The Lean CFO Blog Series #3

Here are next two paradigms the Lean CFO must incorporate into the business to drive financial success with Lean

 

Standard Costing Not Allowed

In many manufacturing companies, standard cost information is still the predominate source of information to analyze operations & make business decisions. This is dangerous for a lean company because standard costing is designed for, and works quite well, in mass-production manufacturing. But lean principles create an operating system, which is totally opposite of mass-production. So continuing to use standard costing in a lean company will lead to conflict & confusion

 

Because of this conflict the Lean CFO must remove standard costing from all business decisions for a lean business strategy to lead to financial success.  Business decision methods in lean companies need to be aligned with the economics of lean: understanding the financial impact of decisions based on how demand is changed due to creating customer value and how spending is changed due to operational & capacity improvements. The Lean CFO must break existing decision making paradigms that exist both within finance & in other departments such as sales & marketing

 

Measure Performance not Profits

Traditionally companies focus on projecting & analyzing financial results, which leads to budgets, financial forecasts & lots of cost analysis. Don’t get me wrong, this stuff is important to be able to explain your financial results to readers of your financial statements.

 

Lean companies add a dimension of financial analysis. Internally measuring the path to improved profitability

 

Improving profitability in a lean company gets back to basic economics: increase customer value to increase demand and measure & manage the supply of resources to control costs.

 

The Lean CFO must shift the primary focus of internal analysis towards the lean path to improve profits. This means measuring the execution of lean practices as they relate to improving flow, eliminating waste and creating value. As I like to say, these measures don’t have dollar signs in front of them. The Lean CFO must implement and maintain an effective lean performance measurement system and be able to translate operational improvements into financial projections.