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.

“Once a week I send my accountants out to the shop floor,” says William Funk, director of finance for the North American division of The Chamberlain Group Inc. (The JIT manufacturer is reportedly the world’s largest maker of automatic garage door openers — which functions “just in time” for end users, too.) The jaunts help finance department employees get an accurate picture about the impact of materials management, labor routines, and overhead spending. “It’s too easy to get subsumed by accounts payable,” says Funk. “The accounting staff needs to understand the bigger picture.”

Another reason these managers “walk the walk” is so they’re able to “talk the talk.” “The language of standard cost accounting is old, and [its ineffectiveness] becomes obvious on the shop floor,” muses Cunningham. She holds fast to GAAP’s cost-and-revenue matching principle, but she has reworked the language of Lantech’s internal financial statements to be more factory friendly. For instance, material usage variances and labor efficiency variances have been replaced by inventory and salaries respectively.

For Funk, operational language is in his job description. A divisional finance chief, Funk reports to two executives at the group level — the corporate controller and the executive vice president of operations. The dual reporting structure fosters an interdependency between finance, operations, and suppliers that’s worthwhile in and of itself — and that quells many of the motivations for playing accounting games, such as booking revenue prematurely.

Costly Accounting

“Traditional accounting is a post-mortem exercise” that’s not suited for a JIT environment, asserts Anand Sharma, president and CEO of TBM Consulting. Too often, he bristles, accounting information arrives late, is misleading, and is hardly understood by anyone outside the accounting function.

Retired CFO Orest Fiume — Cunningham’s co-author on Real Numbers — puts it even more strongly. Corporate accounting is on the brink of irrelevancy, according to the former finance chief of The Wiremold Co., which makes accessories that organize wires and cables in offices and homes. (Wiremold’s most familiar offering, introduced in 1916, might be raceways — those long, thin metal strips that protect electric wiring.) But studying accounting from the perspective of the factory floor, he believes, may revive accounting’s operational relevance.

Fiume defines accounting as a quantitative reflection of the business, and unless the bookkeeping is attuned to the rest of the organization, “the reflection looks like the image in a funhouse mirror.” Accordingly, Fiume makes a case against standard cost accounting, which relies on calculating unit costs, and instead favors cost management, which focuses on the cost of meeting customer demand.

In 1990, management at $30 million (in revenue) Wiremold launched a lean manufacturing effort. During a decade-long transformation, Fiume abandoned the cost-per-unit thinking that, he claims, misdirected attention to metrics such as overhead absorption rates and variance analysis — measures that invite dysfunctional behavior and gaming. By 2000, when the initiative had become the company culture, Wiremold was a $770 million manufacturer.


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