Lean Philosophy and Lean Accounting in Health Care

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 deliver higher quality at lower costs. Though Lean Philosophy was initially paired with traditional accounting methods, lean proponents found that traditional accounting is bloated and incompatible with lean principles. Consequently, Lean Accounting was developed to enhance the Lean Philosophy. Due to the success of both Lean Philosophy and Lean Accounting in manufacturing, these concepts have spread globally to government and service industries, including the health care industry.

Lean Philosophy: Background and Core Principles

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 1930s through the 1940s, Toyota's Japanese management identified seven 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 by tailoring machines for needed volume, using self-monitoring machines, arranging machines in process order, 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 distilled in Lean Thinking: Banish Waste and Create Wealth in Your Corporation (Womack & Jones, 1996) into fundamental elements. James Womack, a co-author of both books, subsequently 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).

Lean Thinking (Womack & Jones, 1996) clarified Lean Philosophy into five basic principles:

(1) defining the value sought by the customer; (2) specifying the value stream of the product satisfying that value while challenging wasted steps; (3) making a continuous flow of product through refined steps; (4) creating "pull" — essentially meaning "customer demand/expectation" — from step to step for continuous flow wherever possible; and (5) continually improving and refining the process to cut the steps, time, and information required in the production process (Lean Enterprise Institute, 2009). In sum, focusing only on steps that create products satisfying a value sought by customers, this philosophy separates the useful from the wasteful, eliminates the wasteful, and wrings the most productivity out of its workforce's time and resources.

The 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 engage 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. 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 them, 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 cross-functional company teams to create, redesign, and further refine processes. Though this tool is logically related to the initiation step, it is valuable at all further steps in the process as well. Kaizen — a system of control and improvement — may also involve a "5S Program," which focuses on visual order, cleanliness, organization, and standardization through five steps: "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 to make maintenance easier; and "Sustain," involving maintaining the first four 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 role rendered unnecessary by the new value streams; and every position whose performance tends to slow the process. Management should also focus on continual improvement of the system, settling for nothing less than progress. Finally, management should assure remaining employees that their jobs will not be jeopardized by Lean techniques (Lean Enterprise Institute, 2009).

Installation

At the installation stage, 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 all, compensating employees according to organizational performance, altering tools 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 dispersing the Lean Philosophy throughout the organization's management and beyond. This is accomplished by changing organizational leadership from a top-down structure to leadership rooted in questioning, teaching, and coaching. Management must also adopt the scientific method of planning a step, performing or having employees perform that step, checking the performance, and then acting on the information gained. Finally, the organization must spread the Lean Philosophy beyond its own boundaries by creating a global strategy and convincing suppliers and customers to adopt the Lean Philosophy as well (Lean Enterprise Institute, 2009).

Lean Accounting: Background, Vision, and Principles

Background

As noted 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 could not understand, and leading organizations 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 for 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).

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 of both current and desired accounting processes, and dedicating itself to continuous improvement and the Plan-Do-Check-Act problem-solving method. Acknowledging and distinguishing between "muda type 1" — waste that cannot be immediately eliminated — and "muda type 2" — waste that can be immediately eliminated — the streamlining process can be accomplished relatively rapidly. The speed with which streamlining can be achieved, along with the realization that some improved processes will eventually be eliminated, frees up accounting personnel to apply these leaner principles to other company processes as well (Maskell & Baggaley, 2006, p. 36).

Accounting Processes Supporting Lean Transformation

The organization's transformation from bloated to lean processes entails three practices: management control and continuous improvement; cost management; and customer and supplier value and cost management. Management control and continuous improvement is accomplished through 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 updated on a weekly basis; and value stream performance illustrated by box scores (Maskell & Baggaley, 2006, p. 36). This tool enables reviewers to examine weekly financial, capacity, and operational processes at a glance.

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

Clear and Timely Communication

The principle of Clear and Timely Communication is achieved through the practices of financial reporting, visual reporting of performance measures, and decision-making. The practice of financial reporting is aided by "plain English" financial statements, simple and chiefly cash-based accounting, and primary reporting using visual performance boards covering 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 (SOFP). Unlike traditional accounting tools, Hoshin policy deployment employs a one-year plan with desired breakthrough changes, measurements to assess progress, and resources required to achieve those changes. 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, and box scores of lean improvements in 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 performance measurements monitoring employees' participation in continual improvement, employee satisfaction, and cross-training, along with 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 and inventory valuation. The practice of internal control employs the tools of a transaction elimination matrix and process maps with controls and Sarbanes-Oxley (SOX) risks. The transaction elimination matrix allows a visual review of traditional practices that can be eliminated without affecting value. Process maps show color-coded risks of violating Sarbanes-Oxley regulations, along with the corresponding controls. By keeping inventory low and visually monitored through methods such as pull systems, supplier partnerships, and single-piece flow, inventory valuation can be achieved through simple methods of valuation (Maskell & Baggaley, 2006, p. 43).

Conclusion

Lean Philosophy was developed in 20th-century manufacturing to continually enhance quality and reduce costs by concentrating on value defined by the customer. The five refined principles of Lean Philosophy are: 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" from step to step for continuous flow wherever possible; and continually improving and refining 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.

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. Designed to facilitate Lean Philosophy, Lean Accounting employs five principles: 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. One example of muda in the health care industry that is readily responsive to Lean Accounting is the medical supplies area. By 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 can streamline supplies processes, significantly reducing costs and improving quality in accordance with Lean Philosophy.

Works Cited

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