Right-designing is the foundation for implementing lean production. It incorporates other lean principles and corrects the volume-related drop in cost

back to original levels. Two main factors contribute to this correction in a lean

environment: equipment and operators. Accountants do not like the cost upswings in the early days of the lean transformation, but accountants new to

lean have a hard time trusting the change dynamics of lean: Economies of

scale are at the mercy of the marketplace; lean limited production enterprises

are at the mercy of engaged, empowered employees who continuously add

value to the production processes. Lean companies focus on low capital cost

and leveraging human capital—they depend on their people to continually

develop and evolve the system. Following the success of the Toyota model,

virtually all lean enterprises demonstrate respect for people (see how lean enterprises demonstrate respect and empower employees in Chapters 3 and 5).

(a) People and Cost/Volume Fluctuations

Operators and material handling can be adjusted to keep a nearly even productivity level at any volume in a properly designed and regulated lean envi36 Lean Accounting

Costs

($)

Volume

EXHIBIT 2.5 Part Costs versus Volume Output

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ronment. All well-designed lean systems use good cell design and balancing

workers to takt time to make these adjustments according to changes in customer orders and flow. When production is designed to meet the takt time, then

labor is added or subtracted according to demand—customer orders—while

maintaining equal costs per output. The design adjusts the number of operators

and material handlers on any type of line—machining, welding, fabrication,

or assembly. Lean enterprises achieve nearly equal costs per volume when operators and material handlers are loaded and balanced to the takt time.

The lean workplace accomplishes these ever-changing adjustments to demand by seeing people as integers, not fractions. Balancing to takt time is always critical. Consider the example of the necessity of changing from 4 to 5.8

line operators. Since a 0.8 person does not exist, lean systems supply the line

with six operators. This “whole employee” lean principle contributes to the

sawtooth pattern of the cost-per-volume graph over time, but the impact of fractions becomes greatly diminished as a company becomes more skilled and

experienced in applying lean principles to achieve continuous operational

improvement.

(b) Equipment Management and Cost/Volume Fluctuations

Equipment costs often have the largest impact on cost/volume fluctuations in the

early stages of lean transformation. Lean principles lessen the cost of machines

and equipment when comprehensively implemented. Precision chip-cutting

machines for producing critical components and assembly conveyor systems

for moving large products like automobiles can be very expensive, and these

costs significantly impact the cost of the product. When production lines that

deploy expensive equipment are designed to lean principles such as takt

time; U-shaped, right-sized machines; and work flow, employees develop strategies to lessen the x-axis. For example, if product volume is projected to increase,

lines can be added as needed to meet customer demand.

Consistent application of lean principles to equipment management has many

advantages besides equal costs per volume. It becomes much easier to invest

capital incrementally as volume increases with right-designed equipment, instead of risking a large, single capital outlay in the hope of covering the not

always realized final volume estimates of a long-term projection. Incremental

investments in capital equipment by purchasing right-sized equipment saves

capital if estimated volumes are not reached due to changes in the actual market demand. Similarly, the lean enterprise has fewer sunk costs if market

Limited Production Principles 37

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demand fails to reach the estimated projections. Lean equipment management

techniques dissipate the losses inherent to the economy-of-scale mentality.

Lean pioneer Mark DeLuzio, former vice president and corporate officer of

Danaher Corporation, knows the value of understanding, developing, and implementing right-designed systems and machines to achieve the smooth integration of capacity and capital:

Many companies think of manufacturing in terms of buying large increments of

capacity. But if you think of lean in a machine design sense, you are purchasing small increments of capacity that is flexible and can be quickly changed

over. It can be easily adaptable to new designs, and can be easily movable within

your plants so you can add an extra 10 percent of capacity without any problem.

Your investment is small—you’re not adding another $500,000 machine to

add just 10 percent more capacity.18

2.8 THE JOURNEY TO THE PROMISED LAND—PERFECTION

Economies of scale may never become totally extinct like dinosaurs and other

inappropriately oversized experiments of nature and humanity, but this chapter stresses the ways that organizations on the road to a lean transformation

must systematically purge all remnants of economies of scale thinking.

Learning to be lean requires a commitment to system wide changes in operations and supportive cost management practices that focuses on the work, not

the financials. Lean environments are designed for people as much as for profit,

and lean environments manage costs by evolving work flow to ever-greater

levels of effectiveness. Perfection? Almost everyone enjoys a personal version of the pursuit of perfection in its tangible forms—the perfect french fry,

the perfect partner, or in the case of lean principles, the perfect workplace that

makes the perfect product. Economies of scale ask people to chase the lowest cost (how inspiring), perhaps the most important reason to begin writing

their epitaph.

Lean looks to the future of the management accounting professional. Most

accountants work in an operational system designed to leverage economies of

scale. Although this is simply the world that most accountants live in, even when

constrained by the issues of traditional environments, flow methods and thinking can be successfully applied. With the knowledge and learning derived from

applying flow thinking to the operation, successful change can begin anytime

the accountants choose to learn the operations. Accountants are an inevitable

38 Lean Accounting

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