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by Bruce L. Baggaley, Senior Partner
This article was originally published in: the Journal of Cost Management, March/April 2003 Volume 17 Number 2. Warren Gordon & Lamont, RIA, pages 23-27

Lean manufacturing has taken hold in increasingly greater numbers of United States manufacturing companies to improve throughput, efficiency, cycle time and customer satisfaction. These improvements have put pressure on management systems geared to support the traditional method of manufacturing that use large batches and long production runs to achieve economies of scale. This article provides a framework for implementing systems and controls more suited to the lean company. It is divided into three dimensions of the lean management issue:
- Developing an Appropriate Management Focus
- Organizing by Value Stream
- Costing by Value Stream

Developing an Appropriate Management Focus

Lean companies focus on creating value for customers. Value is created in the order fulfillment processes, from selling, to manufacturing, shipping and collection of cash, as well as after-sales support. Value is also created in the processes for identifying, developing and bringing to market new products and services. By locating the value creating processes next to one another and by processing one unit at a time, work flows smoothly from one step to another and finally to the customer. This chain of value-creating processes is called a value stream. A value stream is simply all the things done to create value for the customer. All products having similar features and characteristics are manufactured in one value stream. It could be said that a value stream is comprised of all products having the same routing through the company.

A typical value stream will fulfill customer orders through a process like this:

Figure 1: Typical Order Fulfillment Value Stream

The value stream is far more than just the manufacturing processes. In the diagram above, manufacturing is shown as just one step in the whole process of serving the customer and creating value. There are many process that support the manufacturing steps. Some companies make the mistake of defining their value streams too narrowly; they include only the production steps. It is important to see the value stream as including all the things required to create value for the customer.

Value streams can include more than just what occurs within the production plant. Organizations with finished goods warehouses usually include them in the value stream. The warehouse may be outside the immediate control of the plant people, but it contributes to both customer value and waste. Similarly, if the operation pulls materials from another plant within the same organization then this “supplier” will often be included as a part of the value stream. A company that sells through distributors may include the distributor as a part of its value streams in order to “see” the flow through to the end customer.

A lean organization needs to manage the flows of the work through the value streams. This entails a different management focus from the traditional company that is organized and managed by function . Prior to lean manufacturing, most companies were organized by production departments. These departments - sometimes called centers of excellence - were designed to be highly efficient at performing one particular step in the process. A production step could be welding, stamping, surface mount insertion, assembly, burn-in, heat treat, and so forth. An organization of this kind can not see the flow; it is too difficult to identify. As we move into value streams the flow becomes much clearer, and we can manage & improve the process.

The departmental organization, on the other hand, often becomes an obstacle to achieving a smooth flow of the product through the plant, as the focus becomes department efficiency rather than flow. Managing the flow of the work demands an understanding of the value streams and putting in place organizations and controls that are focused around them. The primary purpose of the manager in a lean company is to focus on value stream processes—to work toward improving the flow of the work and the achievement of perfection in quality and customer satisfaction. That can only be achieved through a relentless focus on the place where value is created—the value steam.

We focus on value streams because this is the best way to see the flow of materials, information, and cash. It is the best way to understand and increase the value we are creating for the customer. And it is the best way to grow the business, increase sales, and generate more profit.

Organizing by Value Stream

As lean manufacturing matures within the company it becomes increasingly necessary to manage the value streams. Managers with P&L responsibility for the value stream need to be assigned. Growth and improvement strategies for the company now revolve around the value streamA useful way to look at this is to imagine the company made up of several small, entrepreneurial companies--each one responsible for making their value stream a spectacular success. This form of organization is best for lean companies because it simplifies management of the lean company and because it provides the visibility for managing continuous improvement.

The Simplicity of the Value Stream Organization

The value stream focus greatly simplifies the management of the company.

One book on lean and world class manufacturing[i] has the sub-title “the lessons of simplicity applied”. Lean organizations are always striving for simplicity of operation. It is, of course, very difficult to make processes simple. You must eliminate the root causes of variability and bring the processes under control.

An example of simplicity at work is a kanban pull system. Kanban is very simple. When the card comes up you make some more. You make what the card tells you, and you make it immediately. But a production plant can only move from MRPII to kanban when the methods of lean manufacturing have been successful applied. You must have small batches, reliable processes, effective machines, and regular production cycle times. Moving from MRPII to kanban is a move from the over-complexity of traditional manufacturing to simplicity of operation.

Moving from a departmental organization to a value stream organization is a similar change. You move from a highly complex organization chart with hundreds of cost centers, thousands of transactions to keep track of people, and a bureaucracy..... to 3 or 4 value streams within the plant and a clear-cut line of responsibility.

This is simple not only because the people know where they should focus their work, but also it simplifies the performance reporting, the organization structure, the accounting reports, and other infrastructure processes. A well-run value stream has a team people working together to serve the customers, increase value, improve their performance measurements every week, and make a lot of money. It is simple, clear-cut, and effective.

Value Stream as the Locus for Improvement

Continuous improvement(CI) is achieved through the value streams. Lean organizations have CI teams assigned to each value stream. These are made up of people working in the value stream but may have some outsiders also. The purpose of the CI team is to review the value stream performance measurements each week and initiate projects to make these measurements improve every week.

There is a place in lean companies for the top-down, breakthrough kaizen events, but as time goes on the emphasis of improvement moves to the continuous improvement teams within the value streams. These teams must be within the value streams because they must have view of the entire flow of the processes. This way the focus will always be on improving the flow and increasing the value to the customers; avoiding the pitfall of making local improvement that does not benefit the overall process.

