The Cost Accountant your Hidden Resource

Excess inventory and cost overruns plague companies large and small. While searching for large global solutions don’t overlook solutions that are quick and easy. One continually overlooked issue is review of your assumption prior to production.

After receipt of a substantial purchase orders take a look at the makeup of your pre-production meeting. Attendees usually include Production Manager, Material Control Manager, Quality Representative and possibly someone from the Supply Chain group. The discussion will usually center on the following.

Do we have the necessary capacity available to run the product?

Has the supplier lead-time changed?

Which supplier should we use?

What is a good lot size?

Is manpower trained and ready?

If your company has all these questions answered up front then consider yourself world class and stop reading.  However if you’re like most of us and recognize this meeting read on. Then asked yourself.

Who is absent from meeting and what should be the first question that is rarely ever asked?

Absent is the Cost Accountant!

The first question should be … “What were the assumptions of the quote to the customer based?”

First the cost accountant, exactly where can we find that elusive character? Frequently we must venture deep into the cubicle world to find him or her. It’s usually that friendly loner who helps people with their pivot table issues on their spreadsheets otherwise their only connection to the outside world is the sales department.

The person that everyone recognizes but rarely knows them personally and wonders exactly what they do.  This person is worth finding because practically every measure and target you’re tasked to hit is generated from their assumptions. You put 20 unit loads in the furnace the assumption at quote was 50, did you know that?  Probably would beneficial to know this person and understand how they think.

Seriously this is where the conversation should begin. Costing assumptions and execution of plan in production is what drive the business. There is so much at stake even minor deviations from assumptions can cause major costs and drive excess inventory.

Typical issues include.

Customer order quantity can be deceptive; a 5000 piece order might span three years delivery not uniform. For instance year one 500pcs, year two 3500pcs and 1000pcs in the final year of contract

Supplier agreement doesn’t match your agreement with customer. You signed a five year agreement with customer but quotes from your supplier only good for 90 days.

Quoting using equipment that is no longer in service.

Quote running part through your most modern equipment even though those machines are way over capacity.

Using quotes from suppliers that are currently full or out of favor (not likely to use even if capable).


Get cost accountants actively involved in activities regarding production. Invite them to weekly production meetings keeping them up to date with the actual operation of the facility. They will also become aware of many “hidden factory activities” that happen consistently but are not in cost model.

Cost accountants active involvement in the operational activities of your organization is one way to keep their cubical neighbor the Finance department from visiting you at the end of the production run.


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Stock Room Clerks the Sentries of Inventory

One common excess inventory driver is a direct result errant transaction within storerooms of companies. The problem is easy to correct with proper training however these errors usually go unnoticed except by material planning personnel who are experienced in tracing schedule fluctuation back to the source.

Most organizations employ store keepers or crib attendants to do these transactions.  These positions are critical in maintaining stability within the value stream however the training oftentimes is minimal. Most training focuses on limited software transactions, piece count and part movement. What is lacking is broader knowledge regarding, logistics, ERP and inventory valuation.

One common mistake that drive excess inventory

Clerks making transaction without full knowledge of impact on supply chain.

Below is a typical example.

An item is taken out of stock on loan to the quality department. The part is just needed for review and will be returned in a day or two. If this transaction is improperly done a replenishment signal will occur. Buyer will receive MRP message to replenish and will create and new order usually at a expedite condition. When part is returned to stock Buyer now will see defer or cancellation message. This creates havoc within the value stream and can result in excess and obsolete inventory.

Ask any inventory professional that works with ERP systems if this has happened to them.

Other typical issues …

Inventory adjusted out without proper notifications. This can happen during cycle counts.

Lot control, clerks not knowing the reason or understanding the importance.

Not making transactions in a timely manner.


Storeroom personal should be a part of the inventory control group and develop a professional connection to inventory management.

Have a robust ongoing training in inventory control theory and techniques, including a thorough knowledge of MRP messaging in your ERP system.

An immediate notification loop to the assigned material planner needs to be developed if there are any significant (you decide) inventory adjustments made. Using MRP only for this feedback isn’t acceptable because it’s a lagging indicator.

Clerks should have access to latest industry news regarding latest technique and tools.

Raising the level of professionalism within this group is easy will pay major dividends.



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Excess Inventory Drivers

Recently decided to add category named inventory drivers. This will contain issues opportunities of inventory management from a tactical perspective.

All too often we overlook the simple drivers to excess inventory while we search for complex global solutions. Why is this?

One cause is the too many leaders consider themselves inventory experts without thorough training or tactical experience in inventory management. Reading the “Toyota Way” or understanding the concept of one-piece flow doesn’t make an expert.

