-through changes, measurements to assess progress and resources required to achieve the changes. Sales, operations and financial planning (SOFP) integrates the organization's game plan and is typically done on a monthly basis, according to each value stream. The practice of Impact of Lean Improvement employs the tools of: value stream cost and capacity analysis; value stream maps of current and ideal future processes; box scores of lean improvements of operations, finances and capacity. The practice of Capital planning employs the tool of value stream box scores of capital expenditure impact, often in conjunction with a 3P analysis for capital expenditures. The practice of investing in people employs the tools of: performance measurements monitoring employees' participation in continual improvement, employee satisfaction and cross-training; profit sharing with employees.

Strengthen Internal Accounting Control

The principle of Strengthening Internal Accounting Control is enacted through the practices of: internal control through lean operation controls; inventory valuation. The practice of internal control employs the tools of: transaction elimination matrix; process maps with controls and SOX risks. The transaction elimination matrix allows a visual of traditional practices that can be eliminated without affecting value. Process maps will show color-coded risks of violating Sarbanes-Oxley regulations, along with controls. By keeping inventory low and visually monitored by the use of such methods as pull systems, partnerships with suppliers and single-piece flow, the practice of inventory valuation can be achieved through the tools of simple methods of valuation (Maskell & Baggaley, 2006, p. 43).

Application of Lean Accounting to Health Care: Supplies Areas

Though Lean Accounting originated in the manufacturing sector, its success resulted in its global spread to service industries, such health care. Health care entails numerous complex processes in delivery of services and finance, both of which can be governed by lean accounting. An example of an accounting issue for health care providers is the supplies area. Lean Philosophy experts have found that supplies storage is often an area of muda (source of waste). Lack of confidence in the inventory process' ability to support their demands for supplies such as abdominal pads sometimes causes nurses to stockpile supplies of abdominal pads at patients' bedsides, in personal lockers or in some other unauthorized area close to where the supply will be used (Jimmerson, 2010, p. 6). As a result, stockers will see a lack of abdominal pads in the designated storage area, fully restock, and there will be a significant overstock of abdominal pads throughout the ward. Multiplying each item in the supplies area by the number of personnel having access to those supplies easily illustrates the potential wastefulness of supplies area processes. Consequently, an area that can be addressed by lean accounting in order to eliminate waste lies in supplies inventory.