What CFOs Learn from the Factory Floor

The latest industrial revolution isn't emerging on the assembly line -- it's focusing on the bottom line. But the long-term gains don't come without some short-term strains.

Amid the rumbling, rhythmic sounds of machinery and the whiz and kaplunks of production lines, CFOs are finding unlikely allies. Enmeshed in the gears of industry (and etched in the silicon chips that run them) are the manufacturing theories of production pioneers like Walter Shewhart, George Box, and Taiichi Ohno. Indeed, there are corporate finance lessons to be learned from the ghosts in these machines.

Over the last century, as mass production lines churned out everything from Model T’s to microprocessors, theories such as Shewhart’s notion of total quality management, Box’s practical application of statistics, and Ohno’s just-in-time model turned traditional manufacturing on its head. Today CFOs are bringing these “lean” ideas to corporate finance, highlighting the practical differences between cost accounting and cost management, and recognizing how just-in-time manufacturing reveals a building tension between the income and cash flow statements.

First applied to the manufacturing process by James Womack in his 1990 book The Machine That Changed the World, the term lean describes the concept of driving out waste of any kind and matching production to demand with little or no additional capital expenditure. The seeds of lean, however, were planted much earlier, first when craftsmen were supplanted by mass production, and later when machines were fitted with changeable parts to mimic the craftmen’s customized products.

To be sure, wringing out waste and streamlining the asset conversion cycle — without increasing capex — seems like an idea most CFOs would readily embrace. But the long-term gains offered by lean processes are accompanied by short-term strains that are rarely discussed.

For example, synching just-in-time (JIT) manufacturing with standard cost accounting can prove disruptive, especially to public-company CFOs and controllers. Shareholders and Wall Street analysts expect quarterly gains, and they’re easily disconcerted by the temporary losses that the lean transformation imposes on the profit-and-loss statement. “Very often the income statement is taken as gospel,” says Jean Cunningham, CFO of Lantech.com LLC, an $80 million manufacturer of pallet stretch-wrapping machines. She notes, however, that “it doesn’t reflect the real-time benefits of JIT.”

Free Your Mind — and Your Finance Department

To be clear, lean accounting is not a single technique. It’s a philosophy, a way of thinking about business, emphasizes Cunningham, the co-author of Real Numbers: Management Accounting in a Lean Organization. Lean accounting doesn’t require huge investments in financial software, and there’s no big plan to put in place. Although many CFOs have found specific steps that they can take, says Cunningham, lean accounting actually embodies a promise to yourself to continually look for improvements the corporate finance function.

Lean accounting is iconoclastic. It tears down an old accounting system that was developed to accommodate batch manufacturing and track inventory value — both of which, she maintains, are immaterial measures for companies that employ continuous-flow-manufacturing processes.

And proponents of lean accounting are anything but mystics. On the contrary, a major goal is to clarify financial statements and give nonfinancial managers an unobstructed line of sight into the company. Lean advocates also vow to send CFOs and controllers to the factory, to better understand what, and how, operations managers think.

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