Unfortunately the higher someone is in the food chain the more abstract the concept of tactical inventory drivers become. This makes it difficult for inventory professionals to solve daily issues that drive excess inventory. Oftentimes the software (tools) available doesn’t match the goals and directives given.

How many times has your build plan not matched the assumptions of your quote causing excess inventory or negative revenue? What tools do have in place to catch this before you begin build? There are great tools in place to catch this after the fact.

Inventory professionals also must work to close the information disconnect with management. A basic understanding of finance and accounting will help decode some of management directives. I say basic but really you should strive for an intermediate understanding. You’ll discover that while some directives are conflicting from a tactical level they’re necessary strategically, especially when competing globally.

For example if you can connect the dots between constant receipt backlog on warehouse docks to the balance sheet you might just find a way to hire that additional dock worker everyone understands is needed except management.

Keep returning, as I will post simplistic issues that drive excess inventory along with typical solutions.

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After The Kaikaku

The big Kaikaku event is finally over, the smoke has cleared and the dust has settled. The armies of building contractors along with their heavy equipment have vanished as swiftly as they appeared. Also absent are the great gurus and powerful observers that spear headed the effort. Now it becomes your turn to navigate the post Kaikaku world.

The first thing you’ll notice and will critique is perceived flow of the shop floor.  By “perceived flow” I mean the flow that those whom ran the event envisioned. You will immediately see flaws. But what do you see flaws in? Linkage and flow! Aha your thoughts have already been altered, read on. Now begin the Kaikaku hangover.

After the Kaikaku event you will experience something similar the Kubler-Ross model of grief.

I can’t believe the whole plant was transformed this much in such a short period. My department dismantled my job has changed.

What was wrong with the old method, we have been profitable for decades! How does the company ever expect to recoup this expense?

Leave my position or department intact and I will aggressively assist others with their change.

The world that I help build and make successful no longer exists. Roles, responsibility and expectation are no longer clear.  I’ll just agree to everything do my job and go home.

This isn’t so bad. Almost unconsciously my thoughts have transformed! What once were insurmountable barriers are now just everyday obstacles to be tackled.

The painting department really shouldn’t be next to the warehouse. Anyone who worked here for any length of time should of known that. But wait; there are no more walls and all the equipment has quick disconnect cables and wheels. Lets simply move it. As long as we maintain linkage and flow it will be simple to sell and easy to do.

The new people in the paint line are very limited and most only can perform no more than two of the five tasked now needed.  Those that know the job well have been assigned to other areas where in turn they are no longer as efficient. Maybe the Kaikaku event was performed prematurely.

Thoughts have transformed to; The flow lines have identified a training problem. Too many employees are specialized we have wrenches and screwdrivers at a time we need Swiss army knives. Looking back its evident we trained people to select machinery not product lines. This happened over time and it will take time to resolve.

Major transformation an improvement is always difficult, confusing and at times counter intuitive. But ask yourself this question. Can you more or less conceive moving from Car parts to Ipad components if opportunity arose pre or post Kaikaku? Remember you must first conceive before you can believe. Maybe the gurus are on to something this time.


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Career Paths and Pitfalls In Lean Organizations

The rules for finding a rewarding career are much more nuanced than in the past. There are no longer clear paths to success an advancement. Workplace dedication, keeping your nose to the grind stone and other similar motto’s are outdated in this new fast paced world. Often time management rotates so often an employee’s medium and long-term contributions are lost in the shuffle. This can be especially frustrating in organizations moving to lean. In the lean transition period its difficult to determine what actions an organization values. Then it changes as the organizational lean thinking matures.

For instance production is moving to lean but finance has yet to adopt lean accounting. Good employees get caught in the middle of this struggle which results in undue stress and degradation of organizational effectiveness. Too many good employees on the career hamster wheel and feel helpless to improve or remove themselves from such chaos. For these folks it might be time to understand the new work place dynamics.

Mid Career Employees

Keep Resume Updated –At end of every year review it to make sure your gaining in knowledge and experience. It’s a bad sign if there is nothing to add.

Go Back to School – If you don’t have a degree get one. Most new job openings even for positions you performed in the past will require a degree. Plus having a degree make you more marketable and confidant.  I know the degree won’t significantly improve your current job knowledge or efficiency. That will be our secret but it might help later.

Network – Professional organizations are your friend. You will often find other organizations value your input more than those at your own workplace.

Read; keep up to date with industry practices and procedures.

New Employees

Study the politics of promotion in an organization. Align yourself with the departments and decision makers before an opening occurs. Remember most managers have someone in mind when a position becomes available. Or work hard keep nose to grind stone and hope good things happen.

