Lean Principles | Overview of Lean Principles |
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Page 4 of 10 Accounting and Planning for CustomersEnter the need for Unit Costing and fixed cost recovery as well as Activity Based Costing models and the traditional Western algorithms for calculation of Economic Order Quantities (EOQ) and minimum batch size.Consequently, a generic feature of many Enterprise Resource Planning (ERP) systems (all the rage at the moment in the industrialised West) is the mechanism to link forecast demand, to activity based or unit costing, to process routings, to industrial standards, to economic order quantity, to minimum batch size, to production planning, to purchasing minimum order quantities, to safety stock calculation, to minimum and maximum stock levels...and back to forecast demand. What a house of cards! It is all dependent upon forecast accuracy and the discipline of review at low levels of the organisation. This paradigm of accounting and planning is not restricted to manufacturing. These planning and accounting processes are often in a state of advanced failure with the default driver of business output being the resource levels on hand. Unit Cost and Overhead absorption accounting is simply the wrong model use. At the hub of doubts about these models is the question as to which costs are truly fixed and which are truly variable. The challenge from the new paradigm is that many costs that Western accountants and planners take for granted as being fixed are inherently variable in nature within the new paradigm of production. The traditional Unit Costing applies variable costs to products on the basis of available resources and then spreads centrally managed 'overheads' or 'fixed costs' across the total output units over a specified period. This tends to drive the production of output whether or not any customer actually wants it. Production managers can still hit their Unit Cost 'goals' by simply shoving finished goods into storage. Sound familiar? Activity Based Costing goes one better and allocates costs on the basis of the value adding activities or resources required to complete the output. Activity Based Costing can be used to identify the gulf between value adding resource and waste present in an operation. It does not however, of itself, propose the means to eradicate and control this waste on a sustainable basis. Without the physical move to discrete production processes for each product or group of products and the physical allocation of all value adding resources to the management of the product production process (accountants, planners, engineers, marketers) there is no driver for the ownership of waste. So there is a dimension of product based organizational change as well as a change to product based physical layout implicit within a sustainable solution. Often traditional models take no account of the true cost of holding the various inventories. They don't recognise the financial benefits associated with shorter lead times to supply finished goods and services. They don't calculate the loss associated with being slower to market and slower to improve and innovate service and product. They don't calculate the unnecessary cost expended on the army of people required to drive the multitude of assumption through the 'planning processes' that relates to forecast driven models. Current accounting and planning methods and the resultant design of many ERP systems are the bricks with which the problem area has been institutionalised. |