But if the corporate culture is myopic — or if the strategy isn’t endorsed at the top and communicated clearly throughout the company — then lean strategies can backfire. For instance, a controller who spots a decrease in inventory levels near the end of a quarter might direct factories with underutilized overhead to ramp up production, argues Dunn. Why? By spreading overhead costs among greater levels of inventory, he explains, the P&L will better absorb the overhead burden that would otherwise have registered as a negative variance.
Dunn concedes that there are legitimate reasons to increase inventory, such as responding to a blowout year that exceeds forecast, or even creating a buffer to help protect against a forecasting error. But usually, he says, inventory is built up so that lumpy variances can be smoothed out.
What’s more troubling is that the “variance game” can become chronic. Consider that at the start of every quarter, excess inventory causes management to ride the sales team to reduce the overstock, which they do — causing a drop in inventory levels, a negative variance rate, and the start of another cycle.
Playing the “constant improvement game sets companies up for failure,” comments the Chamberlain Group’s Funk. The trick to marrying the accounting and manufacturing functions, he maintains, is to drive costs and inventory down at the same rate. To do that, finance department staffers need to be “capital stewards,” insists Dunn, who grew up on the factory floor of his father’s precision machining company. That is, they must internalize an understanding of how the manufacturing process converts assets to cash.
Batches? We Don’t Need No Batches
Another lean lesson is to kick the batching habit. Batch accounting, like batch manufacturing, should have gone out with the Studebaker, say CFOs who lean toward lean thinking. Waiting to process payables or receivables on a monthly basis mars the cash conversion cycle with late payments, slow closes, and mistakes that go undetected for weeks, insists Cunningham.
Consider the Lantech CFO’s bold decision to eliminate vendor invoices. Cunningham worked with vendors to build a daily delivery schedule that would drastically reduce Lantech’s inventory, but her efforts let loose a flood of daily invoices that overwhelmed the accounts payable department.
So Cunningham wiped them away — the invoices, that is. Because Lantech’s purchasing department negotiates price and terms in advance, the CFO approved weekly payments to suppliers without an invoice paper trail.
Bob Kaiser, COO and CFO of Hi-Tec Sports USA Inc.— a $150 million manufacturer of athletic footwear — found another way to link his physical supply chain with his financial supply chain. Kaiser electronically linked his factory floor with the finance department using a Web-based middleman called TradeCard, which is provided on an application-service-provider (ASP) model.
According to Kaiser, the just-in-time cash management tool wiped out the reams of paper — purchase and shipping orders, supplier acknowledgements, currency transfer documents — that were used to track and facilitate transactions. And TradeCard provided him with complete transparency into the overall supply chain, from the purchase of boot leather, to the factory floor, to the freight forwarder, to the store shelf, and back into accounts receivable.