Future Employees

Try to enter the workforce on the leadership track. This is the best incentive for keeping a high GPA in college. There are employees who have spent decades trying to enter that management track and you can enter it day one. There are programs that will preordain you as a leader based on your college credentials. Take advantage of internships during your summers understanding how companies really operate is priceless knowledge.


Always be proactive and not reactive in your career. Most large organizations set up three deep contingency planning for key future openings. In other words there are people already in mind when opening occurs. You want to be on that unpublished list. Learn to speak the jargon of your industry, find a mentor inside organization and a coach outside to provide balance. Good luck! I would like to say lean removes the politics of promotion but that would just be Pollyanna.

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Do H.R. Departments Create Value in Lean Environments?

The last decade has been a period of incredible change. From the way we listen to music, communicate and transact business. The world is much more connected but much less personal. Watching the transformation of business has been quite fascinating. Practically every department and person is jockeying for relevance in this new world order. Technology has given the user more power rate the level of service provided in the form of customer satisfaction surveys. Sales departments and Information technologies departments are the primary drivers of this form of feedback. While it does become redundant and at times annoying it does serve a purpose providing the customer a voice.

This brings me to the Human Resource departments. Their role has both expanded and diminished during the past few decades. Naturally someone has to be gatekeeper of all regulatory mandates of local, state and federal bodies. The legal mind field for organizations is daunting to navigate. But beyond that does the employee today perceives value?  Do your managers feel their input is valued and have true voice? Do employees perceive HR staff as a knowledgeable group that can speak to benefits, grievances and advancement, honestly and affectingly? Or is it generally felt HR is group that is very skilled in presentation but lacking in substance; relying too much on website FAQ pages and benefit 1-800 numbers as a primary tool to direct employees questions. As a suggestion spend a few moments with employee pull up website help navigate. In short be a human resource to the employees.

When was the last time you let the employees rate Human Resources. What do think the results would be? No other department has more influence over the general mood of employees in an organization. As a lean practitioner you should be well aware of the importance of a capable and motivated workforce. I fully suggest internal organizational surveys to access organizational gaps and problems in HR. Be honest with the results and address the problems forthright.

In lean environments we are constantly taught to bring value or perish through outsourcing or obsolescence. Lean organizations should be reminded that harmony within an organization is not a one-way street. Suspicion need to give way to trust for an organization to truly move forward and support the gains envisioned. I applaud organizations that look inward an access the perception effectiveness of their human resource departments.

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Ever Considered Phasing Out Performance Reviews?

Deming believed that individual performance reviews were devastating to organizations. This was the third of his seven deadly diseases of business. According to Deming performance review especially those with numerical goals.

Nourishes short-term performance, annihilates long-term planning, builds fear, demolishes teamwork, and nourishes rivalry and politics. It leaves people bitter, crushed, bruised, battered, desolate, despondent, dejected, feeling inferior, some even depressed, unfit to work for weeks after receipt of rating, unable to comprehend why they are inferior. It is unfair, as it ascribes to people in a group differences that may be caused totally by the system that they work in

After spending decades giving and receiving individual performance reviews, I totally agree with Deming. The system creates an environment where individuals usually seek personal not organizational gain.

Individual performance goals can actually be detrimental to the ultimate team or business goal. This can be illustrated easiest in professional sports. When a professional player is given numerical incentive to perform their actions are naturally driven by that fact. The quarterback, with the incentive to throw 20 touchdowns a year will be in direct conflict with the running back’s goal of 1000 yards rushing. Each could make their goals and team could still not make the playoffs, which was the organizational goal.

Another example. There are times when reviews are tied more to budget than performance. If managers are being tasked to consider budgetary constraints in the rating they give then it’s no longer about performance but competition, just as Deming predicted. Therefore if you have group of high performers someone has to be rated lower to stay within budget.

Interestingly now that the world has become so connected and social, peer reviews actually have gained undeniable clout in certain segments. I personally read Amazon reviews before I buy anything significant if I’m going to a movie Rotten Tomatoes is my guide. In the past we relied on the opinions of professionals for practically everything. I don’t suggest that for employees (however would be better than many current programs) this only illustrates the successful transition from the reliance on the individual professional to peer review.

Since the review system is so entrenched in our society I’ll suggest a compromise. I propose a system that would phase out performance reviews over time.

Years 1 though 4 yearly reviews

Years 4 though 10 bi-yearly

Years 10 and beyond…. You get the point…

This would be another incentive for employee to remain with organization. I know this is much too radical for some but at least think out the box for a moment. The performance review system is outdated; don’t just take my word.  Stand by water cooler and listen.