Implementing the Value Stream Organization
The process of attaining a value stream organization follows an orderly progression in synch with the implementation of lean manufacturing. As shown in the figure below, this progression is in three stages. We call the progression a “Maturity Path” because it specifies appropriate steps that can be taken as the company matures in its implementation of lean thinking techniques.

Figure 2: The Maturity Path to Value Stream Organization

The first stage in the Maturity Path occurs when lean manufacturing is being introduced and pilot lean cells are being implemented. The second stage occurs when lean has become widespread in the plant. At this stage it is likely that the cells throughout the plant have been linked into value streams by product group, which cross organizational lines within the plant. The logical next step then is to introduce a value stream organization into the plant. The third stage entails a decision to organize the entire business around value streams. In this stage the value stream becomes the primary organizational scheme, and the departmental structure, if it remains at all, performs a subsidiary role.

It is not necessary to re-draw the company’s organization chart in the short term. When lean manufacturing is first being introduced into the company there is no need to make organizational changes. The pilot cells and other lean changes can be achieved without major disruption to the company’s departmental structure.

When you move to the second stage of the Maturity Path, it becomes necessary to manage by value stream. In this stage, with lean manufacturing wide-spread across the plant, it becomes important to assign particular people to each of the value streams. This would (ideally) include not only the production people but also support people, such as administration, sales & marketing, purchasing, QA, cost accounting, and all the other people involved in managing the flow of work. Support people need to be dedicated to a value stream in this stage in order to provide the services required to maintain the rate of production. Examples of support functions that need to be more available to a lean value stream are listed below:

Production Control-- With the kanban as the principal production control mechanism, replacing the work order, there needs be continuous management of the size and number of kanbans required from the point of view of achieving value stream target rate of production.
Transportation--There need to personnel responsible for ensuring that the right materials and tooling are at the cells at the time needed to maintain the production flow.
Procurement--There need to be personnel in the value stream responsible for ensuring that materials are received from suppliers in the right quantities and on time.
Manufacturing Engineering--There needs to be engineering support available to ensure the focus on continuous improvement.
Maintenance--There needs to be equipment maintenance personnel available to limit equipment downtime, particularly in a constraint resource.

Assigning people to value streams can be a difficult task. There may be three engineers and four value streams, for example. Or there may be support people with particular specialties required by all value streams. Over the longer term cross-training can bridge these gaps, but in the short term there may be people working in more than one value stream.

Some people worry that a value stream organization will require more people because, for example, there is only one production planner for the factory; yet this work now needs to be incorporated into the value streams. This can be overcome in two ways. First, many of these administrative tasks can be eliminated as lean manufacturing matures within the plant.

Production planning, for example, becomes unnecessary when an effective pull system is in place. Second, cross-training can be used to provide the support department’s skills in every value stream. In this scenario, the original production planner joins one value stream and trains people in the other value streams. The production planner, in turn, can be cross trained in inventory control, purchasing, cost reporting, and other support functions. In this way the value streams will contain all the required skills, and no additional people will be needed.

It is common for the department structure to remain in place while the value stream organization is in its infancy. In this case, people still report to their functional bosses, but are assigned to work in particular value stream teams. This matrix management structure is often the most convenient way to make the changes without disrupting the organization of the company. The matrixed organization is most often employed by companies with large and complex operations. They find that their size and complexity makes it more convenient to retain the departmental structure. Having said that, companies that make the radical change quickly are often rewarded by fast and radical improvement. Small and medium-sized organizations almost always take the leap of redrawing the organization chart to reflect value stream management, abandoning their functional organizations.

Once the team is in place and the complexities of the organization have been resolved, the people quickly get focused on increasing value, making improvement, and making more money in their value stream organizations. There are no other departments except for the few people providing support or administrative functions outside of the value streams.

Problems and Issues
Setting up a value stream organization can present difficulties. It is important to keep in mind that it is not necessary to solve all the problems to be able to make progress. It is a lean “rule” that we move ahead step-by-step. If you wait until every eventuality has been discussed and resolved, you will wind up doing nothing!! Value streams are like this. Rarely can a “perfect” value stream be set up, but that should not be an obstacle to setting up a good one.

A common question relates to the number of people in the value streams. A useful rule of thumb is that a value stream should contain between 25 and 100 people. If it’s bigger than 100 people, it will not have the small-team focus required for the value stream to prosper. If it has less than 25 it will not have enough people to run an effective operation. Although these guidelines have often been successfully violated, they are use points of departure in setting up the value streams for the first time.(return to top)

A value stream should represent a significant part of the business. Remember, it is in substance a mini-business within the whole. It is important not to have too many value streams. It is common to have three primary value streams, for example, and then have a fourth that contains all the “odds and ends” that don’t fit well anywhere else. In establishing the value stream organization, it is useful to keep in mind that it is not necessary to solve all the problems up-front. If you get the three primary value streams working well, you will learn more about the processes and be able to better address the problems as they arise. As products in the fourth value stream become more significant they can be grouped to form a new value stream, or combined into one of the existing ones.

There are always some people within the plant or organization that do not fit into the value streams. These will include:
- People whose work does not apply to any particular value streams. An HR person, for example, or a financial accountant. Other examples would be the plant manager, or the facilities people.
- People who support the value streams but their work is not easily split between each value stream. The IT people who keep the computers running, for example.
- People who do cross-value stream work. It is common to have a QA manager outside the value stream, for example. This person’s responsibilities might be to administer the ISO9000 process, certify the training of QA people within the value streams, ensure consistency in quality methods across value streams, and so forth.

The end result is an organization where the majority of people work in the primary value streams, and there are a few vestigial departments supporting the operation. These small departments may be organized in the traditional way, or they may be lumped into a single “cost of doing business” department for budgeting and management purposes.

Womack & Jones, Lean Thinking

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