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Master Scheduling in a Lean World

Every significantly sized organization utilizes some form of MPS (master production schedule). You know the schedule practically everyone ignores while working on hot and ship lists. When was the last time shop Foreman called and said “what’s due on master schedule this week?”.

Think about your organization. Say you need to ship 100 widgets in eight weeks. The master scheduler methodically level loaded 25pcs of finished goods to go to stock in weeks 5-8.

At the end of week 8 the order is completed ready for shipment. Does this describe where you work, or does this sound more familiar.

Production manager (any week prior to week 8 ) “Are the widgets on the ship list this week? Material planner replies,” no the widgets are not due to ship until week eight.” Production manager “ Great, cause we have 150 steel collars due to ship this week so bump the widgets. I can’t believe the customer expects us to build 150 collars in one week!”  The Master Scheduler over hearing conversation thinks to himself, the order was entered a year ago and the master schedule had 30pcs planned to stock each of the prior 5 weeks. If this was followed we could of shipped from stock.

What’s going on here? Why does this same scenario play out over and over in factories across the nation?  Why do we continually perform 80% of the work in the last 20% of the time available?

Similar issue arises when moving to lean manufacturing. Have you ever been told to continually reduce inventory yet maintain robust linkage and flow!  Once the line finally implodes you end up doing 80% of the manufacturing in the last 20% of the time available.

One reason is that the profession Production and Inventory Control is becoming a lost and devalued profession. Once an ERP (Enterprise Resource Planning) is in place many organization believe the software will deliver benefits alone. In depth understanding of the intricacies of “close loop planning systems” is no longer a valued skill set. This ultimately has negative consequences on organizations. Moving to lean manufacturing from ERP creates many “gurus” but few true “practitioners”. The rank and file can surely differentiate between the two.

Organizations need to access who they have leading the charge for change. Then ask? Do they have a long-term vested interest in the outcome? Do they have in-depth understanding of production and capacity management?  Will they be there to shield the front line worker from the short-term problems and issues that arise? Do they really understand the business?

Once a leader / system is in place that the people trust an embrace 50% of the work is done.

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Don’t bring up a problem unless you can offer a solution – NOT

There is a business edict that has always troubled me as a manager. It was “don’t bring up a problem unless you can offer a solution”.  I hope lean practitioners don’t subscribe to this tenet. How many problems are not exposed because an employee can’t offer a solution. Just in… an old school news flash …that is what management is for!  I know we don’t want to be bothered with all the whiners however that is called communication. That is when you mentor, advise and discuss issues and opportunities with your employees. Your role is leader, teacher and guide. A good leader should want to know the problems of the organization. Having a prerequisite of a possible solution before submitting a problem is self-defeating. According to Deming the aim of leadership is to improve man and machine. Just as a salesman’s job begins with “no” a managers job begins with “I have problem”. If an employee has a possible solution great if not begin the problem solving process and thank them for caring enough communicate the issue.

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Should Companies Continue to Be Healthcare Providers?

It’s that time of year again you know the benefit dance. Get out your decoder ring and try to figure out which plan to choose. Hmmm… the higher deductible but lower premium or the higher premium and lower deductible. Am I more likely to break a leg or have a nervous breakdown next year. Better run the simulation just in case. Wow this one has a larger network but doesn’t cover Colorado where I go skiing. Wait I don’t see vision and dental on spreadsheet, oh that’s in packet five. Is wisdom teeth a medical or dental issue, HR afraid to answer so they direct me to providers website FAQ section. I finally reached my dental deductible, need to get as much work before year-end. I have money left in my medical flex spending account… I need to buy something anything, use it or lose it!

Is this truly how we want to continue doing business in lean environments? One thing that would truly advance productivity is getting employers out of the healthcare provider business. I don’t understand why employers would want to continue the practice. Advancing core competencies, customer satisfaction and shareholder value should be the purpose of business. Being a healthcare provider ties up too many resources and discourages the creation of small business.

The New England Journal of Medicine (2010) stated the United States health care system ranked 37th in the world. We’re behind Costa Rica, Chile, Malta, Andorra, Germany, Israel and Canada to name just a few. Some of the places I never heard of before. We freak out at the thought of China becoming the world leader in manufacturing this year but are content with being 37th in healthcare.

Edward Deming warned us about the debilitating cost of rising healthcare on business decades ago. This shouldn’t be a political debate to a lean practitioner. Common sense dictates you benchmark the leaders and adopt the best practices. It would be much easier sell if there were a country named “Toyota”.

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